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Profitability Management

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Contents

1. Unit Summary.................................................................................................. 3 2. Overview of topics covered ............................................................................. 3 3. Overview of profitability management ............................................................ 3 4. Profitability Analysis and Profit Center Accounting......................................... 5

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1. Unit Summary
This unit explains general overview of the various methods used to analyze the profits in an SAP system. The main focus is on comparing the approach of profit analysis with in CO-PA (Controlling profitability Analysis) and EC-PCA (Enterprise Controlling). This unit helps to take decision when to use the CO-PA and EC-PCA modules in SAP implementation.

2. Overview of topics covered

Overview of Profitability Management Profitability Analysis and Profit center Accounting Objects and Aspects in Profitability Management

3. Overview of profitability management 3.1 Relevance to business process

ACL is a MNC company having its legal entities in India, United Kingdom and United States. Company has requirements to present its sales and profitability report in corporate currency as well as their legal entity or local currency. ACL also have requirement to execute reports to know how well their regional managers are performing, how well certain products are doing in certain region, also company has requirement to analyze P&L reports based on their business strategic units as well.

3.2 Configuration / usage consideration

Profitability Analysis (CO-PA) gives the ability to analyze profitability on many different segments and characteristics. It enables to evaluate market segments, which can be classified according to products, customers, orders or any combination of these, or strategic business units, such as sales organizations or business areas, with respect to company's profit or contribution margin. The aim of the system is to provide sales, marketing, product management and corporate planning departments with information to support internal accounting and decision-making.

Costing-based Vs. Account-based CO-PA

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There are two different ways in which CO-PA can capture and hold data Costing based and account based. Costing-based Profitability Analysis is the form of profitability analysis that groups costs and revenues according to value fields and costing-based valuation approach. It guarantees to access at all times to a complete, short-term profitability report.

Account-based Profitability Analysis is a form of profitability analysis organized in accounts and using an account-based valuation approach. The distinguishing characteristic of this form is its use of cost and revenue elements. It provides with a profitability report that is permanently reconciled with financial accounting.

Both Costing based and Account based CO-PA can be used simultaneously. The Operating Concern is the central tenet of CO-PA to hold data.

Feature of Profitability Analysis

Master Data CO-PA module has certain master data. This includes both units which are required to evaluate (characteristics) and the categories in which it is required to analyze values (value fields). In Account - based CO-PA, the values are structured by account. Actual Posting System will transfer both sales orders and billing documents from the Sales and Distribution application component to CO-PA in real time. In addition, an interface program is available to transfer external data to the SAP system. It is also possible to transfer costs from cost centers, orders and projects, as well as costs and revenues from direct postings (G/L account postings in FI, orders received in MM, and so on) or settle costs from CO to profitability segments. Planning In CO-PA Planning, it is possible to create a sale and profit plan. Whereas both types of Profitability Analysis can receive actual data in parallel, there is no common source of planning data. Consequently, it is always possible to plan either in accounts (account - based CO-PA) or in value fields (costing - based CO-PA). In costing - based CO-PA it can be automatic valuation to calculate planned revenues, sales deductions and costs of goods manufactured based on the planned sales quantity. Information System The Information System helps users to interactively analyze existing data from a profitability standpoint using the functions of the drilldown reporting tool. There users can navigate through a multidimensional data cube using a number of different functions (such as drilldown or switching hierarchies). The system displays data in either value fields or
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accounts, depending on the currently active type of Profitability Analysis and the type to which the report structure is assigned. (Each report structure is assigned to either costing-based or account-based CO-PA.)

4. Profitability Analysis and Profit Center Accounting Profitability Reporting

Profitability Analysis (CO-PA) helps user in analyzing the profitability of segments of company external market. These segments can be defined according to products, customers, countries, and numerous other characteristics, as well as companies internal organizational units such as company codes (i.e. ACL) or distribution channels (I.e. direct, wholesale, e-Commerce). The aim is to provide executive management, sales, marketing, planning, and other groups in organization with decision-support from a market-oriented viewpoint.

Profit Center Reporting:

EC-PCA allows calculating the internal operating results for profit center. A profit center represents an organizational subunit that operates independently on the market and bears responsibility for its own costs and revenues. EC-PCA helps to analyze internal profit and loss for profit centers. This makes it possible to evaluate different areas or units within your company. Profit Centers can structured according to region (branch offices, plants), function (production, sales), or product (product groups, as in A Grp). Profit Center Accounting is a component of the "Enterprise Controlling" module.

Accounting Methods
Profitability Analysis (CO-PA) calculates profits according to cost-of-sales method of accounting. Profit Center Accounting (EC-PCA), on the other hand, supports both period accounting as well as the cost-of-sales approach. It is possible for a company to use both of these applicationsand consequently both methodsat the same time in organization. The Period Accounting approach distinguishes between individual cost and revenue elements (such as material costs). The total costs for the period are compared with the total operating output for the period. The output of products manufactured within the period but not yet sold (stock increases), are added to the sales revenues, and the costs of the

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products produced in past periods but sold in this period (stock decreases), are taken away. Together with additional capitalized internal activities and other revenues, this yields the total operating output for the period. In the Cost-of-Sales accounting approach there is no differentiation according to cost elements. Here the sales revenues are compared with the manufacturing costs for the products sold (cost of sale). The manufacturing costs may include material and personnel costs, which were incurred in previous periods. Costs which cannot be directly assigned to the sale, such as sales and administration costs, are displayed separately. The cost-of-sales procedure therefore also indicates whereabouts in the company costs were incurred.
Period accounting method Cost of Sales method

Revenues Sales deductions Changes in stock Capitalized internal services Work in process

Revenues Sales deductions Cost of sales (incl. variances for period)

Total activities Total costs: Material costs Personnel costs Other costs

Gross result Sales and distribution costs Administrative costs Research & Development

Result

Result

Profitability Analysis Using the Cost-of-Sales Method

In cost-of-sales accounting, the cost of sales is set off against revenue using either direct costing or full absorption methods (contribution margin accounting). Standard costs can be used to valuate the cost of sales for the purpose of obtaining a preliminary profit analysis. Or else transfer the variances of production orders and cost centers to Profitability Analysis in order to reconcile CO-PA with Financial Accounting (FI) on the basis of actual costs.

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Costing-Based Profitability Analysis
This type of Profitability Analysis is primarily designed to let you analyze profit quickly for the purpose of sales management. Its main features are, firstly, the use of value fields to group cost and revenue elements, and, secondly, automatic calculation of anticipated or accrual data (valuation). The advantage of this method is that data is always up-to-date and therefore provides an effective instrument for controlling sales.

Account-Based Profitability Analysis

This type of Profitability Analysis enables to reconcile cost and financial accounting at any time using accounts. In contrast to costing-based Profitability Analysis, this type uses cost and revenue elements, which gives you a unified structure for all of accounting. The system posts all revenues and costs to both Financial Accounting and Profitability Analysis at the same time and using the same valuation method. This means that the cost of sales is posted to Profitability Analysis at the point of goods issue.

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