When not to create cost elements for P&L accounts? Implications?

[Former Member]

I noticed some P&L gl accounts are not created as cost elements eg. R&D expense, COGS (posted during SD delivery), sales (posted during SD billing), freight charges, production variance (posted during prod.order settlement), etc.. I'm thinking if cost elements are not created, FI and CO will not reconcile.

Example of our SD delivery posting :

Debit COGS (sales order assignment)

Credit Stock

From above posting, there is amount posted to COGS gl account but no CO assignment except for sales order. Is there supposed to be a follow-up to this posting to reconcile FI with CO ? Or is our setup wrong?

Fyi we do not use CO-PA.

Thanks in advance.

Edited by: Pixel8 ation on Aug 3, 2010 5:16 PM

[Former Member · Accepted solution]

In general, you should not create CoGS as a cost element because, to do so, would be to double-count costs that are already represented in CO. CoGS relates to the sales/profit part of the business (normally analysed in GL, PCA or CO-PA) not in CO-OM.

What I mean is, CoGS represents the salaries and wages, materials and overheads that have already been spent in creating goods. These costs are collected in production orders and then settled into stock at standard price. The amount "left over" in CO-OM (i.e. under or over-absorption) indicates the efficiency of your cost centres, or the accuracy of your standards.

When you make a sale, if you post CoGS back into CO-OM, you are re-intoducing a cost that has already been absorbed.

So, I would never create CoGS (or Revenue) as a cost element; however, I would create R&D expenditure, freight, variances etc. as cost elements, since these represent part of the overhead that should be built into your standard costs.

[Former Member · Accepted solution]

Hi Marc,

Your feedback seems to make sense, though our revenues are created as element 11.

COGS seems to be the exception.

I'm now thinking about WIP (P&L), because it's similar nature to COGS ie. not required as a cost element as it also originates from costs related to manufacturing and it's just an interim amount prior to production completion. The WIP account is posted as :-

Debit WIP stock

Credit WIP (P&L)

Similar to variances (P&L) which originates from costs of manufacturing, it shouldn't be assigned back to CO-OM.

Edited by: Pixel8 ation on Aug 4, 2010 5:47 PM

[Former Member · Accepted solution]

Hi,

Sorry, I probably confused things by mentioning Revenue. Your settings are correct, with Revenue defined as a revenue element (11) rather than a cost element (1).

With respect to WIP (P&L), I would create it as a cost element, since it represents the absorption of cost centre costs and materials into the production of goods, even though the goods are not yet complete. When the goods are completed they will be credited in CO-OM and debited to stock using a similar entry. The impact of these credits (to WIP or to Stock) is to move costs out of CO-OM into the goods produced (CoGS). In CO-OM, the net result of Costs less credits to WIP/Stock, indicates the efficiency of your cost centres or the accuracy of your standards.

I would also create the manufacturing variance accounts as Cost Elements and settle them back to your production costs centres (or possibly CO-PA if you used it), since they are also a reflection of the efficiency of your cost centres - i.e. if a Cost Centre manager is not achieving the standards, (s)he should be accountable for the variance, and if you are concerned about reconciling CO-OM and the costs in P&L, you won't reconcile if the variances aren't posted back to CO.

Regards,

Marc

[sivaprasad_r]

Hi,

The exceptions when P&L accounts should not be created as Cost elements are : ( Inspite of existence of COPA settings )

1. Change in WIP account

2. Sale of Asset gl account ( SAP forces the GL to be a P&L ,which seems illogical)

Otherwise, all P&L accounts should ideally be defined as Cost elements...

Again in the absence of Account based COPA, i am not sure how you are going to reconcile FI and CO books..

Njoy

Siva

[Former Member]

If you are not using COPA, I don't see a reason not to create a P+L account as cost element.

When COPA is used, COGS accounts are often not created as cost elements, because COGS are posted to COPA from Sales orders. The reason being that this way you can attach the COGS to the client/distribution channel/Product that generates the corresponding revenue. COGS in FI , on the other hand, are posted from MM, where you do not (always) have this information that you want for COPA.

Under this scenario, you can still reconcile CO with FI, but it is not "automatic". In your scenario, the only way to reconcile FI with CO seems to be to create COGS accounts as cost elements. Bear in mind, however, that you will have to make sure a CO-Object is found (automatically) for each posting to a COGS account when you create it as a cost element.

Regards

Nikolas

[Former Member]

Hi Nikolas,

Your answer seems to clear some confusion, I think.

So, when CO-PA is used, P&L accounts related to sales orders/production eg. COGS, variances, etc. are not required to be created as cost elements as they will somehow flow to CO-PA ie. FI = CO-PA. As to my scenario, in order for FI=CO, I need to create COGS cost element and configure a default cost center for it via OKB9 ie. delivery posting will assign cost center to the COGS as well as the sales order assignment.

Sounds right?

[iklovski]

Yes, that's correct... With a little remark: there is no connection whether CO-PA exists or not. If you want to see CO reconciled with FI, all P&L accounts have to be defined as cost elements. If you don't care about this, then, technically, it does not matter whether you have CO-PA or not.

[Former Member]

It depends on what you mean by reconcile: In our case we get COGS from VRPS to COPA and the corresponding P+L accounts are not cost elements. Yet, the result in COPA always equals the PL result as there is always an SD document for each delivery and the VPRS equals the value of the goods movement and they are always posted to the same period.

You cannot use the standard tools to reconcile, of course, you have use your own logic.

[Former Member]

Based on my example of the SD delivery, FI is updated but not CO. How would CO be updated if the posting assigns to sales order as default? Is there some post-processing to be done?

[former_member195383]

Technically we have the option not to create cost element for a GL account . That will prevent the entry in that gl accout to flow to CO . We have the option to create the cost element at the time of creating the gl account itself .But if not done, we can create the same at a later point of time also.

[iklovski]

Hi,

In best practice, all P&L accounts have to be created as cost elements in order to have complete picture in CO. However, it's possible that certain G/Ls are not defined as cost elements; of course, in this case, you cannot count on FI-CO reconciliation reports.

Regards,

Eli