UCB Process Example: Plan Value Flow

Jessica_Dewald

Co-authored by @EvaWang and Jessica Dewald

This is the second part of the UCB blog series. If you're new to the UCB solution, you might want to read the introduction blog first: Universal Component Breakdown (UCB): Revolutionizing Product Cost Management and Transparency Pt. 1

Welcome back and let's get right into our first example scenario.

UCB Process Example: Plan Value Flow

Imagine you’re a cost accountant at an e-bike company and you just received a critical task to complete product cost planning for your plant 1710 and make it ready for actual production execution and product cost controlling. This quarter, your company wants to achieve an increased margin for the flagship products to stay competitive. You use UCB to identify the cost drivers that can help improve cost efficiency.

Here's how you tackle it step by step using UCB in a plan value flow:

Start with Financial Planning in SAP Analytics Cloud (SAC) and Plan Data Import

This step is triggered by the financial planning in your company, product cost planning is part of the yearly financial planning.

Once that’s done, you integrate the financial planning data, especially plan cost rates and the cost rates split, directly into the SAP Cloud ERP system - ensuring everything is aligned and ready for the follow-up processes.

Check Plan Cost Rates

You can now display the cost breakdown result of a cost rate in your system:

Display Cost Rates app

You use the Display Cost Rates app to display the different breakdown approaches in parallel. The origin cost breakdown shows the cost rate’s split into its original cost factors. You may already know this concept from the primary cost component split.  

Comparison by period in table view and bar chart view in the Display Cost Rates app.

Pie chart view of an origin cost breakdown in the Display Cost Rates app.

Manage Cost Rates Plan app

In the Manage Cost Rates – Plan app, you review all planned activity cost rates, including both fixed and variable portions. You want to find out more about the original cost factors behind each rate, using the origin cost component breakdown structure to understand what’s driving your costs.

Production and origin cost breakdown in the Manage Cost Rates – Plan app.

Create Standard Cost Estimates and Release Material Prices

With your cost rates in place, you run scheduled jobs to calculate material standard cost estimates. You determine the cost component breakdown and release the material prices with full transparency into each component.

Monitor Material Prices with Component Breakdown

Now it’s time to validate your work. Open the Monitor Material Prices app and confirm that all material prices are available. Then, you zoom in on the finished materials to check the planned cost component ratios. Everything looks good, each cost component is accounted for, and the percentages align with your margin goals.

Monitor Material Prices App

The Monitor Material Prices app provides the material price related cost breakdown based on the standard cost calculation. Just like in the cost rate split analysis, you can analyze material prices based on origin cost breakdown to see the original cost factor and cost drivers at component level.

Cost component breakdown displayed in table, pie and bar chart view in the Monitor Material Prices app.

Identify Cost Drivers for Future Efficiency

With the groundwork laid, you have set-up your product cost standard costs and now you shift your focus to strategic analysis based on the actual business execution.

Your focus would be identifying the cost drivers that could help improve efficiency next quarter and into next year. Whether it's optimizing raw material usage, reducing overhead, or streamlining production activities, you’re now equipped with the data to make informed decisions.

Now we’re ready to get going with the actual value flow based on the most straight forward processes with make-to-stock in-house production and sell-from-stock as an example.

UCB Process Example Part 2: Actual Value Flow - In-House Production Business with Make-to-Stock (MTO) and Sales Processes

MTO production process overview.

Using UCB to Uncover Cost Drivers and Boost Product Margins

You’re a cost accountant and an expert for the actual value flow of your plant’s operations. Products are manufactured using a make-to-stock approach and sold directly to customers. But now, it’s time to go beyond production and sales - you need to analyze the production costs, product profitability, identify cost drivers, and take action to improve margins. Here’s how you do it using the product cost breakdown based on UCB.

Run In-House Production and Sales Processes

Your plant operates on a make-to-stock model. You produce the goods, complete the required business steps like material staging and activity confirmation, finish the product manufacturing activities, and then deliver the products to customers. With that, the control over the goods is shifted to your customer and you’re ready to dive into the financials.

First of all, let's look at how the cost component breakdown is reflected on journal entry level. The cost component breakdown is available for every single document posting of production activity confirmation, raw material consumption on production order, production overhead posting, and material goods movement journal entry documents, including the outbound delivery goods issue for the COGS breakdown.

