Outlining Profitability Management Options

SAP S/4HANA Enterprise Management brings together the worlds of accounting and controlling. The classic two-circuit system kept fixed and variable costs separate. It also separated the analysis of contribution margins as well as the differentiation of variances according to different variance categories explicit in cost accounting. However, such key figures can also be analyzed in financial accounting and profit center accounting in the New General Ledger. Nevertheless, periodic accounting is used in financial accounting and profit center accounting in the New General Ledger, while the cost of sales accounting is the cost accounting procedure in Management Accounting. The use of the accounts’ respective cost elements is defined by the Account Type parameter in the master record of the general ledger account.

You can execute profitability reporting at various levels of detail. In a distribution business environment, the detailed product cost information is not required. Therefore, a full absorption approach may be sufficient to analyze profitability. However, in a standard manufacturing costing environment, the breakdown into fixed and variable standards may be important when analyzing profitability.

To reflect the periodic actual cost, the fixed and the variable standard cost plus variance may be added to analyze contribution margins. Some companies prefer to analyze their contribution margin based on the periodic actual cost, which can be recorded in the material ledger.

Accounting Methods

Note

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. This is also known as cost of sales. The manufacturing costs may include material and personnel costs that were incurred in previous periods. The costs that cannot be directly assigned to the sale, such as sales and administration costs, are displayed separately. For this reason, the cost-of-sales procedure also indicates where in the company costs were incurred.

Methods of Generating Profitability Statements

The accounting methods used for generating profitability statements are as follows:

• Cost-of-sales accounting:

  This method aims to match the revenues for goods or services provided, or both. This includes the value that a company gains as a result of sales against the related expenses for the items that lose value when products are transferred out of the company. As a result, this accounting method displays the profit and loss information in a way that is ideal for conducting margin analysis. This method is best suited to the areas of sales, marketing, and product management.

• Period accounting:

  This method aims to summarize the activity and situational change over a period of time for a given organizational unit. As a result, it presents the revenues and primary expenses incurred during a given period of time, as well as the changes in stock value levels, work-in-process, and capitalized activities. This method is best suited to the areas of production and profit centers.

In theory, applying either method to a particular set of business transactions under a certain set of laws provides the same bottom-line result or profit.

Companies must use one of these methods to generate their legal financial statements. The choice is often determined by the country-specific legal requirements.

The costing-based CO-PA (Controlling Profitability Analysis) uses the defined value fields that the groups for cost and revenue elements represent. The advantage here is that these value fields allow user-defined details in drill-down reporting. A further advantage is that the cost of goods sold can be calculated using six different cost estimates in parallel. With the help of conditions, you can also calculate certain values, such as commissions for commercial representatives, which can be included as estimated values in your reporting.

Margin Analysis helps to ensure that Management Accounting and Financial Accounting (FI) are reconciled at the account level at all times. In the account-based approach, all costs and revenues are transferred simultaneously to FI and CO-PA. The cost of sales, which is posted to CO-PA when goods are issued, is of particular importance for CO-PA. With the SAP S/4HANA solution, it is also possible to analyze fixed and variable costs of the cost of goods sold and there for analyzing contribution margins.

Profitability Analysis (CO-PA) allows you to analyze the profitability of specific market segments, such as products, customers, and their customer groups as well as organizational units (company codes or business areas). The aim is to provide your sales, marketing, product management, and business planning departments with market-oriented controlling information to support the decision-making process.

You can use Profit Center Accounting (EC-PCA) in the New General Ledger to analyze internal profit and loss for profit centers, as well as the balance sheet. Using the online document, online reconciliation, and parallel ledgers within the New General Ledger, you can analyze profit and profitability that satisfies the requirement of fast closing.

PCA in New General Ledger

With PCA in the New General Ledger, you can perform the following tasks:

• Evaluate the different areas or units within your company.

• Structure the profit centers of your company according to regions (branch offices and plants), functions (production and sales), or products (product ranges and divisions).

PCA is part of the New General Ledger in SAP S/4HANA Enterprise Management.

• SAP S/4HANA integrates accounting and controlling for profitability management.
• Profitability Analysis (CO-PA) analyzes market segments like products and customers.
• Profit Center Accounting (PCA) analyzes internal profit and loss for areas of responsibility.
• Fixed and variable costs are analyzed separately in cost accounting.
• Cost-of-sales accounting compares sales revenues with manufacturing costs.