cost assignment allocation structure

Managing Ledger-Specific Allocation Structures

After completing this lesson, you will be able to:

• Describe the use of a ledger-specific allocation structure
• Enumerate the steps to implement a ledger-specific allocation structure

Settlement Per Ledger

In SAP S/4HANA, the settlement of a project can be run per ledger (see settlement parameter in the settlement profile or the settlement rule Currencies/Ledgers: L-Settlement parallel ledgers). Using this method, costs to be settled are separately calculated for each ledger. This is also known as the concept of Parallel Accounting.

Ledger-Specific Allocation Structure

In some specific cases, like multinorm in Asset Accounting, it may be necessary to use different cost elements for settlement, depending on the ledger used.

You can complete your settlement parameters with a ledger-specific allocation structure . It allocates the costs incurred on a sender by cost element or cost element group. In addition, it offers the possibility to distinguish different cases (per ledger, optionally, per company code).

The maintenance is the same as for a classical allocation structure.

If some ledger-specific allocation structure is implemented, it is applicable for the combination instead of the allocation structure. If there's none, the settlement parameters and allocation structure is applicable.

In the previous example, a Ledger-Specific Allocation structure is implemented. It overrides any allocation structure defined in the settlement parameters.

Here there are different cases:

• Case 1: postings to be settled in ledger 0L and for company 1010, the allocation structure to be used will be Y1_10.
• Case 2: For the other companies, run for ledger 0L, nothing is specified, the Ledger-Specific Allocation Structure Y1_0L is applied.
• Case 3: For all settlement run for ledger 2L.

In case of any settlement for another ledger, as nothing is specified, the settlement parameters are applied.

Hereafter, you can see how to maintain a ledger-specific allocation structure in the Manage your solution tile, application area Finance, sub application area Overhead Cost Management, configuration step 3-Maintain Ledger-Specific Allocation Structures .

It's a decision table.

Create a Ledger-Specific Allocation Structure

Prerequisites.

Before you can create a Ledger-Specific Allocation Structure , you have to create an Allocation Structure . This is done using the Implementation Activities tile and then expanding Accounting → Overhead Costs → Overhead Cost Processes → Period-End Closing → Maintain Allocation Structures .

To create a Ledger-specific Allocation Structure , use the Implementation Activities tile and then expand Accounting → Overhead Costs → Overhead Cost Processes → Period-End Closing → Maintain Ledger-Specific Allocation Structures .

Choose Edit .

Choose New Entries .

Specify the following parameters:

Allocation Structure: Maintained in the settlement parameters of the cost object (derived from the settlement profile).

Ledger: The ledger for which the settlement is carried out.

Company Code (optional): Company code of the settlement sender.

Ledger-Specific Allocation Structure: Allocation structure to apply for settlement posting (includes the cost elements used for settlement postings).

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• SAP Glossary ›
• Controlling ›
• allocation structure

What is allocation structure in SAP (CO - Controlling)?

Sap glossary - details.

SAP Term: allocation structure

Component: CO

Component Name: Controlling

Description: A tool that allocates the costs incurred on a sender by cost element or cost element group. The allocation structure is used for settlement and for assessment. An assignment assigns a cost element or cost element group to a settlement or assessment cost element. Each allocation structure contains a number of such assignments. The allocation structure must meet the following criteria: Completeness - For a settlement or assessment to be executed correctly, the allocation structure must represent all cost elements under which costs are incurred. Unambiguity - There must be only one cost element in an allocation structure.

AnswerBot for ERP

• SAP Term: --> Key Concepts: Allocation structure is a feature of SAP Controlling (CO) that allows users to define the distribution of costs and revenues between different cost centers or profit centers. It is used to allocate costs and revenues in a systematic way, based on predefined criteria. Allocation structures can be used to allocate costs and revenues between different cost centers or profit centers, or even between different company codes. How to use it: To use an allocation structure, users must first define the criteria for the allocation. This includes defining the source and target cost centers or profit centers, as well as the percentage of costs or revenues that will be allocated to each target. Once the criteria have been defined, users can then create an allocation structure in SAP Controlling (CO). The allocation structure can then be used to automatically allocate costs and revenues between the source and target cost centers or profit centers. Tips & Tricks: When creating an allocation structure, it is important to ensure that the criteria are properly defined. This will ensure that the correct amount of costs and revenues are allocated to each target cost center or profit center. Additionally, it is important to ensure that the allocation structure is regularly updated to reflect any changes in the criteria. Related Information: For more information on how to use allocation structures in SAP Controlling (CO), please refer to SAP's official documentation on the topic. Additionally, there are many online resources available that provide detailed tutorials on how to use allocation structures in SAP Controlling (CO).
• AnswerBot is an artificial intelligence solution provided by tomco.ai . Disclaimer : AI-generated answers may occasionally provide incorrect information as the model learns about SAP functionality.

