Lesson 3 of 5
The cost flow: from expense posting to market segment
10 min
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The single most useful picture in management accounting is the cost flow: how a cost enters the system, where it lands first, and how it travels until it shows up as part of a product's cost and a customer's margin. Every course in this track builds on this picture, so it is worth following one month at Contoso step by step.
- Primary postingSupplier invoices, payroll, energy and depreciation post to G/L accounts with a cost center, for example Detroit maintenance (17101102)
- Cost centersCosts collect by responsibility: Detroit maintenance, Detroit assembly (17101101), IT (17101301)
- Allocation between cost centersAt period end, service cost centers such as maintenance and IT pass costs to the cost centers that used them
- Activity allocation to productionDetroit assembly charges labor hours to production orders for CMC-ALT-100
- Production orders and variancesOrders collect materials and activities; the difference to the $150 standard is settled as variances
- Billing and margin analysisInvoices to Great Lakes Fleet Services post revenue and cost of goods sold with market segment attributes
Step 1: primary postings
Costs enter management accounting through postings in financial accounting and logistics. SAP's material gives both routes: a primary cost can be entered directly in financial accounting, such as a supplier invoice in accounts payable, or generated in another application, such as a goods movement in materials management. Every cost-relevant posting must name a cost object. When Ana posts the $2,400 Lakeside Components invoice for maintenance parts, the expense line carries cost center 17101102 Detroit maintenance.
Step 2: one real posting, some statistical ones
A posting can touch several cost objects, but SAP's rule is strict: exactly one real posting takes place in management accounting, and only the real object can pass the cost on. Up to three further statistical postings are possible, for information. Cost centers are special because they can receive real or statistical postings. If an expense goes to a real internal order with a cost center entered too, the order gets the real posting and the cost center a statistical one. The profit center is always derived and updated statistically, for example from the cost center's master data.
Steps 3 and 4: allocations
At period end, costs move along the flow. Distribution passes on primary costs and keeps the original account. Overhead allocation (called assessment in SAP ERP) passes on primary and secondary costs under an allocation account, so the original account detail is lost on the receiver. Activity allocation charges quantities of an activity type at a price: if Detroit Assembly (17101101) confirms 400 labor hours of activity type ASSYHR on production orders for CMC-ALT-100 at the planned $52 per hour, $20,800 moves from the cost center to the orders. Production order 1001200 for 500 alternators alone needs 250 hours (0.5 h each), so it receives $13,000.
| Allocation | What moves | Contoso example |
|---|---|---|
| Distribution | Primary costs, original account kept | Building energy costs spread to Detroit cost centers by floor space |
| Overhead allocation (assessment) | Primary and secondary costs under an allocation account | IT costs charged to departments by headcount |
| Direct activity allocation | Activity quantity times price | Maintenance hours charged to Detroit assembly |
| Activity confirmation on orders | Production activity at the planned price | Machine hours charged to CMC-ALT-100 production orders |
Ways costs move between cost objects.
Steps 5 and 6: products and margins
Production orders collect materials and activities. When the alternators are received into stock, they are valued at the $150 standard; at period end the difference between actual and standard cost is analyzed as variances and settled. When an alternator is sold, billing posts revenue, and the goods issue posts cost of goods sold. In SAP S/4HANA these journal entry lines carry market segment attributes such as product, customer and sales area, so margin analysis can show the margin of CMC-ALT-100 sales to Great Lakes Fleet Services without a separate posting.
- During the monthPrimary postingsInvoices, payroll and goods movements post to cost centers and orders
- During the monthProduction and billingOrders collect costs; billing posts revenue and cost of goods sold with market segment attributes
- Period end, step 1AllocationsDistributions, overhead allocations and activity allocations run in a planned sequence
- Period end, step 2Order closingOverhead on orders, variance calculation and settlement
- Period end, step 3ReportingCost center, product cost and margin reports reviewed and signed off
What would you do?
After the month-end allocation run in CMQ, the Detroit maintenance cost center still shows a large balance, and Detroit assembly received less than expected. What should the tester check first?
- Costs enter through primary postings from finance and logistics; each needs a cost object.
- One real posting per line; up to three statistical postings; profit center derived statistically.
- Distribution, overhead allocation and activity allocation move costs between objects at period end.
- Production orders compare actual cost with standard; variances are analyzed and settled.
- Billing and goods issue lines carry market segment attributes for margin analysis.
Check your understanding · not graded
Lesson check
1. How many real postings to a management accounting object does one posting line make?
2. Which allocation keeps the original primary cost account on the receiver?
3. How does a profit center get its values from a cost center posting?
4. What makes margin analysis possible without a separate posting?