differrence between primary and secondary cost

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Difference Between Primary and Secondary Cost Element

Explain the difference between primary and secondary cost element? With an example.

Primary cost elements are like materail costs, personnel costs, energy costs...where a corresponding GL account exists in FI..to allow costs to flow...

Secondary cost elements are like production costs, material overheads, production overheads, they can be created and administered in only CO. These are used ininternal cost allocation, overhead calculation, settlement transactions., it does not flow to FI...

General - Cost Element----------------------------------Basically, cost element are carriers of costs.

Primary Cost Element--------------------------------

When cost element carriers cost between FI and CO they are called Primary, the link is established GL A/c = Cost element(Primary). A question may arise as to whether all GL accounts are cost element, it again depends upon the business requirement, where COPA is active then revenue account (GL) are also cost elements, where COPA is not active then revenue account (GL) should not be made as an costelement.

Example....Again cost of goods sold particularly in VAX (make to stock) is not an cost element, where the same COGS in VAY (make to order) is a cost element. Price Difference account should not be made as cost element.

Entry while booking expenses

Travel Expenses A/c - with Cost Centre Dr. Rs.YY(will be a GL A/c and cost element) - entries flows to CO thru FITo Cash A/c Cr. Rs.YY

Secondary Cost Element-------------------------------------When cost element carries cost with in CO, then they are called secondary cost element.

Example.... - Take Product Costing---------------------------------------------------On manufacture of the goods the cost of the above product (production order) is

arrived at accumulating material cost + operational cost + overheads (%), additive cost if any.

The cost of operation is accumulated in cost centre be it production / production service / service cost centres, while booking FI entries.

Those operational cost has to be allocated to production order based on operational activities carried on and its cost involved in it. Those operation activities in CO are termed as activity types and has to link the same in KP26 with ratesand cost centre (ie., sender cost centre and receiver production order).

In order to find the production order cost, the allocation of cost from sender cost centre to production order for the operational activities carried on and its

cost associated with it, have to be loaded, hence in CO the cost centre allocate that portion of operational cost to production order, and this cost is carriedby a cost element (since there are no FI involvement and entries are flowing wi



thin CO by crediting sender cost centre and debiting receiver production order acost element has to be created.... say "Operational Cost - Activity" the entrywill be

Operational Cost - Activity (Production Order) Dr Rs.XXTo Operational Cost - Activity (Cost Centre) Cr Rs.XX

The entries are with in CO. And the cost element created is secondary since it d

oes not has an link with GL Account in FI correspondingly.

In CO the production order and cost centre are co object including but not limited to.

Tips by N.Sathish Kumar

Items in a chart of accounts that are relevant to cost, are referred to as costelements. They are used forentering all costs within the entire cost accounting system. Cost elements are required to ensurecomprehensive reporting and detailed planning.

Cost Elements are:

? The vehicle for carrying costs.? Similar to G/L account? Time dependent? For every P&L type G/L account, corresponding cost elements need to be created.

Primary cost element? Actual cost? Corresponding G/L account required for costs.Secondary cost element

? Costs within CO? No corresponding G/L account should exist

The cost element type specifies the business transactions for which a cost element can be used.

Primary Cost Elements:

The following primary cost elements are used in Cost Object Controlling:

? 01: Primary cost elements, general

These can be debited with all primary postings (such as FI, SD or MM). Accounting documents are generated for these postings.

? 22: Cost elements for external settlement

These are required, for example, for settling order or project costs to CO-external objects. Examples of CO-external objects are fixed assets (AM), materials (MM), or G/L accounts (FI). Settlement generates an accounting document.

The primary cost elements are linked to G/L accounts in Financial Accounting. Unless an Account is created in Chart of Accounts, a corresponding Cost Element cannot be created.

Secondary Cost Elements:



The following secondary cost elements are used in Cost Object Controlling:

? 21: Cost elements for internal settlement

These are used for settling order or project costs to CO-internal objects. CO-internal objects could be orders, profitability segments, cost centers, and projects.

? 31: Cost elements for results analysis

These are used for saving the data generated during WIP calculation or results analysis on the order or project. As Product Costing Module is not used, this isnot used in Hitachi Europe Limited.

? 41: Cost elements for overhead

These pass overhead costs from cost centers to orders, projects, and so forth.

? 43: Cost elements for direct internal activity allocation

These are used by the system in internal activity allocation to allocate costs.

differrence between primary and secondary cost

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