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Profitability Accounting

Within Controlling, two modules have been designed specifically for certain types of profitability

reporting: Profitability Analysis, or CO-PA, and Profit Center Accounting, or EC-PCA


Executive Information System (EIS), Sales Information System (SIS), and Special Purpose

Ledger (SL) can also be configured to perform some profitability accounting as well.
Purpose of PA
The business purpose of Profitability Analysis is to provide profitability-oriented

performance information on a company's market segments or sales channels, in order to


support corporate planning and decision-making, especially in the areas of sales and
marketing.
The definitions of both 'market segments' and 'performance figures' are freely definable,
allowing for maximum flexibility in market evaluation. The definition of a market is configured in
the system through the selection of characteristics that are to be the subjects of analyses.
Performance figures may either be profit and loss account balances or freely defined value
fields.
Market segments are normally some combination of information regarding customers,
products, and the selling organization. Performance figures are normally measurements of
quantities, revenues, discounts, surcharges, product costs, margins, period costs, etc.
The results of Profitability Analysis can be analyzed with a multidimensional reporting tool,
which allows the dynamic sorting and rearranging of data to provide multiple perspectives
within a single report.
Purpose of PCA
The business purpose of Profit Center Accounting is to provide profitability-oriented

performance information along the lines of a company's physical or management structure, in


order to analyze the profitability of internal organizational units and assign responsibility for
their performance.
When using EC-PCA, the structure of an organization must be defined in terms of profit
centers in a standard profit center hierarchy, where each profit center has responsibility for
revenues, expenses, and in some cases certain assets and liabilities.
All business transactions in R/3 which are relevant for profit and loss generate postings in
profit center accounting. Even the flows of goods and services between profit centers are
recorded. Thereby, the performance of each profit center can be accurately measured.
The balances for selected balance sheet items (such as assets, FG inventory, WIP, payables and
receivables) can also be attributed to profit centers, making it possible to analyze certain key
financial ratios (like return-on-inventory, or return-on-investment) for each profit center.
The results of Profit Center Accounting can be analyzed with a two-dimensional reporting
tool, which essentially is limited to displaying information according to profit centers (and
profit center groups) and account balances (and account groups).

PA Methods
Cost-of-sales accounting
With this method, the emphasis is on matching the revenues for goods and/or services

provided (the value that a company gains as a result of sales) against the related expenses for
those items (the value that is lost when products are transferred out of the company).

Therefore, this accounting method displays profit and loss information in a manner optimized
for conducting margin analyses, and as such it is optimal for the sales, marketing, and product
management areas.
Period accounting
With this method, the emphasis is on summarizing the activity and situational change over a

period of time, for a given organizational unit. Therefore, this accounting method presents the
revenues and primary expenses that have been incurred during a given period of time and the
changes in stock value levels, work-in-process, and capitalized activities. As such, it is optimal
for the production and profit center areas.
Evaluated Objects
Profitability segments are the market channels or strategic business units that are to be

analyzed in CO-PA. They may be combinations of product, customer, and sales structure
information, and/or may encompass company code, business area, and profit center
information.
Since reporting margins and other profitability figures along marketing lines (as defined by

these profitability segments) is the primary purpose of CO-PA, its design has been optimized
for producing profit and loss statements under the cost-of-sales accounting format and
philosophy.
Profit centers are areas of responsibility within a company for revenues and expenses, as

well as certain assets and liabilities in some cases. All profit centers are arranged into a
standard hierarchy representing the entire organization.
Since reporting performance information along responsibility-oriented organizational lines (as

defined by this profit center hierarchy) is the primary purpose of EC-PCA, its design has been
optimized for producing profit and loss statements under the period accounting format and
philosophy. However, cost-of-sales accounting in EC-PCA is also now possible with the aid of
functional areas.
Costing-based Profitability Analysis:
Reports display values by value fields' (flexibly defined performance figures).
Can be posted with estimated values, for example 'anticipated sales commissions'.
Indirectly reconciles with Financial Accounting.
Uses CO-PA specific transaction data tables.
Revenues and cost-of-sales are recognized simultaneously.
Account-based Profitability Analysis:
Reports display values by cost elements (CO revenue and expense accounts).
Cannot be posted with estimated values.
Reconciles directly with Financial Accounting at the account level.
Shares data tables with other CO applications such as Cost Center Accounting.
Revenues and cost-of-sales are updated asynchronously .
Data Flow in PA

In costing-based CO-PA, information can be taken from SD at two points in the order cycle:

when an order is taken or changed [optional], and when an invoice for an order is generated.
In account-based CO-PA, information takes data from SD at two points in the sales cycle:

when a goods issue is performed, and when an invoice for an order is generated..
Costs from other areas of CO can be transferred into CO-PA periodically, through settlements,

assessments, and activity allocations.