Manage Journal Entries (New Version) App

In the Manage Journal Entries app, for example, you can access cost component breakdowns for journal entries to analyze posting confirmations, material consumption, and goods receipts of production orders:

Origin cost breakdown in the Manage Journal Entries (New Version) app.

Analyze COGS Breakdown after Make-to-Stock Process is Finished

To get a clearer picture, you open the Costs of Goods Manufactured Review Booklet. You can view the actual COGM values or compare current costs with previous periods and spot red flags in both raw material and production cost components.

Cost of Goods Manufactured (COGM) Review Booklet

The COGM Review Booklet provides comprehensive analytics reports for the cost of goods manufactured after production costs have been posted from production activities and goods movements etc. You can now view and analysis the COGM in a hierarchical view based on the production cost component hierarchy or original cost component hierarchy. It shows costs at each component level as well as the subtotal costs at hierarchy node level, for example, total overhead costs or total material costs.

Identifying the Root Cause

You drill down into the COGM component breakdown by order, cost origin or accounts etc. The review booklet provides flexibility to make the needful dimension available in the reporting based on your own needs.

Period comparison in the COGM Review Booklet.

Run Sell-from-Stock and Analyze COGS Posting and COGS Breakdown

In our example, an outbound delivery is completed for the sales order 488476, that is, the flagship product bike MZ-FG-M500 is delivered from warehouse to customer 10100001. With that, the accounting document 4900000078 is posted, which credits inventory and debits COGS, the latter represents the expense associated with the sold product MZ-FG-M500.

COGS line items in the Manage Journal Entries app.

In the COGS line item (4900000078/000002), you can view the cost components that comprise the total COGS amount and its fixed and variable parts in both company code currency and group currency.

The following screen shows the cost breakdown components using the origin cost breakdown (method CBOB):

Origin cost breakdown in the line item view of the Manage Journal Entries app.

You can also switch to the production cost breakdown method CBPB.

Production cost breakdown in the COGM Review Booklet.

Review Product Performance in Product Profitability Review Booklet

Go to the Product Profitability Review Booklet and open the Margin View to assess how your products are performing during this period. One of the products sold exceeds expectations with a 35% margin. But the other one is underperforming at just 15%, which is well below the target. You know it’s time to investigate further.

Product Profitability Review Booklet

With the Product Profitability Review Booklet, you can access the total contribution margin view. Additionally, the COGS breakdown view can help you to understand your total cost of goods sold either according to the production cost breakdown or to illustrate the original cost factors. Furthermore, fixed and variable costs split are also supported in the end-to-end process.

Year-to-date margin view in the Product Profitability Review Booklet.

You can display the COGS breakdown with the production cost breakdown structure in a hierarchical view:

Year-to-date COGS breakdown on the basis of the production cost breakdown in the Product Profitability Review Booklet.The second option lets you display the COGS breakdown based on the origin cost breakdown in a hierarchical view, enabling you to analyze the original cost factors, such as energy or water: Year-to-date COGS breakdown on the basis of the origin cost breakdown in the Product Profitability Review Booklet.

The third option lets you display the COGS breakdown component by product sold:

Year-to-date COGS breakdown by cost breakdown component "Product Sold" in the Product Profitability Review Booklet.

This option lets you display the COGS breakdown related to the product sold:

Year-to-date COGS breakdown related to the product sold.

These are just a few examples to demonstrate the flexibility you have with the drill-down options and filters available in review booklets.

Let’s summarize what we learned: By leveraging UCB with the help of the new review booklet capabilities, you’re not just tracking costs, you’re uncovering insights that drive necessary decisions. You’re helping your organization by providing needful insights to stay competitive, efficient, and profitable.

What's the relationship between the existing cost component split solution (CCS) and UCB?

At the moment, you can still use the existing cost component split solution (based on scope item BEG) and UCB (based on scope item 7NH) in parallel. We recommend you use the existing solution CCS with scope item BEG for go-live purposes until the scope of UCB reaches the intended coverage.

For more information about scoping, see SAP Note 3544173 - Universal Component Breakdown (UCB): Product Cost Breakdown (Scope Item 7NH) in SAP Cloud ....

We know there’s still a lot to unpack with this new solution and there’s more to come on the SAP Community soon. Feel free to post your comments and questions below. We’re looking forward to hearing from you.