The individual cost centers form the lowest hierarchical level

Classic Rockers Case

Student Text

Logistics and Support Processes of SAP with an Emphasis on Internal Control

Ronny Daigle

Sam Houston State University

Huntsville, Texas

3. Chapter 3: Production Logistics (PP)
   This chapter discusses the production logistics process along with descriptions of the exercises in the Student Exercises document that require students to create MRP views for materials, BOM, routing, run MRP, convert planned orders, issue goods to manufacturing, confirmation of completion, and order settlement.

4. Chapter 4: Sales Logistics (SD)
   This chapter discusses the sales and distributions logistics process along with descriptions of the exercises in the Student Exercises document that require students to create customers, create sales views for trading goods and finished products, material prices, discounts, customer material info records, item proposal, customer inquiry, create sale orders, create delivery, pick goods, post goods issue, and bill the customer.

Classic Rockers allows participants to process transactions and learn fundamental internal control concepts for sales logistics, production logistics, procurement logistics, and accounting/controlling. The case is preconfigured with all control/configuration data and master data necessary to process those transactions. However, for each area, the case has optional exercises that can be used by participants to set up the master data required for transaction processing. Each participant will utilize his/her own set of master data (either self-created or pre-established) to process transactions within Classic Rockers.

The case can be used in its entirety (all sets of exercises – either with pre-established master data or with self-created master data) in classes that have the objective of addressing the primary business processes of sales, production, procurement and materials management, etc. Alternatively, each set of exercises addressing a particular logistics or support area can be used independently in classes where only that business area is of concern (again with or without master data creation exercises). Through the use of the Classic Rockers case, in total or in part, students are introduced to SAP navigation, master data use (and optional creation), transaction processing, the flow of data through each business process, the integration of the various processes with one another (i.e., an organization’s value chain), and fundamental internal control concepts specific to SAP. This feature allows the use of the case across disciplines with minimum detailed knowledge of the complete SAP system on the part of the instructor. Its best use would be to introduce students to how transactions are processed, how processing makes use of master data to process transactions across the value chain, and how internal control can help make information more reliable and the value chain more efficient and effective. These concepts, especially internal control, are typically covered in Accounting Information Systems courses.

The various modules of SAP R/3 are highly integrated. Much of the data in the system are shared. The table below indicates some of the sharing aspects of master data in SAP.

SAP General Terms

Passwords: Each user has a unique password. On the initial log in to the system, the user must change a generic delivered password to one chosen by the user. The password must be at least three characters long, cannot begin with a “!” or “?”, and the first three characters unique and not contained in the username.

Roles and Profiles: Roles specify the sets of tasks or activities that can be performed by a particular user within the system. A role is assigned to each user. When the user logs on, the system automatically presents a specific menu for that user’s assigned role. For example, a receiving clerk should perform only certain tasks within the SAP system. When a receiving clerk logs on, that user’s role will define what the user will be allowed to view, create, change, delete, etc. Profiles work in the same manner as do roles to restrict authorization for access to the system. User profiles and roles are entered by system administrators into user master records thus enabling users to access and use specific functions within the system. SAP also produces a separate application enhancement called Governance Risk and Controls, which can identify compatible and incompatible duties with a color coding. This application is not part of the software you are using but know that organizations use it to properly define roles.

A business process can be described as a set of linked activities that transform an input into a more valuable output thus creating value. In many cases business processes are classified as operational processes or as support processes. At the most basic level, a typical business utilizes three operational processes: procurement (purchasing and materials management), production, and sales and distribution (customer order management). The typical support processes include accounting/controlling and human resources. While these processes have specific identities, they are linked together (integrated) in order to carry out the day-to-day activities of a business. For example, the sale of a manufactured product involves not only the sales process but also production (the creation of the product); procurement (of necessary raw materials); accounting/controlling to determine the profit on the sale; and human resources to ensure the operations are staffed with qualified or trained employees. These linkages of activities across business processes necessitate the sharing of data across those processes, regardless of which process created the data initially. For example, data related to a finished product may be initially created in the production process, but the data are also required in the procurement process and, of course, in accounting/controlling for costing purposes, as well as in calculating pay based on work production hours. SAP as an integrated ERP system utilizes the principle of a common data record for a given object that can be accessed by any process that has need of the various attributes contained in that common record.

Business processes are often viewed as elements of a logistics value chain. From this perspective the operational processes are defined as sales logistics, production logistics, and procurement logistics. This is the approach taken in the overall structure of the Classic Rockers case. The case is separated into the sections as outlined below.

Transaction data describe a business event or may be the result of a business process. For example, a sales order would contain transaction data that have resulted from a customer placing an order to purchase a product from the company. The various attributes necessary to process that sales order transaction would include such data as the customer (which allows detailed customer data to be drawn from the customer master record), the item or items being sold (which would draw data from the material master records for those items), the quantities being sold, the desired delivery date, the customer PO number, etc. While the customer master data for this transaction would be the same for various sales orders to that customer, the other data such as items wanted, quantities, delivery dates, etc. would most likely vary from order to order. For this reason, transaction data vary from event to event. Transaction data may also arise as the result of the outcome of a completed business process. For example, the system may process an inquiry to determine the current stock quantity level for a raw material. That inquiry is a transaction that extracts the data for the quantity on hand in the warehouse. This too, of course, will vary over time. Other examples, pertaining to human resources, would involve the hiring of employees and pay transactions. From one perspective, therefore, transaction data can be viewed as resulting from the events or activities that are taking place in the business. The transaction data represent the recorded attributes, elements, and results or outcomes of business events and activities, and, as a result is the most volatile and frequently used data in day-to-day business operations. Each of the logistics and support processes addressed in Classic Rockers contains exercises that require the processing of transactions through the particular process.

