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Profitability Analysis (CO-PA) enables a detailed analysis of a company’s profits and losses across various dimensions such as customers, products, regions, or strategic business units like sales organisations, profit centers, or business areas. The information obtained provides valuable input to the entire company and its individual areas, supporting decision-making.
But which form of profitability analysis is best suited? Many companies face the decision of whether to use the costing- or accounting-based form. This article compares and distinguishes these two forms.
What distinguishes account-based CO-PA from costing-based CO-PA?
Account-based CO-PA is an account-based form, i.e. costs and revenues are recorded in G/L accounts. This form of profitability analysis works with cost and revenue types that are stored in the respective account and provides a profit and loss report that is permanently reconciled with financial accounting. This means that all costs and revenues are transferred to financial accounting and profit and loss accounting at the same time, e.g. the costs of sales are posted to profit and loss accounting when goods are issued. In general, all postings in the accounting CO-PA correspond exactly with the FI/CO postings.
Costing-based CO-PA summarises values and quantities in value fields. The value fields represent sales-related key figures such as revenue, revenue reductions and costs. In contrast to the account-based approach, with costing-based CO-PA the costs of sales are only transferred to CO-PA with the invoiced sales revenue and not with the goods issue posting. In addition, imputed costs (such as imputed freight costs) can be taken into account in costing-based CO-PA.
Please note that costing-based CO-PA only supports the cost of sales method. It is therefore not possible to present the results using the total cost method with this method. In account-based Profitability Analysis, results can be presented using both the cost of sales method and the nature of expense method.
Two paths to the same result?
Generally, both methods of profitability analysis lead to the same result, but imputed costs such as cash discount, commission, freight, insurance, etc., can cause discrepancies between the two methods.
The following example demonstrates the profitability determination once using the account-based method and once using the costing-based method:
In account-based CO-PA, it is possible to either break down the cost of goods sold into individual components through cost layering or view it in a summarized form, as all components each have a general ledger account number. Costing-based CO-PA, on the other hand, can display a detailed breakdown of revenue deductions and functional cost blocks of overhead costs.
The essential difference between the two methods becomes evident through calculation. In costing-based CO-PA, revenue deductions consider imputed costs using SD condition technique, which are not yet known at the time of document posting and therefore not listed on the invoice. In summary, in our example, the costing-based result differs from the account-based result exactly by the amount of costs.
SAP S/4HANA redefines CO-PA
With SAP S/4HANA, account-based profitability analysis has been partially redefined and its functionality enhanced.
The following innovations and improvements differentiate account-based profitability analysis under S/4HANA from previous ERP versions:
- Simplified Architecture: Under S/4HANA, CO-PA is integrated into the universal data structure of the Universal Journal (ACDOCA). This leads to a unification of data structures and allows a consolidated view of financial and controlling data.
- Real-Time Analysis: Thanks to HANA’s in-memory technology, profitability analyses can be conducted in real time. This allows for faster and more detailed insights into profitability.
- Enhanced Reporting and Analysis Capabilities: S/4HANA provides advanced reporting tools like SAP Fiori and SAP Analytics Cloud. These tools enable new, user-friendly dashboards and analytical reports.
- Integration with Other Modules: Integration with other SAP modules like SAP SD (Sales and Distribution), SAP MM (Materials Management), and SAP PP (Production Planning) remains. For example, production variances can still be allocated to CO-PA. Instead of value fields, accounts are now used for the distribution of variances. The same applies to the transfer of standard costing into CO-PA. If elements were assigned to value fields in costing-based CO-PA, this is now done via new general ledger accounts. This means more accounts are used to represent certain transactions in account-based CO-PA.
- Greater Flexibility in Planning: Planning in CO-PA has become more flexible. Users can make more detailed and specific plans and compare them with actual data.
- Improved Performance: The performance of CO-PA analyses has significantly improved due to the use of the HANA database. This results in faster load times and shorter response times for reports.
- Increased Data Consistency: The integration of CO-PA into the Universal Journal increases data consistency, as all financial data is stored in a single source. Therefore, FI and CO are always reconciled, eliminating the search for discrepancies between FI and CO-PA.
These innovations make account-based CO-PA under S/4HANA more powerful and user-friendly.
Account-based or costing-based: Which path should you choose?
Since only account-based CO-PA is integrated into the Universal Journal, SAP recommends it as a “Best Practice.” Additionally, previous concerns about account-based profitability analysis not meeting extended reporting and structuring requirements or providing non-informative results are largely addressed under SAP S/4HANA. The functional expansion of account-based profitability analysis also allows for the presentation of a contribution margin scheme that fully matches the general ledger, meeting the requirements of comprehensive contribution margin accounting. Therefore, companies should use the integration of CO-PA into the Universal Journal to enable a consolidated data base that includes both FI and CO data. This reduces data redundancies and simplifies reporting. Another reason for using account-based CO-PA is that new functionalities in CO-PA will only be available in account-based CO-PA. FIORI applications and reports (e.g., Embedded Analytics) are also based on this technology. However, it should be noted that costing-based CO-PA remains available under S/4HANA, even if SAP will no longer develop it further. Customers thus have the option to use both scenarios, even in parallel if desired.
The following illustration shows the setup of a contribution margin scheme in account-based CO-PA:
The cost layering of product costing allows for the breakdown of cost of goods sold. The allocation of costs for sales and administration is done via the allocation cycle. Additionally, under SAP S/4HANA, it is possible to structure this multi-level, account-based contribution margin accounting by freely definable characteristics such as region, product group, or item. These characteristics can also be changed or extended later.
Whether the focus of profitability analysis should be on including calculative surcharges and statistical SD conditions or on reconciling all FI/CO postings must ultimately be decided by analysing specific company requirements. However, SAP S/4HANA increases the attractiveness of account-based profitability analysis for manufacturing companies due to its high performance and new functionalities and reporting capabilities.
FIORI Apps for CO-PA
Here are some interesting FIORI apps in the CO-PA environment:
Profitability Analysis - Line Items
This app enables the analysis of profitability data at the line item level. Users can gain detailed insights into individual postings and filter them by various characteristics.
Profitability Analysis - Product Profitability
This app provides an overview of key profitability metrics, such as revenue, costs, and profit, and allows their analysis by various dimensions.
Market Segment Reporting
This app supports the analysis of market segments (e.g., product, customer, etc.) at the line item level. The report can be defined using global hierarchies (e.g., account groups) to meet your requirements and display revenues, costs, and contribution margins in the desired format.
On the subject of FIORI apps, I recommend the articles:
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