Valuating Deliveries with Cost Component Split

Objectives

After completing this lesson, you will be able to:

  • Valuate Deliveries with Cost Component Split

Valuating Deliveries with Cost Component Split

The figure illustrates a multilevel margin reporting for a single sales order, based on journal entries created by logistic processes and controlling allocation postings. These journal entries are enriched with multiple pieces of information. For example, we store the fixed amount portion of a cost component split item, which allows us to display the Cost of Goods Sold (COGS) - Fixed Amount in Company Code Currency.

The figure illustrates a multilevel margin reporting for a single sales order, based on journal entries created by logistic processes and controlling allocation postings. These journal entries are enriched with multiple pieces of information. For instance, we store the fixed amount portion of a cost component split item, which allows us to display the Cost of Goods Sold (COGS) - fixed amount in Company Code Currency.

We store the market segment attributes in all journal entries, which can be accessed through the navigation panel on the left. This enables flexible slicing and dicing of the margin by all market segment fields. At the top, you see four revenue rows. To calculate the product revenue, we aggregate the billed amount and the realized revenue. The realized revenue, created by EBRR based on the delivery postings, shows the matching revenue for deliveries that have not yet been billed.

Sales Order Delivery

We now move to the second step in the order-to-cash process: the delivery of goods from the warehouse and the associated goods issue.

The image is a flowchart that illustrates the process of Delivery with Cost of Goods Sold in Financial Accounting / Margin Analysis, showing the flow of information and process steps involved, including elements such as sales order, delivery, billing, sales quantity, revenue, cost of goods sold (COGS), stocks, bonuses, customer, warranty, and cost of goods manufactured (COGM), with additional labels and symbols indicating the involvement of financial accounting (FI), the new general ledger (NEW GL), and other acronyms (A PCA, M SD, 123), as well as plus and minus signs next to COGM suggesting its addition to or subtraction from certain elements in the process.

The basis for evaluating a delivery is a sales order related to delivery from stock.

Screenshot of the Sales Order Overview with the Sales Order with ID 31 displayed.

We create the delivery for this sales order by using the Pick Outbound Delivery app to enter the pick quantity, then post the goods issue.

Create Outbound Deliveries Application with the line item with the Sales Document 31 highlighted.

The outbound delivery is created with reference to sales order no. 31. To do this, use the Pick Outbound Delivery app. To post the goods issue, use the corresponding app.

After the picked quantity has been entered and applied, the delivery is ready for goods issue.

Screen showing the Delivery Item Application.

Using the Track Sales Order Details app, you can evaluate the corresponding documents related to the goods issue. The process flow indicates that the invoice has not yet been created. You can select the Outbound Delivery.

You can also view the delivery document.

Screen is showing the Track Sales Order app with an example of the delivery document.

You can evaluate the complete process flow and navigate into the line items and their documents.

Image is showing the process flow in the Outbound Delivery Application for the Sales Order 31.

The system provides a comprehensive overview of the entire process from both a logistical and accounting perspective.

Accounting Documents for Goods Issue with Event-Based Revenue Recognition

The previous figure shows the process flow regarding the documents of:

  • The sales order.
  • The delivery.
  • The material document for the goods issue.

When you select the goods movement figure, you can view the corresponding accounting documents. The following figure illustrates that three accounting documents have been created, corresponding to the material document.

The image is showing the process flow for the Sales Order ID with the box for quick actions on the accounting document displayed.

Posting Affecting Profit or Loss

The first accounting document records the posting of the goods issue in profit or loss. General ledger account 13400000 reflects the reduction in inventory value, while general ledger account 54083000 records the expense as a counter entry. Account 54083000 is a general ledger account designated as a primary costs account type. This designation is significant because only one account of this type can be selected as a CO module in Margin Analysis. An expense account designated as Non-Operating Expense is not eligible for selection in Margin Analysis.

The image is showing the application Manage G/L Account Master Data

More associated journal entries are listed for this accounting document.

The image is showing Associated journal entries for the selected sales order.

Cost Component Split

First, let's examine document number 4900000004. This line item includes the cost breakdown and therefore the cost components of the material costs resulting from the goods issue posting. This enables the creation of a contribution margin calculation in Margin Analysis. An overview of the necessary settings, including a so-called cost allocation profile and its connection to material cost estimate, is explained in a later lesson.

The image is displaying line items for the Reference Document 4900000004

Event-Based Revenue Recognition

Event-based revenue recognition is designed to facilitate real-time reporting by recognizing costs and revenues as they occur. Costs are matched to the revenues of the period and immediately reported as expenses, while revenues are directly posted to an income statement account. Recognition and adjustment postings are generated simultaneously with the transactions.

The revenue recognition process is fully integrated with the general ledger. Revenue recognition data is stored alongside cost and revenue data, eliminating the need for periodic reconciliation. You can analyze recognized values based on an accounting principle such as IFRS or local GAAP, and examine individual recognition postings in detail.

