Profitability analysis

- Provide profitability info on a company’s market segment or sales channel

Profitability analysis is a combination of:
1. Characteristics
2. Value Fields/ Cost Element
Characteristics are subject to be analyzed
Value Fields are performance figures

Key Figures- can be in terms of quantity or rupee

- Are maintained for each characteristics
Value Field + characteristics = determine and analyses the profitability of market segment

Characteristic Value Field

1. Region 1. Sales Quantity
2. Sales Office 2. Customer Discount
3. Product 3. Sales Revenue
4. Customer 4. Direct Sales Cost
5. Business Unit

Costing based in copa is to generate reports with in controlling area which has no effect on FI
but collects /receives data from FI and SD/MM
Accounting based in copa is to generate reports or information regarding finance.

Costing based Accounting based

• Analyze profit quickly
• Use of value fields to group cost and
revenue elements
• Automatic calc. of anticipated or
accrual data
• Advantage: data always up-to-date
• Reconcile cost and financial acctng.
• Use cost and revenue elements
• Postings to both: FI and PA.
• Advantage: COGS posted to PA at
point of goods issue
Profitability Analysis Master Data
Operating Concern Definition
1. Structures and segments the profitability analysis module

2. Is the top reporting level for P&L accounting and sales management, at which
analysis of market segment profitability is performed

3. Allows one or more controlling areas to be assigned to one operating concern

Characteristics Definition
1. Criteria to which operating results can be analyzed and differentiated sales and profit
planning can be performed

2. To be defined within the customizing

Can be differentiated in :
3. Fixed characteristics:
Pre-defined automatically for every operating concern (e.g., sales organization, customer
and product).
4. Non-fixed characteristics:
Can be added to an operating concern.
Must be added in the field catalogue

Value Fields Definition

1. Is only necessary in costing-based CO-PA
2. Contains the currency amounts and quantities to be analyzed
3. Is to be defined within the customizing
4. Allows frequently-used value fields to be predefined

Frequently-used value fields are already predefined (e.g., sales quantity, revenue).
Values are defined and defined independently of any operating concern.
Aggregation methods need to be specified.
For Costing-based Profitability Analysis:
SAP pre-delivered value fields can be used. If required, a custom value field can be included.
Two value field types: Amount and quantity.
Example: Invoiced quantity is a value field of Quantity type.

A combination of characteristics is defined as Profitability segment.

The profitability segment is the account assignment object for the Profitability Analysis.

TO BE NOTED:
The operating concern is the highest reporting level within CO-PA.
It defines the limit of the sales and marketing information that can be reported together from this
module.
One or more controlling areas are assigned to an operating concern

A profitability segment is an element of an operating concern which is formed by a number of

characteristics.
Each intersection corresponds to a profitability segment (each combination of characteristics is a
profitability segment).

Costing-based in CO-PA: Account-based in CO-PA:

Information taken from SD: Information taken from SD:
1. Order is taken or changed (optional). 1. Good issues is performed.
2. An invoice for an order is generated. 2. An invoice for an order is generated

WHY COPA ?
1. Provides more options to look at profitability than can be obtained from the FI module.
2. Captures more detailed information than the FI module. For example, the user can
analyze fixed cost, variable cost, cost component split costs, etc.
3. Is an analysis tool to aid in management decisions like make vs. buy, produce vs.
outsource, where to spend the advertisement dollars etc.

Every billing document item generated in SD immediately results in a corresponding line item in
PA
The output characteristic values for a given transaction determines the relevant profitability
segment.

Valuation is used to calculate:

• Sales deductions that are not part of the invoice
• Costs of sales
• Calculated direct costs

Standard reports are not available for CO-PA reporting as the data structure itself is
flexible.
Profitability reports have to be custom-designed, although it does not require any advanced
programming knowledge.
In addition to using value fields, key figure schemes can be defined for reporting requirements.
Example for a key figure scheme: Contribution is derived based on the formula (Revenue –
Variable costs). Revenue and variable costs would be a collection of one or more value fields.
PRODUCT COST CONTROLLING
1. Determine standard costs
2. Evaluates the inventory and inventory movements
3. Sets up a basis for transfer pricing and inventory valuation
4. Determines the actual costs of the manufacturing process
5. Focuses on production order as a cost collector
6. Compare actual and target costs -> production variances

The validity of Product Cost Controlling is dependent on the quality and the structure of the Cost
Element and Cost Center Accounting.
An inaccurate split of direct and overhead costs, as well as improper selection of internal cost
allocation methods, lead to random settlement of costs.

Product Cost Planning Definition

1. Calculates cost of goods of a manufactured product
2. Sets up a standard price that will be used as a base for assessing production
efficiency and calculate variances
3. Updates price in the Material Master record
Example: if you are making cookies and you want to know your standard cost for making 1
batch of cookies, you will look at your recipe to get the list of required ingredients (Bill of
Materials). You also want to know the time that it will take you for each step (Routing).
To come up with the cost of the batch of cookies, multiple the quantity of ingredients times their
individual cost plus the hours of labor times the labor rate.
This standard cost can be used as benchmark against the actual values you used to make the
cookies. The variances can be analyzed and a cause-effect relationship can be established to
detect production inefficiencies

Cost Object Controlling Definition

1. Analyzes whether the Actual Production Costs matched or exceeded the Planned
Costs
2. Allocates Overhead by defining Overhead Rates
3. Calculates the Work in process (value of unfinished goods)
4. Calculates the Variances between Actual Costs and Target Costs

The “Lifecycle“ of a production order illustrates both typical activities within Cost Object
Controlling and interfaces (integration aspects) with Logistics.