Internal Control

For example, the receipt of an order of goods is an event requiring recognition in the financial statements per GAAP. While the purchase order placed for those goods received is not recognized in the financial statements per GAAP, it is an important economic event for which data must be collected and processed for ensuring the later event of receiving is proper. Why is this so? It is so because the purchase order authorizes the receipt of goods. The lack of a purchase order should result in no receipt, and therefore no recognition of the receipt in the financial statements.

To bring together the concepts of a system, information and accounting, an AIS is therefore a set of interrelated components working together to collect and process data from economic and financial events into information that is useful to decision-makers.

• Information that has been generated from data collection and processing

• Formal and documented procedures to be performed for collecting and processing data into information (the exercises in the cases can be thought of as formal procedures, for example)

In general, there are three basic objectives of an AIS (Romney and Steinbart, 2009):

• Collect and process data from economic and financial events

Just as internal control is part of a system, internal control is also a system comprised of interrelated components that meet certain internal control objectives. The COSO Framework describes internal control as a process implemented by an organization’s management that provides reasonable assurance that certain objectives will be met:

• Reliable financial reporting

• A particular transaction is valid (i.e., did occur).

• A particular transaction is recorded (i.e., the transaction has been posted in the records).

Internal control can only provide reasonable assurance because there are certain inherent weaknesses in any system of internal control. These include management override of controls, collusion amongst people with incompatible duties and human error. The cost of a control in comparison to risk minimization can also be a prohibitive factor when designing internal control. For these reasons, there is no full-proof system of internal control.

Internal Control Components

• Monitoring – Review and response to how internal control is meeting risks and meeting objectives; includes internal audit activities

• Information and communication – Gathering information about internal control and communicating it to management and employees provides feedback on what is being done successfully and what is not, so that improvements can be made for managing risks and meeting objectives

Not only is it important to design a system to collect and process data and generate information with reasonable assurance, it is important to assign various tasks in a way so that errors and fraud are minimized. This is the concept of separation of duties, which is referred to previously in this chapter when discussing Roles and Profiles. For a particular type of transaction and related assets and records, four types of duties should be separated so that errors and fraud are minimized:

• Authorization

Proper separation of duties does not simply mean that no person can perform two different types of duties. The duties must not be related to the same type of transaction and related asset and records. For example, it is proper to allow an individual to process payroll transactions (recordkeeping) and update vendor master records (authorization). This pair is compatible as opposed to the recordkeeping-authorization pair given above dealing with vendors. Similarly, it is proper to allow a person to handle the bank deposit (custody) while reconciling the fixed asset records to the general ledger. This pair is also compatible, unlike the custody-reconciliation pair given above dealing with cash transactions.

As noted previously, students will have access to areas in SAP that they would (or should) not have if they were assigned a position within an actual organization. Having access to many areas allows students to appreciate the integration of activities and audit trail in SAP. At the same time, students should appreciate which activities are compatible and incompatible with others. Your instructor may seek to emphasize this concept by assigning certain internal control questions throughout the case.

General vs. Application Controls

• Range check – Like a limit check but includes both an upper and lower limit on a field. For example, an organization may require a certain minimum value of items to be ordered, but a certain maximum value before a special authorization is required. A range check would make sure the minimum was met and whether special authorization is required. Assuming all data had been input properly in this situation, the range check is helping enhance that a particular transaction is properly authorized because it is making sure that it should occur.

• Reasonableness test – Determines the correctness or logic of a relationship between two or more data items before a transaction is recorded or record updated. For example, it could be considered unreasonable for a particular category of employee to be paid a certain salary. For example, it is unreasonable for an administrative assistant to have a salary of $25,000 per month, while it is more reasonable for someone in executive management to have such a salary. The relationship between employee category and salary is considered illogical. Assuming an error had been made in entering an administrative assistant’s salary in the master records in this situation, the reasonableness test is helping enhance that the master record is recorded accurately, and therefore related transactions.

• Zero-balance test – Compares numerical data entered to a pre-determined number for ensuring accuracy. For example, when entering a transaction in the general ledger, debits should equal credits. If not equal, SAP will not allow posting. In the example, the zero-balance test is helping enhance that a particular transaction is recorded accurately.

Each of these application controls is present in SAP. Careful attention throughout the exercises will help gain an appreciation for them. Students may make data entry mistakes at times in these exercises, and such application controls as these are in place to help make sure the mistakes are not recorded. Careful study of these application controls shows that application controls are generally a preventive control automated in the system.

To summarize much of this discussion on internal control, it is a key element in any system, especially in an AIS. Internal control helps:

• Improve data collection and processing

Understanding these objectives and particular sub-objectives (such as at the transaction level), helps provide an appreciation for procedures that exist in SAP (such as application controls) for helping ensure that the exercises performed are done so efficiently and effectively. These internal control concepts should be kept in mind when reading later chapters and completing related exercises of this case.

References

Romney, M. B. and P. J. Steinbart. 2009. Accounting Information Systems. 11^th ed. Upper Saddle River, NJ: Pearson Prentice Hall.

SAP Help Portal. <http//help.sap.com>

3. The third exercise establishes the fixed and variable costs for planned production, which takes place in the PP exercises. Without these costs, production could not be performed and recorded, thereby interfering with selling activities in the SD module.