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Understanding Cost Structure: Direct, Indirect Costs & Allocation Methods

Explore the intricacies of cost structures, including direct and indirect costs, and learn about various cost allocation methods across different industries.

Every business, regardless of its size or industry, must grapple with the complexities of cost management. Understanding how costs are structured is crucial for making informed financial decisions and ensuring long-term sustainability.

Effective cost management involves distinguishing between direct and indirect costs, as well as employing appropriate allocation methods to accurately assign these costs.

Key Components of Cost Structure

A comprehensive understanding of cost structure begins with recognizing the various elements that contribute to a company’s overall expenses. These components can be broadly categorized into fixed and variable costs. Fixed costs remain constant regardless of production levels, such as rent, salaries, and insurance. On the other hand, variable costs fluctuate with production volume, including raw materials, utilities, and direct labor. This distinction is fundamental for budgeting and forecasting, as it helps businesses anticipate how changes in production levels will impact their financial health.

Another important aspect is the differentiation between product and period costs. Product costs are directly tied to the creation of goods or services and include expenses like raw materials, labor, and manufacturing overhead. These costs are capitalized as inventory on the balance sheet until the product is sold. Period costs, however, are expensed in the period they are incurred and include selling, general, and administrative expenses. Understanding this distinction aids in accurate financial reporting and compliance with accounting standards.

Additionally, the concept of economies of scale plays a significant role in cost structure. As businesses expand their operations, they often experience a reduction in per-unit costs due to increased efficiency and bargaining power. This can lead to competitive pricing and higher profit margins. Conversely, diseconomies of scale can occur when a company grows too large, leading to inefficiencies and increased per-unit costs. Balancing growth with operational efficiency is therefore a strategic consideration for any business.

Direct Costs Analysis

Direct costs are those expenses that can be directly traced to the production of specific goods or services. These costs are integral to the manufacturing process and include raw materials, direct labor, and manufacturing supplies. For instance, in an automobile manufacturing company, the cost of steel used to build car frames and the wages paid to assembly line workers are considered direct costs. These expenses are easily identifiable and can be directly attributed to the end product, making them straightforward to manage and allocate.

The precision in tracking direct costs is paramount for businesses aiming to maintain accurate financial records and optimize their production processes. Advanced software tools like SAP and Oracle ERP systems are often employed to monitor these costs in real-time. These platforms offer detailed insights into material usage, labor hours, and other direct expenses, enabling companies to make data-driven decisions. For example, a company might use these tools to identify inefficiencies in their supply chain, such as excessive material waste or underutilized labor, and implement corrective measures to enhance productivity and reduce costs.

Moreover, understanding direct costs is essential for pricing strategies. By accurately calculating the total direct costs involved in producing a product, businesses can set prices that cover these expenses while ensuring a reasonable profit margin. This is particularly important in competitive markets where pricing can be a significant differentiator. For instance, a bakery that meticulously tracks the cost of ingredients and labor for each type of pastry can price its products competitively while maintaining profitability.

Indirect Costs Analysis

Indirect costs, unlike direct costs, cannot be easily traced to a specific product or service. These expenses are necessary for the overall operation of a business but are not directly tied to the production process. Examples include utilities, rent, administrative salaries, and depreciation. These costs are often referred to as overhead and can be more challenging to allocate accurately. Understanding and managing indirect costs is crucial for maintaining financial health and operational efficiency.

One of the complexities in dealing with indirect costs is their allocation across various departments or products. This process often involves using cost drivers, which are factors that cause changes in the cost of an activity. For instance, the number of machine hours used might be a cost driver for allocating factory overhead. Advanced accounting software like QuickBooks and Xero can assist in tracking and allocating these costs more precisely. These tools can automate the allocation process based on predefined criteria, reducing the risk of human error and ensuring more accurate financial reporting.

Another important aspect of indirect costs is their impact on budgeting and forecasting. Since these costs are not directly tied to production levels, they can be more stable and predictable. However, they still require careful management to avoid unnecessary expenditures. For example, a company might negotiate better lease terms or invest in energy-efficient equipment to reduce utility costs. By closely monitoring and controlling indirect costs, businesses can improve their overall cost structure and enhance profitability.

Cost Allocation Methods

Cost allocation methods are essential for distributing indirect costs across various departments, products, or services within a business. One widely used method is the Activity-Based Costing (ABC) approach, which assigns costs based on the activities that drive them. For example, if a company identifies that machine hours are a significant cost driver, it will allocate overhead costs proportionally to the number of machine hours each product consumes. This method provides a more accurate reflection of resource usage and helps in identifying inefficiencies.