It also possible to post into CO-PA from FI through a manual journal entry or through certain

automatic entries, such as those generated out of MM for physical inventory differences,
material revaluations, etc.
Data Flow in PCA
When Controlling is active in R/3, each posting to a revenue or expense account that has been

set up as a cost element in CO requires an account assignment object, which dictates where
the revenue or cost will reside in CO. Examples of account assignment objects are cost
centers, internal orders, production orders, profitability segments, etc.; profit centers are not
account assignment objects!
The master record of each account assignment object contains an assignment to a profit
center, which is required when Profit Center Accounting is active. This causes the system to
generate a statistical posting (additional posting) in EC-PCA whenever one of these objects is
posted to. Therefore, all revenue and expense postings in the system generate statistical
entries in the EC-PCA module.
Whenever there are postings within CO (allocations) which have the affect of moving revenues
and/or costs between objects with different profit center assignments, profit center accounting
will be updated, so the EC-PCA module keeps track of all internal value flows.
Sometimes a profit center cannot be determined automatically by the system during a
transaction. In these cases, the system assigns a dummy profit center to the posting, in order
to ensure completeness of data in EC-PCA. These costs can be moved to the correct profit
centers later on after they have been analyzed.
Parallel Currencies in PA
In costing-based CO-PA, all amounts are stored at minimum in an operating concern currency,
which is specified in the operating concern attributes.
It is also possible to configure the attributes to store values in the local currency as well; this
has the effect of doubling the stored transaction data, though.
Account-based CO-PA stores all transaction in three currencies, the transaction currency, the
local currency, and the controlling area currency.
Profit Center Accounting can store transactions in the transaction currency, the local currency, and a
special profit center accounting currency.

Basic Concepts of CO-PA


Characteristics
Answers the question: "What do I want to report on?"
Examples:

Divisions, Regions, Products, Customers

Characteristic Values
Answers the question: "What values can I have for these characteristics?"

Examples:

Region South; Region North

Profitability Segments
Answers the question: "What is the technical definition of my sales channel?"
Example:

combination of Region North, Product Prod1, Sales Rep Miller

Value Fields
Answers the question: "What performance measures do I want to track and analyze?"
Examples:

Gross Sales, Surcharges, Discounts, Cost-of-Sales

Categories of Characteristics
Characteristics can be categorized according to how and when they are defined:
Copying characteristics from reference tables: You can use characteristics that already
exist in other applications when you define your operating concerns. For example, you can
copy fields from the tables for customer master records, material master records, and sales
documents. You can also copy the partner roles defined in the structure PAPARTNER in the
Sales and Distribution (SD) application as characteristics in Profitability Analysis.
User-defined characteristics: You can create ones which are only required in Profitability
Analysis. These are referred to as "user-defined characteristics". To derive values for these
characteristics, you need to define your own derivation strategy.
Predefined characteristics: In addition to the fixed characteristics, a number of other
predefined characteristics are available in the field catalogue and can be added to your
operating concern if desired. These include the customer group, customer district, country,
and others.
Fixed characteristics: A number of fundamental characteristics are automatically predefined
in every operating concern. These include the product number, company code, billing type,
business area, sales order, and so on.
Steps in defining Operating Concern
Maintaining characteristics and value fields
Maintaining the characteristics and value fields in the field catalog are the first steps to
creating a new operating concern. The field catalog contains all the fields which can be used
to define the data structures for CO-PA reporting. It may or may not be necessary to add new
characteristics or value fields before creating a new operating concern; it depends on the
reporting requirements.
Note that value fields only have relevance with respect to costing-based Profitability Analysis.
Defining the Attributes and Data Structures
Defining the attributes and data structure definition for the new operating concern is the final
step. It involves specifying the relevant fiscal year variant and currency information, importing
the necessary characteristics and value fields from the field catalog, and generating the
environment.

Technically, the data structure definition determines the structure of the transaction data tables
which are created during the generation process. These transaction data tables are clientindependent, meaning they are available for use in all clients in an instance, regardless of
where they were created.
Costing-based CO-PA stores its transaction data in its own data tables which are created

when activating and generating the operating concern. This means that its data will never
affect the execution speed of a report in another CO application.
Account-based CO-PA stores its transaction data in the transaction data tables for
Overhead Cost Management. This means that its data will affect the execution speed of
reports for other CO applications (which share the same transaction data tables).
Deleting Operating Concern
An entire operating concern can be deleted with the following steps:
1. Remove the controlling area assignment(s)
2. Delete the customizing settings in all clients
3. Delete the environment
4. Delete the data structures
Derivations
1) Derivation via Table Lookup
2) Derivation from Customer hierarchy
3) Derivation with Move and Clear
The move function is available to directly either move a value or part of a value from one
characteristic to another, or to move a constant into a characteristic, when certain conditions
arise.
For example, the sold-to value is copied into the ship-to value with the move function if the
ship-to field is originally not populated by any previous derivation step.
The clear function is available to clear a value from a characteristic, when certain conditions
arise.
For example, the employee value is cleared to 'not assigned' when the product is a specific
value, because perhaps employees should not get sales credit for certain items.
The system automatically generates a move derivation step for moving the dummy profit
center value from EC-PCA into CO-PA if no profit center can be determined by other steps.
Valuation
Valuation can be used either with actual or planning data. Valuation is often used in CO-PA

planning to access pricing and product cost information for products which have planned
quantities, thereby allowing projected revenue and cost-of-sales figures to be calculated
automatically.
Valuation can be configured to function either in real-time (at the time data is first posted to
CO-PA) or periodically (at some later point, when manually triggered). Periodic valuation might
be preferred if posting-time performance is an issue. Likewise, it gives the option of reevaluating posted data.