CHAPTER 2: Procurement Logistics (MM)

In many cases, a company may wish to enter a long-term purchasing arrangement with one or more of its vendors. One means of doing this in the SAP system is a contract. This is a type of "outline agreement", or longer-term buying arrangement rather than one or a series of individual purchases. The contract is a binding commitment to procure a certain material or service from a vendor over a certain period of time. A scheduling agreement is another type of "outline agreement", or longer-term buying arrangement. Scheduling agreements provide for the creation of delivery schedules specifying purchase quantities, delivery dates, and possibly also precise times of delivery over a predefined period.

In many cases a company may wish to purchase a given material from one particular vendor. This eliminates the need to search for possible vendors for the given material when a purchase is required. The SAP system allows for the creation of a purchasing info record that will accomplish this task. The info record establishes the link between a given material and specific vendor. This info record contains data that facilitate the purchasing activities. For example, the info record shows the unit of measure used for ordering from the vendor and indicates vendor price changes affecting the material over a period of time. A business may wish to purchase materials or services from several vendors and thus create and maintain relationships with more than one vendor as a matter of company policy. This can be done by creating a quota arrangement that allows the company to automatically apportion the total requirement of a material over a period among several different sources of supply.

Information for material requirements planning (MRP) and consumption-based planning/inventory control. Examples: Safety stock level, planned delivery time, and reorder level for a material.

• Purchasing

Information relating to the storage/warehousing of a material. Examples: unit of issue, storage conditions, and packaging dimensions.

• Forecasting

A unique number (capture in the primary key field) is assigned to each material master record. This number identifies a specific material. Material numbers can be assigned internally or externally. Internal number assignment means that the system assigns material numbers, whereas external number assignment means that the person creating the material master record does so. Once this number is assigned, it is used to track the material throughout the SAP system.

The material master record contains attributes of the given material such as the description of the material, the units of measure (e.g., base or stock-keeping unit, order unit, sales unit, unit of issue), material type (e.g. trading, finished, raw material), gross and net weight (with and without packaging, respectively) and weight units (e.g., lbs., ounces, kilos, etc.), price (e.g., standard, moving average), packaging material required for sale, loading group (e.g., forklift, crane, handcart), country of origin, shelf life, and transportation group (e.g., on pallets, in liquid form, etc.).

Purchasing (Purchase Order)

A purchase order is a legally binding instruction from a purchasing organization to a vendor to deliver a quantity of material or to perform a service at a given time at an agreed upon price. The purchase order contains data such as the required material, the quantity to be delivered, the price, terms of delivery, etc. The purchase order can also include a storage location in the warehouse where the material will be stored when received. This storage location is, of course, for internal use only and is of no use to the vendor. If the vendor accepts the purchase order, the material will be delivered as per the requirements established in the purchase order.

• Goods receiving can check whether the delivery is from an actual purchase order (typically through reference of the purchase order number on the vendor’s receiving report that accompanies the goods). This checking helps enhance the transaction-related control objective that a particular transaction is properly authorized.

• The system can propose data from the purchase order during entry of the goods receipt (for example, the material ordered, its quantity, and so on). This integration of data in SAP therefore simplifies both data entry and checking (over- and under-deliveries). This integrating data feature in SAP helps enhance the transaction-related control objective that a particular transaction is recorded accurately. This integrating data feature is not only present here, but in other instances such as when creating the invoice receipt (see later discussion in this chapter).

Goods receipts for the warehouse can be posted to three different stock types:

• To unrestricted-use stock: stock located in the warehouse that is not subject to any kind of usage restrictions.

Creation of a Material Document: When the goods receipt is posted, the system automatically creates a material document which serves as proof of the goods movement from receiving to the warehouse.

Creation of an Accounting Document: Parallel to the material document, the system creates an accounting document. The accounting document contains the posting lines (for the corresponding accounts) that are necessary for the movement.

• Goods receipt into the warehouse: If the goods are destined for the warehouse, the system increases total valuated stock and the stock type (for example, the unrestricted-use stock) by the delivered quantity. The stock value is updated at the same time.

• Goods receipt into consumption: If the goods are destined for consumption, only the consumption statistics are updated in the material master record.

• Purchase order history: During goods receipt posting, a purchase order history record is automatically created. This record contains data essential for Purchasing, such as: the delivered quantity, the material document number and item, the movement type, the posting date of the goods receipt, and which user(s) recorded/updated the purchase order.

• Purchase order item: If the "delivery completed" indicator is set in the material document, the order item is considered closed, and the open purchase order quantity is set to zero.

• Transfer requirements and quantities in the Warehouse Management System

• Inspection lots in Quality Management

• It completes the materials procurement process - which starts with the purchase requisition, continues with purchasing and goods receipt, and ends with the invoice receipt

• It allows invoices that do not originate in materials procurement (for example, services, expenses, course costs, etc.) to be processed

• Executing the account postings resulting from an invoice

• Updating certain data in the SAP system such as open items and material prices

The use of tolerance limits helps provide dual consideration of both accurately recording a particular transaction (a transaction-related control objective) and promoting efficient and effective operations (an internal control objective) by allowing some tolerance so that activities do not get halted by some acceptable difference that can then be investigated.

When the invoice is entered, the system also finds the relevant account. Automatic postings for sales tax, cash discount clearing, and price variances are also generated and the posting records displayed. Like previous discussion about automatic posting, this feature helps enhance the transaction-related control objective that a particular transaction is recorded, as well as recorded accurately. If a balance is created, the user is required to make corrections, as an invoice can only be posted if the balance equals zero.

