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 in internal
cost allocation, overhead calculation, settlement transactions., it does not flow to FI...

General - Cost Element

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Basically, cost element are carriers of costs.

Primary Cost Element

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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 cost element.

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 FI
To Cash A/c Cr. Rs.YY

Secondary Cost Element

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When cost element carries cost with in CO, then they are called secondary cost element.

Example.... - Take Product Costing

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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 rates and 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 carried by a cost element (since there are no FI
involvement and entries are flowing within CO by crediting sender cost centre and
debiting receiver production order a cost element has to be created.... say "Operational
Cost - Activity" the entry will be

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

To Operational Cost - Activity (Cost Centre) Cr Rs.XX
The entries are with in CO. And the cost element created is secondary since it does 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.