Managing Cost Accounting in SAP Business One

• Let us look at a business example:
• Assuming you are implementing SAP Business One at a company with three departments: sales, support, and development.
• Naturally, the sales department generates more revenue than the other departments. On the other hand, they also have a lot of expenses: travel, hotel, dinner, conferences, advertising, bonuses, and so on.
• The accountant of the company asks you how they can find out the bottom line for each department. How can they issue a profit and loss report for a department?

Before diving into the cost accounting process, let us review the relevant terminology as it is defined in SAP Business One.

• In addition to their regular bookkeeping, many businesses perform expense and revenue analyses that measure the profitability of each of their business activities or departments.
• For this purpose, you define company units for each business activity or department. These are the cost centers which are used to consolidate the expenses and revenues resulting from the ongoing activity of the specific organizational unit.
• A distribution rule is a cost accounting method used to allocate direct and indirect expenses and revenues to one or more cost centers. It contains information regarding the portion or the fixed amounts of the expenses or revenues to be allocated to each cost center.
• When working with the cost accounting process, costs submitted to the general ledger are automatically distributed to the cost centers using the defined distribution rules.
• The cost accounting function in SAP Business One enables you to define sets of cost centers and distribution rules. Generating respective reports provides important cost-related information. The system collects the data posted to accounts and presents it in different ways in reports.

• To use the cost accounting functions in SAP Business One, you must define the profit centers or departments in the company as cost centers. You can then compile a profit and loss statement for each cost center in every period.
• In our example, OEC Computers defined their three departments: sales, support, and development as cost centers.
• You can combine your cost centers into groups by using a sort code.
• Choose Financials  Cost Accounting  Cost Centers to define and maintain cost centers.
• The system automatically creates a center zero cost center (Center z) that collects the costs and revenues that cannot be clearly distributed to other cost centers because not enough information is available. The Center_z cost center can also record costs that are not to be reported in internal cost accounting. For example, if you want to show only 80% of your rental expenses as costs, you can assign the remaining 20% to Center_z.

• If you want to include costs submitted to the general ledger in cost accounting automatically, you should link an account to a distribution rule in the Chart of Accounts.
• You can only link accounts with the account type Sales or Expenditure in the chart of accounts.
• Distribution rules define how the costs or revenues posted for an account are distributed to the cost centers.
• In everyday work, you post journal entries or marketing documents to a G/L account that is linked to a distribution rule.
• When you create a cost center, the system automatically creates a distribution rule with the same name. This rule (which cannot be changed) is configured so that the system posts all the costs or revenues to the relevant cost center. In other words, the system does not split the amounts. You can use these distribution rules for direct costs and revenues, which you can assign uniquely and in full to a specific cost center.
• For example, in OEC Computers, company car expenses are assigned directly to the Sales cost center, since only sales employees have company cars.
• After linking the car expenses account to the Sales distribution rule, each time you issue an expense to the company car expense account, the full amount will be allocated directly to the sales cost center.

• Indirect costs and revenues are not allocated directly to a cost center. Instead, you allocate them to one or more cost centers using a distribution rule. In the distribution rule, you specify how the amount is to be allocated amongst the cost centers. You can allocate by percentage or ratio. For example, you can distribute costs to the cost centers in accordance with the size of the department areas. Similarly, you can distribute voluntary employee benefits among the number of employees.
• If you cannot define the total allocation (because you do not have enough information at the time), the system allocates any unassigned costs or revenues to the Center_z cost center. When you have the information you need, you can change the distribution rule so that the system corrects the distribution accordingly.
• Choose Financials  Cost Accounting  Distribution Rules to define and maintain distribution rules.

• As you do with direct costs and revenues allocation, link the relevant accounts to an indirect distribution rule in the Chart of Accounts.
• Post a journal entry or marketing document to a G/L account that is linked to a distribution rule.
• In our example, each time you issue an expense to the electricity expense account, the amount will be automatically allocated to the different departments according to the distribution rule definition.

• You can change the distribution rule set in the G/L account when you issue a marketing document or a manual journal entry.
• For journal entries created from marketing documents and for manual journal entries, you can change the allocated distribution rule at any time.
• This distribution rule takes priority over the rule defined in the G/L account and in the marketing document.
• In the journal entry, choose the G/L account row and use the distribution rule field in the table or in the Expand Editing Mode.

• When posting a manual journal entry, you have the option to define a manual distribution rule.
• The amount you enter in the journal entry row is the total amount to be distributed.
• In the Define Manual Distribution Rule window, choose the cost centers and allocate the amount between them.
• You will NOT be able to use this manual distribution rule in future journal entries.
• You can see the amounts of this distribution rule in the Distribution Report and the Cost Accounting Summary Report.

Sometimes fixed amounts are required to be allocated to specific cost centers. For example, the sales employees are in the field a lot; however, the support and development employees are not. So, the company wants to allocate a fixed amount of the monthly rent expense to the support department and the development department. To achieve this, in the distribution rule setup you can define a fix amount of 3000 for support and development cost Centers.

You can include the sales cost center too with no cost value to absorb any differences.

Note!

• When issuing costs, the fixed allocated amounts will remain the same. In case there is a difference between the defined total amount (6000 in our example) and the cost amount submitted every month, the rest of the cost will be submitted to the cost center with no defined value (the sales cost center in our example).
• In case you keep only the support and development cost centers defined. Any difference will be allocated to the zero cost center (Center_z).
• This refers to both cases - when the cost amount is higher or lower than the total defined amount.