• Invoices based on goods receipt: With goods-receipt-based Invoice Verification, each individual goods receipt is invoiced separately.

• Invoices without an order reference: When there is no reference to a purchase order, it is possible to post the transaction directly to a material account, a G/L account, or an asset account.

In order to purchase raw materials from vendors, there must be a raw material master record. This master record will contain all of the basic data needed to acquire the good from the vendor. A material master record must be created for each trade good that will be purchased. Raw materials are goods that will be used in production to create finished products. Trade goods are generally sold separately as independent products, but trade goods may also be used in production as component parts of a given manufactured product.

In creating finished goods from raw materials, the system must have some means of recording the use of the raw materials to produce the finished goods. This requires that a master record for each finished product be created so that the physical quantities materials used, and the related costs can be transferred in the system from raw materials to finished goods as the products are completed in production.

Vendors that supply goods to the company have a nasty habit of wanting to be paid for those goods. In order to ensure they get paid, they send an invoice to the company outlining what is to be paid for, when, and how much. The vendor invoice will reference the original purchase order sent in order to facilitate the processing of the invoice for payment. Invoices are not paid unless the quantities, prices, and other aspects of the invoice agree with the purchase order data and also with the receiving report, within tolerance limits. Ensuring the agreement among these three is the role of purchasing logistics invoice verification. For this reason, the purchase order must be input in the invoice receipt process to establish the linkage between the purchase order and the vendor invoice. Before an invoice can be released to accounting to make a payment, the data from the purchase order, the receiving report, and the vendor invoice must be in agreement. For example, if the purchase order requested 100 items of a particular good, the receiving report indicated that 125 were received, and the vendor invoice indicated that 150 were to be paid for, the company would not wish to make this payment until these discrepancies were resolved.

CHAPTER 3: Production Logistics (PP)

The make-to-stock strategy is appropriate if the materials are not segregated (i.e., not assigned to specific sales orders) and costs need to be tracked at material level, not at sales order level. Make-to-stock production should be used if stock is to be produced independently of orders so that customers can be immediately provided with goods from that stock at a later time. The company may even want to produce goods without related sales orders if there is an expectation of future customer demand. This means that make-to-stock strategies can support a very close customer-vendor relationship because the objective here is to provide customers with goods from stock as quickly as possible. In a make-to-stock environment, smoothing of production can be an important feature. This means irregular requirements flow resulting from different customer requirements quantities can be smoothed and simply produced to stock.

Make-to-stock strategies are usually combined with a lot-size key or a rounding value. For instance, it may be desirable to produce the entire amount for the whole month once a month only, or to produce full pallets only. No specific product structures are required for make-to-stock strategies. In other words, the material may or may not have a BOM. The material can be produced in-house or procured externally.

An important factor for ensuring that customers are provided with reliable due dates is continuous feedback between sales and production. In the R/3 System, changes to quantities or dates for production or procurement of components are passed back to the sales order of the finished product where the committed quantity or confirmation date is also changed. Similarly, changes to quantities or dates in the sales order are passed on to production and/or procurement.

Master Data in Production Logistics

A bill of material (BOM) is defined as a complete, formally structured list of the components that make up a product or assembly. The list contains the object number of each component, together with the quantity and unit of measure. A bill of material can only refer to a quantity of at least 1 of an object.

The following graphic shows some components of a bicycle that are included in a BOM.

Routing

• Machines, machine groups

• Production lines

• Scheduling - Operating times and formulas are entered in the work center, so that the duration of an operation can be calculated.

• Costing - Formulas are entered in the work center, so that the costs of an operation can be calculated. A work center is also assigned to a cost center.

A work center is created for a plant and is identified by a key. The work center category, which is defined in customizing the work center, determines which data can be maintained in the work center. The data are grouped thematically together in screens and screen groups. Examples of such screen or screen groups are:

• Basic Data

• Hierarchy

• Technical data

In the case of external procurement, the system creates either planned orders or directly creates purchase requisitions. Procurement proposals for external procurement plan the external procurement quantity. Once the MRP controller is satisfied with the results of planning, the planned orders are converted into purchase requisitions or the purchase requisitions are converted into purchase orders and passed on to the purchasing department. Purchase orders are also fixed elements, which must be followed.

If a planned order in external procurement is created first, the MRP controller has more control over the procurement proposals. Only when the MRP controller has checked the planned orders and converted them into purchase requisitions can the purchasing department order the material. Otherwise, the purchase requisition is immediately available to the purchasing department, which then takes over responsibility for material availability and warehouse stocks. The creation indicator for purchase requisitions in the initial screen of the planning run controls whether the system is to create purchase requisitions immediately or whether it is to create planned orders first.

• It is a procurement proposal in MRP for requirements coverage, that is, an internal planning element. It is not binding and does not trigger procurement directly; it serves for planning purposes only.

• It can be changed or deleted at any time (exceptions: planned orders for direct production and for direct procurement).

Automatic Creation of Planned Orders

During the MRP planning run, the system automatically calculates the materials to be procured as well as the requirements quantity and date. The system then creates the corresponding planned order.