The valuation strategy is central to valuation configuration. A valuation strategy


may contain references to multiple valuation techniques (costing sheets, user exits, product
costing info, etc.) which are to be applied to a given COPA-relevant transaction.

Valuation: Overview
What can valuation be used for?
Storing estimated or calculated values
Retrieving product cost information
Accessing additional performance figures

Where do the values come from?


Product Costing module
Costing sheets in CO-PA
Pricing procedures in SD
Customer exits

Where does valuation take place?


Actual: either at the time of posting, or periodically
Plan: either at the time of planning, or in aggregate
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Valuation using Costing Sheet


Costing sheets are a vehicle through which special values can be accessed or calculated.

They are the central piece to the condition technique, a method used all over SAP for
performing calculations (such as overhead application in PP or order item pricing in SD).
Costing sheets consist of a sequence of user-defined condition types, each of which accesses
a value or performs a specific calculation, as dictated by the definitions of the condition types.
Each condition type is mapped to a value field in the operating concern.
Base condition types form the basis for calculations; they refer to value fields which have
already been populated through other means; these condition types must have on their master
record a condition category of K, a calculation rule of B, and condition class of B.
Calculation condition types perform calculations on lines in the costing sheets, which represent
subtotals of amounts (like base amounts, for example); these condition typesactually populate
value fields with values; their definitions can vary (see CO-PA documentation for details).
Calculation condition types each have an access sequence and set of condition records, which
store surcharges, deductions, or absolute values for certain combinations of characteristic
values.
For complete details on the how to use the condition technique, please refer to pricing
documentation or take a class on pricing or the condition technique.

Valuation using Material Prices

Within the condition technique, special condition types can be set up to retrieve costing values

directly from material master records. To use these in CO-PA, they must be defined there,
placed on a costing sheet, and mapped to value fields, like all other condition types created in
CO-PA.
To retrieve the standard price, regardless of the valuation control setting in the material master,
define a condition type with a condition category of S, a calculation rule of B, and a condition
class of B.
To retrieve the moving average price, regardless of the valuation control setting, define a
condition type with a condition category of T, a calculation rule of B, and a condition class of
B.
To retrieve either the standard or the moving average, depending on the valuation control
setting in the material master, define a condition type with a category of G, a calculation rule
of C, and a condition class of B.
Periodic Valuation
Periodic valuation is the process by which certain CO-PA transactions, based on selection

criteria, are valuated at point after the transaction has originally posted and been stored.
Any differences between the original values of a line item and the new values as calculated by

periodic valuation will be posted in a delta (=change) line item to CO-PA, under the original
record type. The reference document for the delta line item is the original CO-PA line
document number.
Periodic valuation can be carried out either online or in the background. It is suggested that
this be run in the background if there are a large number of line items to be valuated (as
determined by a test run).
Often, a separate valuation strategy is utilized for the periodic valuation of data as for the
online valuation of data. This approach may be for adding additional details at the time of
period valuation.
Examples of when periodic valuation might be used at month-end:
To populate CO-PA with Product Cost details that were not imported at transaction time.

To populate CO-PA with revised estimates for previously estimated values.


To populate CO-PA with actuals against previously estimated values.
To populate CO-PA with estimated revenue and COGS for planned quantities.
Valuation by definition populates costing based COPA with values which are not present in
FI.
Flow of Actual Values FI, SD, CO
Sources of Value Fields
The value fields in costing-based CO-PA contain the amounts and quantities that you want to
report on. They represent the finest level of detail at which costs and revenues are broken
down.
One of the most important tasks in Customizing for costing-based CO-PA is to assign your
costs and revenues to the desired value fields so that you can calculate the contribution
margins that your organization requires in the information system.

Sources of Value Fields

Quantity

SD

Sales Revenues

Billing Document

Sales Deductions
Cost of Goods Sold

CO-PC

Variable Cost of Goods Mfd

Cost Estimate

Fixed Cost of Goods Mfd

FI

General Ledger Posting


CO-OM

PS

Freight Costs
Sales and Administration Costs

Cost Center
Order
Process

Marketing Costs

WBS Element
Network Operation

Research & Development Costs

Additional Costs

Costed Discounts

CO-PA
1996
1997
1998

Bonuses

Variances

Costed Bonuses

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Difference in Data Transfer from SD

Differences in the Data Transfer from SD


Costing-Based

Account-Based

Data transferred as soon as


it is created

Data transferred when it is


posted in Financial Accounting

Short-term, up-to-date data

Same as FI

Transferred to value fields

Transferred to cost and


revenue elements

Fictitious costs are


permitted

Reconciled with FI

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