SAP is a company that provides business software solutions to organizations who want to leverage technology to automate, integrate or improve business processes. SAP cost elements refer to classifying an organizations consumption of production values within a controlled area using the SAP R/3 system. Each cost element corresponds to an item that is cost relevant in the organization's chart of accounts. SAP distinguishes cost elements as primary-cost elements, which are revenue based, and secondary-cost elements, which refer to internal values used inside the organization. To better understand this, it is helpful to have a fundamental knowledge of cost element accounting.
Cost Element Accounting
Cost element accounting is very precise. It aims to record all costs incurred and to record those costs in groups; the system also describes the origins of the cost recorded. The specific use of this type of accounting is to represent all specified costs in an organization, and identify where that cost occurred. Using cost element accounting helps managers and executives reconcile costs with internal accounting procedures.
Primary Cost Elements
A primary cost element is a cost or revenue item that corresponds with the organization's chart of accounts in SAP. To assign a primary cost element, the general ledger must have an account that the cost falls under, and have it listed in the Financial Accounting function. When attempting to enter a primary cost element, the system first checks to verify there is a corresponding account under Financial Accounting. Examples of primary cost elements include energy cost, personnel costs and material costs.
Secondary Cost Elements
For secondary cost elements, you must name these under the Cost Accounting function. Secondary cost elements represent internal values. These may include overhead costs, settlements and internal activities. In the case of secondary cost elements, if you have a corresponding account already created in Financial Accounting, you cannot also create one in Cost Accounting.
The SAP R/3 system functions as an integrated accounting system. Therefore, all cost elements are closely aligned with the general ledger used under the Financial Accounting function. The cost elements record which costs under what categories were incurred in any settlement period. The system seeks to provide transparency into internal value flow and consumption. As such, each cost element is assigned to either an order or a cost center. This checks the data at the end of a settlement period is divided by cost elements and cost centers or internal orders, allowing analysis for decision-making purposes.
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