The planned order consists of the following:

• Order data (quantities, dates, account assignment, material data, procurement data, etc.), and

For materials that are to be produced in-house, the planned order is converted into a production order. Production orders are a fundamental part of Production Planning and Control (PP). PP is fully integrated in the Logistics (LO) component and has, among others, interfaces to:

• Sales and Distribution (SD)

• What is to be produced

• When production is to take place

• From a requirement generated in requirements planning (i.e., conversion of a planned order to a production order)

• Using an assembly order

• Reservations¹ are generated for bill of material items held in stock

A production order specifies which material is to be produced, where it is to be produced, which operations are required, and on which date production is to take place. It also defines how the order costs are to be settled.

As described in this procedure, production orders can be created manually without being previously requested. Alternatively, they can be automatically created by converting a planned order. During requirements planning (MRP run), planned orders are created at every BOM level to cover requirements. For materials produced in-house, a secondary requirement is also generated when the BOM is exploded, which is necessary for producing the end product or assembly. For externally produced materials, an ordering transaction is initiated when a purchase requisition is generated.

When a production order is created and after each subsequent change to the order, the system calculates the planned order costs expected to be incurred during production. The planned costs are assigned to cost elements. Those cost elements are primary costs and secondary costs. Primary costs (material costs and costs for external procurement/external processing) are assigned directly to the order, for example, material withdrawals or the purchasing of externally processed parts. Secondary costs (production costs, material overhead costs, and production overhead costs) are allocated to the order via internal cost allocation.

When a production order is settled (after the production is completed), the actual costs incurred for the order are settled to one or more receiver cost-objects (for example, to the account for the material produced or to a sales order). Offsetting entries are generated automatically to credit the production order. If the costs for the production order are settled to a material account, the order is credited each time material is delivered to stock. The material stock account is debited accordingly. If the costs for the production order are settled to another receiver (for example to a sales order), the production order is credited automatically at the time of settlement. The cost-objects (material account or sales order) are debited accordingly. The debit posting remains in the order and can be displayed even after the costs have been settled. The settled costs are updated in the corresponding receiver cost-object and can be displayed in reporting.

• Non-order-related scheduling is carried out using routings. This type of scheduling can be used to calculate the in-house production time of a material and compare it to the lot size-independent in-house production time from the material master record. The lot size-independent in-house production time from the material master record can then be automatically or manually adjusted.

Completion of Production

• Monday through Friday are working days.

• Saturday, Sunday and public holidays are non-working days.

A bill of material must exist identifying what components are necessary to build a particular product. This must be created along with a routing in order to identify the processing steps to be performed during the production process.

Once the bill of material and routing are created and components assigned, the MRP system is executed to plan the availability and requirements for the actual manufacture of rocking chairs. A stock requirements list can be displayed in order to view the results of the planning run.

Chapter 4: Sales Logistics (SD)

Sales logistics is the business process through which an entity secures and processes orders from customers (sales order processing), initiates the delivery of products or the provision of services (outbound logistics), and bills the customer for products shipped or services rendered (billing). In SAP this process is located in the Sales and Distribution (SD) module. In order to carry out the sales logistics process, SD must access data on customers, be integrated with Materials Management (MM) in order to establish product delivery and be integrated with Financial Accounting (FI) in order to provide data on receivables due from billings generated. The graphic below illustrates the various steps and interactions necessary in the SD process. To reiterate a point that has been mentioned in previous chapters, the integration of data within SAP helps make value chain activities more efficient and effective and increases the reliability of information generated.

Several divisions can be assigned to a sales organization which is responsible for the materials or services provided. In the SAP R/3 System you can define a division-specific sales organization. For example, a rocking chair company may wish to have a “standard” division that sells consumer rocking chairs and a “competitive” division that sells competitive graded rocking chairs. Product groups (i.e., divisions) can be defined for a wide-ranging spectrum of products. For every division you can make customer-specific agreements on, for example, partial deliveries, pricing and terms of payment. Within a division you can carry out statistical analyses or set up separate marketing procedures.

The graphic below illustrates the relationships between sales organization, distribution channel, and division.

• Type of shipping (for example, train, truck)

• Loading equipment necessary

General data, company code data, and sales and distribution data are stored separately in the customer master record.

• General data are maintained for every customer, such as name, address and telephone number, communication, etc. Such data are identifiable only via the customer number, not via the number of the company code or the sales area. Maintaining the data is possible from both the accounting view and the sales and distribution view.

• Sold-to party - Person or company that places an order for goods or services. The sold-to party can also perform the functions of the payer, bill-to party or ship-to party. For the sold-to party, data on sales is necessary (for example, the assignment to a sales office or to a valid price list). In most cases, the company which places an order for the delivery of goods, or the rendering of services is at the same time ship-to party, payer and bill-to party. For this reason, in the SAP R/3 System the function sold-to party includes all these other functions.

• Ship-to party - Person or company that receives the goods. The ship-to party is not necessarily the sold-to party, the bill-to party or the payer. For the ship-to party only data required for shipping is necessary (for example, unloading point and goods receiving hours).

Materials with the same basic attributes are grouped together and assigned to a material type. The material types primarily involved in SD are trading goods, finished products, services, and packaging material. The material type represents certain features of materials in the system and has important control functions: the material type is used, among other things, to group field selection functions for a material, or to define the screen sequence, the type of number assignment and number ranges during material master record maintenance. Depending on the material type, company areas maintain different data screens. This screen selection applying specifically to an application is called a "view.”

