SAP CO Overhead Cost Controlling: Cost Center Accounting, Cost Elements, Allocation Cycles and Internal Orders

Part 2 of the SAP CO overview covers Overhead Cost Controlling. Overhead is cost that cannot be attributed directly to a specific product or service. In SAP it is first collected on a cost center or an internal order, then allocated or settled to the final cost object using a defensible basis.

Note: screens, menus, T-codes and processing steps vary by SAP version and company-specific configuration.

1. Cost Center Accounting makes cost responsibility explicit

A cost center is the management accounting unit where costs arise and where someone is responsible for them. Cost centers can follow teams or departments in the HR organization, but separate cost centers are also created for cost management or allocation purposes.

CO-CCA role Description
Planning and budgeting Cost plan and budget per cost center
Actual collection Actual costs originating in FI are collected on the cost center
Variance analysis Plan versus actual comparison
Allocation Support cost center cost allocated to production or sales cost centers
Reporting Analysis by cost origin using standard and user-defined reports

Slide reference: cost center definition, design criteria, standard hierarchy.

2. The cost element says what kind of cost it is

If the cost center answers "where did the cost arise", the cost element answers "what kind of cost is it". In the S/4HANA Universal Journal environment, the G/L account and the cost element are managed as one object.

Cost element type Used for
Primary cost element Costs and revenues that enter through FI from external transactions
Secondary cost element CO-internal transactions: allocation, settlement, activity allocation

When posting an expense, checking the account alone is not enough. The cost object (cost center, internal order, WBS element, profitability segment) has to be entered as well.

3. SKF and Activity Type: the language of allocation bases and internal services

A Statistical Key Figure (SKF) is a quantity used as the basis for splitting costs, for example office floor area, headcount, number of phone calls or number of transactions processed.

SKF value type Suitable for
Total value Figures that change every month
Fixed value Figures that stay constant over a period

An Activity Type represents an internal service provided by a cost center. Services that can be measured in quantity, such as machine hours, labor hours or inspection hours, are defined as activity types, and their cost is allocated to the receiving cost object using a planned or actual price.

Slide reference: activity type concept, planned and actual activity price.

4. Reposting, Distribution and Assessment

Periodic allocation in SAP is managed by cycle and segment. The three main methods differ in what happens to the original cost element.

Method Cost element on receiver Purpose and trade-off
Reposting Original cost element kept Moves cost that was posted to the wrong object, or that belongs to another responsibility unit, from sender to receiver; the focus is on changing the assignment
Distribution Original primary cost element kept Sender cost center cost allocated to several receivers; the receiver can still see the origin by account
Assessment One secondary cost element Several cost elements bundled into one secondary cost element; receiver reports are simpler, but account-level detail has to be looked up on the sender

Slide reference: Distribution configuration and execution example (primary cost element kept); Assessment configuration and execution example (secondary cost element).

5. Internal orders collect cost for a specific purpose

An internal order is used for cost with a clear purpose and time frame, such as an event, a promotion, a short-term investment, a repair or a specific project, rather than for a permanent responsibility unit.

Step Activity
1 Create the internal order and assign the responsible cost center, profit center and business area
2 Enter a plan or budget
3 Enter the internal order as the cost object when actual cost is posted
4 Review plan, actual and line-item detail in reports
5 At period end, settle to the final receiver (cost center, asset, WBS element) according to the settlement rule

Slide reference: why cost tracking by purpose becomes clearer with internal orders.

6. Summary

Overhead management is not about splitting cost for its own sake. Cost is first collected accurately on the responsible unit, then allocated on a basis that can be explained. Cost centers hold the cost responsibility of the permanent organization, internal orders hold cost for a specific purpose, and SKFs and activity types provide the allocation basis. Part 3 follows the product cost flow: standard cost from BOM and Routing, production confirmations, and the closing steps that produce actual cost.

This is part 2 of a 4-part SAP CO overview.

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