• Once OEC Computers has set up their cost centers and distribution rules, they can view the allocations in a table format.
• Choose Financials  Cost Accounting  Table of Cost Centers and Distribution Rules to display the allocations for distribution rules.
• Here we see an example of how OEC Computers could set up their distribution rules to distribute costs to the appropriate department cost centers.

Here are some key points:

• To use the cost accounting functions, you must define the profit centers or departments in the company as cost centers.
• When you create a cost center, the system automatically creates a distribution rule with the same name. This rule is configured so that the system posts all the costs or revenues to the relevant cost center.
• Indirect costs and revenues are not allocated directly to a cost center. Instead, you allocate them to one or more cost centers using an indirect distribution rule. In the distribution rule, you specify how the amount is to be allocated among the cost centers.
• To automatically include costs from the general ledger in cost accounting, link a distribution rule to accounts in the Chart of Accounts.
• Each time you issue an amount to these accounts, the amount will be automatically allocated to the different departments according to the distribution rule definition.
• You can change the distribution rule set in the G/L account when you issue a marketing document or a manual journal entry.
• For journal entries created from marketing documents and for manual journal entries, you can change the allocated distribution rule at any time.
• This distribution rule takes priority over the rule defined in the G/L account and in the marketing document.

• OEC Computers uses the cost accounting option in SAP Business One. In the past, they defined their three departments: sales, support, and development as cost centers.
• Now, while discussing the products OEC Computers sell, the CEO tells you that they want to analyze revenues and expenses by the two lines of business they run: hardware and applications.
• They want to see the bottom line for each product line, but the accountant claims that a better analytic view will be according to departments. That is sales, support and development.
• They want to issue the Cost Accounting Summary report both by department (sales, support and development) and by line of business.
• You tell them that they can analyze the same data according to the company departments and also per line of business.

• Multiple dimensions enable up to five different views to be generated on the same data.
• This option appears only after the Use Multidimensions checkbox is selected on the Cost Accounting tab of the General Settings window under Administration → System Initialization → General Settings.
• To define dimensions choose Financials → Cost Accounting → Dimensions .
• In our example you can define the departments in the company as dimension 1 and the lines of business as dimension 2.
• For each dimension create cost centers and distribution rules that will match your reporting requirements. Note that each cost center and distribution rule belongs to only one dimension.
• When issuing the various reports choose the relevant dimension.

Let us look at the company electricity cost:

• In the Chart of Accounts window, link the electricity costs account to the 2 dimensions: Departments and Lines of business.
• For each dimension define the relevant distribution rule. In the departments dimension it is the indirect rule that distributes the costs in accordance with the size of the department areas. In the line of business dimension the costs will be distributed among the number of employees in each cost center.
• In everyday work, each time you issue an expense to the electricity expense account, the amount will be automatically allocated to the different departments according to the distribution rule defined in dimension 1. And in parallel, the same amount will be allocated according to the number of employees working for each line of business as defined in dimension 2.
• You can then run the various reports and compare the analysis of costs and revenues per department versus per line of business.

• In the General Settings window - Cost Accounting tab, you can set the distribution rules display in marketing documents and journal entries. Select whether to display distribution rules of several dimensions in one column, separated by semicolon (;) or to display all active dimensions in separate columns. For more information regarding these two options, refer to the Online Help.
• You can change the radio button status at any time. The change only affects the way in which distribution rules are displayed; it does not affect the database.

• You can produce some standard reports for a specific dimension and distribution rule, for example, Profit and Loss Statement, Trial Balance, and Budget Report.
• Choose Financials  Cost Accounting to run cost accounting specific reports:
  • Cost Center Report to display an overview of the posted costs and revenues.
  • Distribution Report to get a picture of overhead expenses posted by specific transactions and the distributed amounts in each cost center.
  • Cost Accounting Summary Report which includes Journal vouchers and use hierarchies for desired report structure.

Note that you can also run these reports according to a selected financial project.

• Use the Cost Center Hierarchy to define cost accounting report templates according to company needs.
• You can then use these templates in various reports.
• The template enables the data to be grouped in different ways. Based on how the data is grouped, management gets a better view of how the different parts of the organization are performing.
• Each hierarchy is directly related to one dimension (if dimensions are used in the company).
• For each dimension multiple templates can be created.
• You can define hierarchies with up to three levels.
• Cost centers can only be attached to the lowest nodes in the hierarchy.
• You can also use formulas to aggregate various cost centers.
• In the example presented, for the Departments dimension, the Sales and the Support cost centers are grouped under the text title Customer service and summed up using the Subtotal option.
• Choose Financials → Cost Accounting → Cost Center Hierarchy to define and view cost accounting report templates.

Here are some key points:

• Multiple dimensions enable up to five different views to be generated on the same data. This option appears only after the checkbox is selected on the Cost Accounting tab of the General Settings window.
• For each dimension create cost centers and distribution rules that will match your reporting requirements.
• In the Chart of Accounts window, link the relevant accounts to the dimensions. For each dimension define the relevant distribution rule.
• In everyday work, each time you issue an amount to the expenditure or sales account, the same amount will be automatically allocated to the dimensions and their distribution rules in parallel.
• You can set the distribution rules display in marketing documents and journal entries.
• When issuing the various reports choose the desired dimension.