Trading goods are movable goods intended for commercial exchange. Trading goods are always bought and re-sold by the company. The material master record for trading goods, therefore, always contains purchasing data and sales data. Finished products are goods that are produced in-house by the company in the manufacturing process. These goods are created from raw materials through the production logistics process. Services are represented and managed in the SAP System as materials. Services are non-material goods that differ from other goods, particularly in that their production and consumption coincide. Services are generally regarded as non-transportable and non-stockable. Typical services are commercial services, transport services, bank and insurance services, goods from cultural organizations and the mass media, as well as services provided by the public security forces or the education and health sectors. Since services cannot be stored, a material master record of this material type does not contain inventory data or inventory management data. No fields for gross weight, net weight or unit of weight are included in the basic data for a service, as are for other material types. Packaging material includes all materials needed for packaging, for example, boxes or crates.

In a company that has multiple plants, the delivering plant refers to the plant from which the goods are to be delivered to the customer, within a specific sales organization and distribution channel. The plant can be automatically proposed by the system when processing a sales order, if it has been maintained in one of the master records.

In order to better serve customers, a customer material information record can be created. The data in this record includes the customer-specific material number, the customer-specific material description, and customer-specific data on deliveries and delivery tolerances. If, for example, one of your customers uses a number for a material which differs from the number your company uses to identify it, you can store the material number used by the customer in the customer material information record. During order entry, items can be entered by specifying the material number used by the customer. The system will then relate the customer’s material number to the material number used in your company for that product and access all of the pertinent data for that material. The use of a customer material information record shows how the respective AIS between the vendor and customer can be integrated for improving the efficiency and effectiveness of conducting business with one another. While the integration of data improves the efficiency and effectiveness of the value chain within an organization, this type of integration improves the supply chain between vendor and customer.

When processing the inquiry, the availability of the desired product is checked to determine when it can be promised for delivery. The response to the inquiry is valid for a specific period of time (as set up when processing the inquiry). In processing the inquiry, the system accesses both the customer master record and the material master record for related sales data.

In cases where there are frequently occurring material combinations and common delivery quantities associated with customer orders, data can be stored as an item proposal. This proposal forms a “template” that can be used when customers place orders that meet the established material combinations and delivery quantities. The order entry can be processed more efficiently using item proposals when an order is placed by a customer. An item proposal, containing the materials a customer usually orders, can be assigned to one or more customers. When using item proposals in the sales document, this item proposal is then proposed for selection.

The data proposed by the system can be used as a basis for the order. If the sales order processing requires it, you can modify this data manually or add new data. For example, your pricing policy may allow you to manually change the value of certain discounts within a permitted range. In addition, you can branch in the sales order to several different screens where you can display and modify data, such as terms of payment and delivery data.

In the sales order, functions such as pricing and printouts are available. The system makes two important checks during the sales order process:

As soon as the material availability date or the transportation scheduling date for a schedule line is reached, the schedule line becomes due for shipping. When you create an outbound delivery, you initiate shipping activities such as picking, packing, and transportation scheduling. A delivery is processed through one shipping point. Which shipping point carries out the processing for a delivery can be determined automatically during order processing or you can specify it manually in the order. The system carries out the following activities when an outbound delivery is created:

• Checks the order and materials to make sure the outbound delivery is possible (for example, it checks for delivery blocks or incompleteness)

• Checks the delivery situation of the order and any partial delivery agreements

• Redetermines the route

• Creates an inspection lot if the material must pass a quality check

• Updates sales order data and changes order status

• Routinely at certain times

• Manually according to overviews of the day's workload that an employee has requested.

• Which serial numbers are picked

• Which valuation types the stock is taken from

• Stock is updated

• G/L accounts are updated

When the goods issue is posted, the system automatically creates posting lines on the accounts of the accounting system. In addition to causing an inventory update in the material master record, a goods issue posting causes an update of the consumption statistics if the material is planned with MRP. If the withdrawal is unplanned, both total consumption and unplanned consumption are updated. With a goods issue that references a reservation or a sales order, the quantity withdrawn is updated in the reservation item. The reservation item is completed when the total reservation quantity has been withdrawn or when the final issue indicator is set manually at goods issue. In the case of a goods issue with reference to an order, the quantities withdrawn for the components are updated in the order. As stated in previous chapters, all of these automatic postings that are based on integrated data that are described in this and the prior paragraph helps enhance both transaction-related control objectives that a particular authorized, valid transaction is recorded and recorded accurately.

Billing represents the final processing stage for a business transaction in Sales and Distribution. Information on billing is available at every stage of order processing and delivery processing. During billing, you can decide whether you want to create an invoice for every delivery, or whether you want to send the customer an invoice every month. The billing process is integrated with the accounting/controlling support process. When you create a billing document, the system automatically creates all relevant accounting documents for:

• Accounting

The billing integration with financial accounting consists of forwarding billing data in invoices, credit and debit memos to Financial Accounting. The system:

One feature of sales logistics processing in the SAP R/3 SD module is the document flow display. The document flow shows how far the sales document has been processed and creates a business transaction out of consecutive documents in the system. For example, a document flow could contain an inquiry, a sales order, delivery, the good issue, the invoice, and the accounting document for the journal entry to record the sale. The document flow indicates the number of each document, the date initiated or completed, and the current processing status of the particular processing step. If you displayed the document flow from the sales order, the inquiry would be a preceding document and the delivery and invoice would be subsequent documents. The document flow can be used to access the original document created in the system when each of the steps in the sales processing took place.

In this manner, the document flow forms an “audit trail” that can be used to examine the supporting documents for a given transaction. As a reminder, an audit trail of activities is one of the two basic categories of control activities, along with proper separation of duties. The integration of data within and across processes of the value chain, as well as the automatic posting/updating of documents and records, shows the strong audit trail of activities within SAP.