Another common method is the Direct Allocation method, which assigns costs directly to cost objects without any intermediate cost pools. This approach is simpler but may not be as precise as ABC. It is often used in smaller organizations where the complexity of operations does not justify the need for more sophisticated allocation methods. For instance, a small consulting firm might allocate administrative costs directly to client projects based on billable hours, providing a straightforward way to manage expenses.

The Step-Down Allocation method is another technique that sequentially allocates service department costs to production departments. This method recognizes the interdependencies between departments and allocates costs in a hierarchical manner. For example, the costs of the human resources department might first be allocated to the IT department, which in turn allocates its costs to production departments. This method ensures that all indirect costs are accounted for in a systematic way.

Cost Structure in Different Industries

The cost structure of a business can vary significantly depending on the industry in which it operates. For instance, manufacturing companies typically have a high proportion of direct costs due to the substantial expenses associated with raw materials and direct labor. In contrast, service-based industries, such as consulting or software development, often have higher indirect costs, including salaries for administrative staff and office rent. Understanding these industry-specific cost structures is essential for effective financial planning and management.

In the retail sector, cost structures are heavily influenced by inventory management and supply chain logistics. Retailers must carefully balance the costs of purchasing and storing inventory with the need to meet customer demand. Advanced inventory management systems like NetSuite and TradeGecko can help retailers optimize their stock levels, reducing holding costs and minimizing stockouts. Additionally, the rise of e-commerce has introduced new cost considerations, such as shipping and fulfillment expenses, which must be carefully managed to maintain profitability.

In the healthcare industry, cost structures are often complex due to the diverse range of services provided and the regulatory environment. Hospitals and clinics must manage both direct costs, such as medical supplies and staff salaries, and indirect costs, including facility maintenance and administrative expenses. Cost allocation methods like ABC can be particularly useful in this context, helping healthcare providers understand the true cost of different services and identify areas for cost reduction. Moreover, healthcare organizations often invest in specialized software like Epic and Cerner to track and manage their costs more effectively.

Managerial Accounting Techniques for Effective Decision-Making

Economic order quantity: formula, calculation, and optimization, you may also be interested in..., special purpose financial statements: types, uses, and guidelines, annual depreciation methods: types, calculations, and impacts, understanding and analyzing the statement of owner's equity, understanding and analyzing off-balance sheet accounts.

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How do settlement rules work.

How do Settlement Rules, Profiles and Allocation Structures Work?

By tanya duncan.

This question was posed specifically about project systems, but this applies to all cost objects in SAP that require settlement: Production orders , process orders , sales orders , and internal orders . 

Settlement occurs at month end so the remaining balance on cost objects can be offset and the variance can post to a final resting place on the financial statement. During settlement, the difference between the debit and credit of the order is transferred to the cost center based on the finished good material’s profit center. Each cost object in Controlling has a settlement rule to determine where and how the remaining costs should settle. The settlement rule is generated based on the settlement profile assigned to that order type. 

The settlement profile configuration determines if the order is settled in full, can be settled, or not, what receivers are valid, what allocation structure is relevant, along with many other settings. This is the key piece of settlement configuration that links together other elements like the allocation structure . A different settlement rule is generally required for each cost object.

The allocation structure determines what source cost elements are posted to what settlement cost centers. For example, you can group together material costs to see them separately from labor costs and service costs. You can also settle those costs to different settlement cost elements to have more visibility to that level of detail during settlement.

To learn more about settlement rules and other SAP FICO topics please visit our SAP FICO Learning Center please click here .

Allocation Structure 

An allocation structure allocates the costs incurred on a sender by cost element or cost element group, and it is used for settlement and assessment. An assignment maps a cost element or cost element group to a settlement or assessment cost element. Each allocation structure contains a number of such assignments.

Process Order  

A process order is a manufacturing order that is used in process industries. A master recipe and materials list are copied from master data to the order. A process order contains operations that that are divided into phases. A phase is a self-contained work-step that defines the detail of one part of the production process using a primary resource.

In process manufacturing, only phases are costed, not operations. A phase is assigned to a subordinate operation and contains standard values for activities, which are used to determine dates, capacity requirements, and costs.

Production Order

A production order is used for discrete manufacturing. A BOM and routing are copied from master data to the order. A sequence of operations is supplied by the routing, which describes how to carry out work-steps.

Sales Order

A sales order is a customer request for delivery of goods or services at a certain time. A sales order line item can be a real cost object if you are using nonvaluated inventory.

Settlement Profile

A settlement profile contains the parameters necessary to create a settlement rule for manufacturing orders and product cost collectors and is contained in the order type.

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Tanya Duncan

• SAP S/4HANA Finance
• Practical Guide to CO-PC (Product Cost Controlling)
• The Essential SAP Career Guide

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