In our example, this refers to two line items: 100000007 in the leading ledger 0L and line item 7000000002 in the local ledger 2L. As noted, the expected revenue can be calculated for each ledger, fulfilling the requirements of the International Financial Reporting Standards (IFRS).

The image is showing the two line items 100000007 and 7000000002 from the associated documents

Planned revenue on behalf of the customer.

Image showing the price elements with a value of 120 EUR.

The following figure shows that the planned revenue of the sales order is posted as expected revenue in the leading ledger 0L and parallel ledger 2L.

The figure shows that the planned revenue of the sales order is posted as expected revenue in the leading ledger 0L and parallel ledger 2L.

Cost of Goods Sold in Margin Analysis

SAP S/4HANA Finance enables you to split the cost of goods sold (COGS) into the individual cost components, according to the cost component structure of the material cost estimates.

COGS are posted in financial accounting and margin analysis when the goods issue to a delivery is posted. We know from the past that, originally, the goods issue in margin analysis was posted to one G/L account according to the valuation class of the material. This account is defined in account determination of materials management with the Transaction GBB-VAY (GBB stands for Offsetting Entry for Inventory Posting and VAY stands for Goods Issue for Sales Order). The posting for the goods issues still happens on the account that is maintained in the material account determination. Also, SAP S/4HANA Finance enables you to split these costs according to the components of the cost component structure of the material cost estimate that was used for inventory valuation.

Create G/L Account for Splitting COGS

Before you start configuring the split of the COGS, you must create a G/L account with cost element category 1 for every cost component of the cost component structure. In the following figure, G/L Account 50301000 for COGS Direct Material is being created. Direct material is a cost component in the cost component structure. Cost element category 1 has been chosen for Primary costs/cost-reducing revenues, and Primary Costs or Revenue has been chosen for G/L Account Type in the Type/Description tab.

The image is showing the application Change G/L Account Centrally with the G/L Account number highlighted.

After creating all the necessary general ledger (G/L) accounts for the COGS split, you can begin the configuration process. To configure the split of the COGS in margin analysis, follow the configuration path: Financial AccountingGeneral Ledger AccountingPeriodic ProcessingIntegrationMaterials ManagementDefine Accounts for Splitting the Cost of Goods Sold.

Create a Splitting Profile

By choosing New Entries, by pressing F5, you can create a new splitting profile. For this example, create Cost Splitting Profile Z100 as shown in the following figure, and assign it to Controlling Area Z100. The chart of accounts in the Chart/Accts column is automatically derived from the controlling area.

If you select the checkbox in the Acc Based Split (account-based split) column, the system consistently splits the cost into the cost components. Whenever there is a posting on the Source Accounts, you will specify in the next section.

For this example, do not select the checkbox, because you want the system to split the COGS only based on movements of the sales order. Mark your Cost Splitting Profile by selecting the checkbox at the beginning of the line, then navigate to the Source Accounts folder in the left section of the screen.

The image is showing the configuration activity Splitting of Goods Sold with the step Cost Splitting Profile selected.

Maintain Source Accounts

To add the Source Accounts (refer to the following figure), choose New Entries or press F5. The Source Accounts are the general ledger (G/L) accounts affected when a goods issue for the delivery is posted. These accounts for the goods issue are set up in the materials management account determination with Transaction GBBVAY. In this example, maintain G/L account 54083000 for inventory change COGS as the Source Account. In the Valuation View column, you can specify a particular valuation, such as a group valuation.

If you do not specify a valuation, the splitting applies to all existing valuations. Mark your Source Account by selecting the checkbox at the beginning of the line, then navigate to the Strategy Sequence folder on the left section of the screen.

The screen is showing the step Maintain Source Accounts

Define the Strategy Sequence

In the Strategy Sequence, you define a strategy for each source account, dictating how the system attempts to split the cost. If the system does not find a material cost estimate in the first sequence, it proceeds to the next sequence, and so on. For example, create Strategy Z01 with Sequence Number 1, where the system splits the cost using the Current Standard Cost Estimate. This is the cost estimate that is active in the material master at the time of the goods issue posting.

You can also split your COGS using the actual cost component split from the Material Ledger. If you are using actual costing in the Material Ledger, you can select the Split Revalued Consumption with Actual Cost Component Split checkbox. Next, proceed to the Target Accounts folder in the Splitting of Cost of Goods Sold section on the left side of the screen.

The screen is showing the step Define the Strategy Sequence

Maintain Target Accounts

Below, you are guided on how to maintain a target account for each cost component of the cost component structure. The target account must be a general ledger (G/L) account with cost element type 1 (primary costs/cost-reducing revenues); otherwise, you can't save the cost splitting profile. To display the possible entries for each column, press F4 to open the Help section. For one line, you must select the checkbox in the Default column. If the system cannot determine a target account for a cost component according to the cost splitting profile, this cost component is assigned to the account marked as Default. After you have maintained all your Target Accounts, navigate to the Offsetting Accounts folder on the left side of the screen.