The value of a sale is measured by the price of the goods sold. Therefore, sales prices for materials sold must be created first in the SAP system in order to value the sales transactions. Sales prices are defined by Sales Organization and Distribution Channel to address the issue that materials may be sold by different sales organizations through different distribution channels at different prices. For example, sales prices may differ between geographical regions and will almost certainly differ between retail and wholesale distribution channels.

In some cases, unique sets of sales prices may be established for customers based on business considerations. These customer specific prices must be created first for the materials sold to that customer. In other cases, the company may make the business decision to offer discounts based on some factor such as the amount of the order. In these cases, a customer discount must be set up first to apply the discount to orders from specific customers.

The actual billing of the customer for a shipped sales order occurs in the Production Logistics process rather than in Accounting as may be assumed. A billing document with a unique number is created that will be used by Accounting to process the actual collection of funds from the customer when they are remitted.

Chapter 5:

Financial Accounting (FI)

In carrying out its external accounting function, Financial Accounting involves basically three accounting functions: General Ledger Accounting, Accounts Receivable processing, and Accounts Payable processing.

COMPANY CODE: The company code is the smallest organizational unit for which a complete self-contained set of accounts can be drawn up for purposes of external reporting. This includes the entry of all transactions that must be posted and the creation of all items for legal individual financial statements, such as the balance sheet and the profit and loss statement. It also involves recording all relevant transactions and generating all supporting documents for financial statements such as balance sheets and profit and loss statements. A company code can, for example, be a company or subsidiary.

All data that are valid for a particular company code, as well as for the plants and storage locations assigned to it, are stored at company code level. This includes, for example, accounting data and costing data if valuation is at company code level.

Before the Accounts Receivable, Accounts Payable, and General Ledger application components of SAP can be used, a company code must be created as a minimum structure. More than one company code can be set up per client, enabling accounting for several separate companies simultaneously. At least one company code must be created.

Master Data in Financial Accounting

CUSTOMER MASTER RECORD: Both Financial Accounting and Sales Logistics use customer master records. By storing customer master data centrally, it can be accessed (integrated) throughout the organization and avoid the need to enter the same information twice. Maintaining the customer data centrally also avoids inconsistencies (i.e., enhances the transaction-related control objective of “all transactions are recorded accurately”). If the address of a customer changes, for example, this change will only have to be entered once and the accounting and sales departments will always have up-to-date information. The customer master record links primarily to the Accounts Receivable function within Financial Accounting. By definition, an account receivable is an amount owed by a customer. The customer master data record is necessary, therefore, not only to make the sale but to also process the collection of the customer’s payment and recording that payment in accounts receivable.

ACCOUNTS PAYABLE SUBSIDIARY LEDGER: The Accounts Payable Subsidiary Ledger accounts for the values of business transactions with vendors. The accounts payable ledger records values at company code level. When a purchase is made and goods are received from a vendor (as processed and recorded in Procurement Logistics), an entry is made in the accounts payable ledger under that vendor number, indicating that there is an amount owed to that vendor for the goods. For each vendor there is a sub-ledger account to which all amounts concerning this vendor are posted. A posting to the vendor account is not the same as a payment. For example, payment is only executed when the Financial Accounting department posts the vendor's payment to a bank account, for example.

The accounts contained within the accounts payable ledger are of all vendor numbers created in the company code. The sum of all amounts owed to those vendors (i.e., the sum of the account amounts in the ledger) is the total amount owed by the company to all its vendors. When a payment is made to a vendor, the vendor account in the accounts payable ledger is reduced by the amount of the payment. Therefore, in transaction processing, purchases from vendors are recorded by vendor number and payments made to vendors are recorded by vendor number.

With respect to a timing difference, it could be due to either the goods having been received but the invoice having not been received as of yet, or the invoice having been received but the goods having not been received as of yet. In the first situation, the GR/IR account carries a temporary liability (credit balance). In the second situation the GR/IR account carries a temporary negative liability (debit balance) while Accounts Payable carries an offsetting liability (credit balance). In both situations, the accounting records are proper, assuming legal title to the goods does not change hands until received. In the first situation, the liability has been accrued, while in the second the offsetting balances net to zero, which is proper if legal title has not changed hands until received.

From an error/fraud perspective, a balance in the GR/IR account could be due to an authorized transaction posted to the account; an invalid/non-occurring transaction posted to the account; the failure to post a transaction to the account; or an inaccurately posted transaction. It is therefore important to periodically reconcile this account as you would other accounts such as bank accounts, accounts receivable and accounts payable for the purpose of detecting errors and fraud.

Many of the data transactions involved in Financial Accounting involve the payment of invoices or the receipt of payments from customers. However, payments for invoices involving purchased goods must be approved by the invoice verification process in Procurement Logistics before payment can be authorized – i.e., a preventive control.

Customers are billed as the final step in the Sales Logistics. Financial Accounting processes the payments from customers that are received as the result of the billing invoices from Sales Logistics. Just as payments to vendors are verified against posted invoices, so can payments from customers against billings.

Within Controlling there are a number of features that provide different information sets for management decisions. Cost center accounting is used for the source-related assignment of overhead costs to the location in which they occurred. Activity-based costing can be used to analyze cross-departmental business processes in order to optimize overall organizational goals and to prioritize business flows. Internal orders are used to collect and control costs according to the job that incurred them. Product cost controlling calculates the costs that occur during manufacture of a product, or provision of a service; it enables the company to calculate the minimum price at which to profitably market a product.

