Comparing Sales Revenue with Manufacturing Costs Using Cost of Sales Accounting in the General Ledger

Objective

After completing this lesson, you will be able to describe how cost of sales accounting can be performed in general ledger accounting

Cost of Sales Accounting

Profit and Loss Statement

The figure contrasts Period Accounting and Cost of Sales Accounting using visual icons.

The profit and loss statement of an organization can be created according to two different procedures:

  • Period Accounting
  • Cost of sales Accounting

Period Accounting 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.

Cost of sales accounting compares the sales revenue for an accounting period with the manufacturing costs of the activity. The expenses are allocated to the commercial functional areas (production, sales, administration, research and development and so on). Expenses and revenues that cannot be assigned to the functional areas are reported in further profit and loss items, sorted according to expense and revenue type. With this type of grouping, cost of sales accounting identifies where costs originate in a company. It therefore portrays the commercial purpose of the expense.

Definition and Use of Functional Area

The figure shows an excerpt of the universal journal with different columns, such as ledger, company code, fiscal year, document, line item, G/L account, segment, profit center, functional area, cost center, amount, and currency. Functional Area is highlighted.

Definition of Functional Area

A Functional Area is an account assignment characteristic that sorts operating expenses according to their function.

Use of Functional Area

If you want to use cost of sales accounting in SAP S/4HANA, you must sort your operating expenses by functional area. A functional area is used as an account assignment characteristic that sorts operating expenses according to functions. Examples of functional areas: 

  • Production

  • Administration

  • Marketing

  • Research and Development

The system must determine a functional area for certain expenses. The functional area can be retrieved from various objects, for example, the master record of the G/L account or a cost center. When posting to an expense account, the functional area will be on the line item.

Example of Functional Area

The figure presents a comparison between Period Accounting and Cost of Sales Accounting, detailing the financial performance of a company across different functional areas: Production, Sales, Administration, and R&D. In Period Accounting, net sales revenue is 5,463, with total expenses amounting to 5,350, resulting in a profit of 114. The expenses are broken down into material expenses, staff costs, depreciation, and other expenses. In Cost of Sales Accounting, net sales revenue remains the same, but the cost of sales is 3,374, leading to a gross result of 2,089. After accounting for sales, administration, and R&D expenses, the operating profit is also 114. The functional areas contribute differently to the total expenses, with Production having the highest expenses and R&D the lowest.

Bike Company

In our scenario for the Bike Company an amount was posted to G/L Account 61500000 (Sales Commission) and functional area YB30 (Sales and Distribution).

Log in to track your progress & complete quizzes