The screen is showing the step Maintain Target Accounts

Maintain Offsetting Accounts

Below, you see how to maintain the Offsetting Accounts. Usually, the COGS account is used as an offsetting account for the COGS component split. If you’re using the Material Ledger, you can compare the originally posted costs with the actual costs according to the Material Ledger. This isn’t the case in this example, so there’s no need to maintain an offsetting account. Move to the Company Code Settings folder on the left side of the screen.

The screen is showing the step Maintain Offsetting Accounts

Activate the Splitting Profile in the Company Code

Before you can save the cost splitting profile, you must activate it for the company code. In the following procedure, add a new entry for Company Code Z100 by choosing New Entries or by pressing F5. Assign Cost Splitting Profile Z100 with a Valid From date of 01.01.2020 to Company Code Z100. Mark your Company Code by selecting the checkbox at the beginning of the line, then navigate to the Document Type Mapping folder on the left section of the screen.

The screen is showing the step Activate the Splitting Profile in the Company Code

Assign the Document Type

You can assign a different document type for the posting of the COGS splitting in the following figure by choosing New Entries or by pressing F5. For this example, the COGS split must not be posted with a different document type. Therefore, don’t maintain any entries here: Save the cost splitting profile by choosing Save or by pressing Ctrl+S.

The screen is showing the step Assign the Document Type

Review COGS Split

In our example, we have a sales order no. 31 featuring the product FG1_CP, which is a shaft with rolling bearings. We compare the actual released material cost estimate with the Cost of Goods Sold (COGS) from the goods issue posting in the order-to-cash process.

The figure displays the Cost of Goods Sold (COGS) corresponding to the goods issue for the delivery of the sales order..

The previous figure displays the Cost of Goods Sold (COGS) corresponding to the goods issue for the delivery of the sales order.

Comparison of the Material Costing with the COGS in the report in Margin Analysis

The figure displays the cost component split of the actual released material cost estimate. Aside from a minor rounding difference of 1 euro cent, the cost splitting from the material calculation and the goods issue posting are identical.

The preceding figure displays the cost component split of the actual released material cost estimate. Apart from a minor rounding difference of 1 euro cent, the cost splitting from the material calculation and the goods issue posting are identical.

The image shows the report in Margin Analysis titled Product Profitability with Production Variances, which selects customer order no. 31

The cost component split reveals that the total variable costs are EUR 58,099. The total fixed costs amount to EUR 28.54, with a rounding difference of EUR 0.01 cent. The subsequent report in Margin Analysis titled "Product Profitability with Production Variances," which selects customer order no. 31, confirms both cost components.

The Calculation of Adjusted Revenue within EBRR

The calculation of the adjusted revenue follows the logic of Percentage of Completion (POC):

The image presents a formula to calculate an adjusted revenue figure, denoted as Revenue_adjusted. The formula states that the adjusted revenue equals the actual costs divided by the planned costs, multiplied by the planned revenue. Mathematically, this is expressed as: Revenue_adjusted = (Costs_Actual / Costs_Plan) * Revenue_Plan. This calculation adjusts the planned revenue based on the ratio of actual costs incurred to the costs originally planned. If the actual costs are higher than the planned costs, the adjusted revenue will be proportionally higher than the planned revenue. On the other hand, if the actual costs are lower than anticipated, the adjusted revenue will be proportionally reduced compared to the planned revenue.

In the following example, you see a sales order with the sales order number 53. The order has a planned quantity of two pieces (2 PC), of which one piece (1 PC) was delivered.

The image shows a sales order with the sales order number 53, which has a planned quantity of 2 pieces, of which 1 piece was delivered

The order quantity of two pieces (2 PC) results in a planned revenue of EUR 400, with a sales price of EUR 200 per piece.

The image is showing the price elements of the order, displaying a planned revenue of EUR 400 with a sales price of EUR 200 per piece.

One piece of the planned product quantity will be delivered. This means that 50 percent of the planned costs are realized as actual costs.

The image is showing the section Planned Deliveries inside the Sales Order app.

According to the Percentage of Completion (POC) method, as prescribed by the IFRS (International Financial Reporting Standard), this results in an expected revenue of EUR 200, compared to the planned revenue of EUR 400.

The illustration of the process flow for the sales order indicates that the delivery is partially realized and still partially planned.

The illustration of the process flow for the sales order indicates that the delivery is partially realized and still partially planned.

Navigating to the outbound delivery then enables you to navigate to the material document for the goods issue.

The image shows the process flow of the Outbound Delivery.

All financial documents can be analyzed starting from the material receipt. The third financial document displays the calculated expected revenue of EUR 200, which corresponds to half of the planned revenue of EUR 400.

The image displays the calculated expected revenue of EUR 200, which corresponds to half of the planned revenue of EUR 400.

Evaluate the Incoming Sales Order in Margin Analysis

Business Example

The sales order that you created was posted in the ACDOCA table in an extension ledger. Therefore, you can analyze the incoming sales order in Margin Analysis.

Familiarize yourself with the process of analyzing the incoming sales order in Margin Analysis by utilizing the interactive simulation.

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