Profitability analysis within Controlling analyzes the profit or loss of an organization by individual market segments. The system allocates the corresponding costs to the revenues for each market segment. Profitability Analysis provides a basis for decision-making, for example, for price determination, customer selection, conditioning, and for selection of the distribution channel. Profit center accounting evaluates the profit or loss of individual, independent areas within an organization. These areas are responsible for their costs and revenues. Profit Center Accounting is a statistical accounting component of the SAP system that occurs on a statistical basis at the same time as “true” accounting. In addition to costs and revenues, the system can display key figures, such as return on investment, working capital or cash flow on a profit center.

When master data are created, the system always assigns the Controlling objects to a controlling area and a company code.

PROFIT CENTERS: A profit center is an organizational unit in controlling that reflects a management-oriented structure of the organization for the purpose of internal control. Management can analyze operating results for profit centers for which they are responsible for using either the cost-of-sales or the period accounting approach. By also calculating the fixed capital, profit centers can be analyzed as investment centers. The analysis of profit center results is a detective control for determining whether errors and/or fraud have occurred.

Any number of alternative groups of cost centers can be created. Groups can be structured, for example, by organizational and/or functional viewpoints. Cost center groups enable the user to perform evaluations for each decision-making, responsibility, or control area. These groups also support the processes during planning and internal allocations. Following the sales organization example, assume that each local sales office sells a particular line of the company’s products. Sales offices selling product line A could be grouped together in an alternative hierarchy along with all other local sales offices that sell the same product line regardless of the area or region. In this way, operations and cost could not only be followed by geographical location (under the standard hierarchy) but also by product line.

Users can assign each cost center to only one group within the standard hierarchy, but to as many alternative groups as required. This allows for the information related to each cost center to be “sliced and diced” any way management desires.

Primary costs arise through the consumption of goods and services that originate from outside the company such as the cost of items purchased from vendors, employee salaries and wages, purchased services, costs of fixed assets (i.e., depreciation), etc. These costs are recorded as expenses in the appropriate accounts in the General Ledger in Financial Accounting. A link must be created for an item recorded as an expense in Financial Accounting to be treated as a primary cost in Controlling.

Because a primary cost has a matching expense account in Financial Accounting, a posting to an expense account therefore results in a cost that can be traced directly to a particular cost object in Controlling. For example, the costs for an external activity provided by a supplier can be allocated directly to a cost object in Controlling. This requires the incoming invoice to be assigned to the cost object. When the incoming invoice is entered in Financial Accounting (FI), the amount is immediately allocated to the cost object in Controlling as well as being recorded in the appropriate general ledger expense account in Financial Accounting.

Transaction Processing in Controlling

Like Financial Accounting, the transactions in Controlling can be described as economic and financial data transactions. In the most basic format, controlling transactions involve the assignment of costs to various cost objects such as products, cost centers, orders, etc. through an allocation process.

Human Resources 10%

Corporate Sales 20%

ASSESSMENTS: An assessment is an additional way through which costs are allocated. Assessment is a method of internal cost allocation by which the company allocates (transfers) the costs of a sender cost center to receiver CO objects (orders, other cost centers, etc.) under an assessment cost element. The method works according to the keys defined by the user.

Unlike Distribution, where only primary costs can be allocated, an assessment is a method of allocating both primary and secondary costs. In Assessment the original cost elements are assigned cumulatively, or in groups, to assessment (secondary) cost elements. The original cost elements are not recorded in the receivers’ accounts but are recorded as an assessment from the sender cost center. Also, sender and receiver information (sender cost center, receiver cost center, or business process) appears in the Controlling (CO) document.

As some final comments about the two methods of allocation (distributions and assessments), the formalized method by which certain costs can be assigned helps enhance the reliability of financial reporting in a number of different ways. As noted previously, the analysis of profit and cost centers results is an important detective control for identifying errors and fraud. If costs are only to be recorded through allocations, any recorded activity to a cost center that is not recorded through an allocation may indicate either a lack of transaction authorization or an invalid/non-occurring transaction. Further, if there is an expectation of costs being allocated to a cost center, but none are allocated, it may indicate the failure to record such costs and/or perform the allocation. Also, the formalization of the allocation process reduces data entry repetition, thereby helping improve the accuracy of data entered into the system.

Accounting and Controlling Master Data and Transaction Exercises for Classic Rockers

The company may decide to add profit and loss accounts (P&L accounts) to the general ledger in order to differentiate both expenses or revenues in a manner that is more detailed or descriptive than those the accounts provided by the system. For example, the company may wish to set up its own rent expense account in order to track rent charges from a particular vendor or for a particular rental. The company may also wish to track revenues from different sources in a more detailed manner than the revenue accounts delivered with the system.

If the company decides to use cost allocation in Controlling, it must create accounts for primary cost elements that link Accounting to Controlling automatically.

In cases where the company has made the business decision to allocate costs to cost centers, either a distribution cycle or an assessment cycle must be created. Either involves, of course, the cost centers from which and to which the charge is to be made. Each of these cycles must contain the “tracing factor” or basis on which the distribution or assessment is to be made (e.g., headcount, square feet, etc.). The company must make a business decision to allocate by a distribution (where costs retain their nature as they are allocated) or by an assessment (where the costs “lose” their identity and are simply charged as a lump-sum assessment).