Profitability and Cost Allocation leveraging Dynamic Rule Maintenance

[JensArendt]

Greetings everyone! I'm Jens Arendt, and I'm excited to introduce you to the sample content of Profitability and Cost Allocation within the Universal Model of SAP Profitability and Performance Management (SAP PaPM) Cloud in this blog post. But before we dive into details, allow me to introduce myself. With nearly a decade of experience in the development company of SAP Profitability and Performance Management, I have had the privilege of witnessing the evolution of this field firsthand. I actively contributed to Operational Transfer Pricing and Profitability and Cost Management projects, both in SAP PaPM on Premise and SAP PaPM Cloud environments.  

Recently Universal Model a new feature for SAP PaPM Cloud was released. To find out more about it, you can visit this blog post: Unveiling the new functionality in 2024 of SAP PAP... - SAP Community.

In the following I will introduce you to the functionalities and main benefits of the Profitability and Cost Allocation sample content in the new Universal Model.

Overview

In today's business landscape, understanding the intricacies that drive a company's success is paramount. However, determining the true costs associated with products and services often presents a significant challenge. This lack of transparency can obscure the precise landscape of profitability, leaving organizations without a clear understanding of their financial position. To address this issue, we have developed the Profitability and Cost Allocation sample content. It acts as a digitalized management tool with sophisticated profitability analytics to closely monitor the operations of a company, enabling users to determine and optimize profitability while analyzing cost allocation at a detailed activity level using activity-based costing (ABC).

The ABC model provides high accuracy in cost management by directly allocating costs to activities, thus enhancing cost transparency for informed decision-making. Additionally, it offers detailed insights into cost drivers, facilitating strategic resource allocation and performance evaluation.

Profitability and Cost Allocation Sample Content

The Profitability and Cost Allocation sample content covers the end-to-end functionality of the profitability and cost process of an enterprise. It includes aspects of data integration, data input, processing (including calculations and allocations), and reporting, all within one central solution.

Figure 1 General Architecture of the Profitability and Cost Management Content

Data enrichment

Data enrichment involves combining relevant documents to form the basis of allocation. The sample content has a live connection to S/4Hana General Ledger, enabling real-time data retrieval. Users can further enhance the data, including driver data used in allocations. This content enriches hierarchical data information for accounts, cost centers, activities, and resources, allowing customization to meet specific needs.

After data enrichment, the solution performs distributions and allocations using a step-based approach.

Resource Assignment

First, the system allocates amounts from both the general ledger and forecast data to the corresponding resources, considering the period information. This allocation is performed based on resource driver rules provided by the user.

What sets this apart is the use of the Dynamic Rules feature. I will discuss this feature in detail later.

Step-based Allocation

Afterwards, the amounts from General Ledger accounts are allocated to resources by pooling costs and revenues into resources allowing for these resources to be consumed by activities.

Activities are events or tasks that need to be performed for a specific purpose, such as producing or selling a product, and in the process, consume resources. An activity can consume different resources, and a resource can be consumed by different activities. For this reason, the resources required to perform an activity and the share of each resource consumed are calculated and allocated in the next step. This allocation is performed using the “Resource” value as a driver.

Next, amounts are allocated from activities to products and services using the “Activity” value as a driver. Activities that can be directly attributed to a specific product or service are defined as such in this function. Other activities, which cannot be directly attributed to a specific product or service, are defined based on the estimated share or portion of each product or service in the activity performed.

An additional functionality here is the automatic calculation of additional activities based on historical data, scaling it to meet current period requirements. This automated creation of activity drivers ensures the lowest level of granularity, even if the input data is at a higher level. Lastly, the allocation sends amounts from products and services to customers or channels based on the quantity of each product.

Finally, amounts from products and services are allocated to customers. Actual and planned sales data are used to provide sales channel and customer granularity. From the run result of this allocation function, a full profit and loss statement is made available at the most granular level (customer), ensuring full traceability of financial data (such as GL accounts and cost centers) and driver data (such as resources and activities). The allocation of the data is then performed using “Quantity” as a driver.

Reporting

The Profitability and Cost Allocation sample content also benefits from the ability to create persona-based dashboards. All important information for a user is combined here.

KPIs, detailed charts and more reporting possibilities provide necessary information for financial analysis. Furthermore, the user has the opportunity to analyze data according to his needs.

     

Dynamic Rules Overview

The Story behind

The 'new' dynamic rules are available for Derivations, Calculations and Allocations. It is certainly known from the use of these functions in the Standard Model that it is possible for Modeling users to maintain rules for Allocations, Calculations and Derivations during design time. With the activation, these rules become effective in the format of stored procedures. However, there is a limitation: these defined rules can no longer be customized by Activity users, which is why we also call them 'Static Rules'.

Dynamic Rules are the answer to the need to enable Activity users to maintain the rules without the need to reactivate the whole environment.

Prerequisites

      1.  The Modeling User has defined relevant fields in the business function without maintaining any                       specific selections or values. In this example it is the condition and assignment fields in a Derivation.

           

      2.  The Modeling User has set the function to API-State = Active so that process activities can reference               it.

           

      3.  The Modeling User has activated the environment of this function.

           

      4.  The Process Manager defines an activity based on the function and sets Enable Show Rules = true

           

How to use Dynamic Rules

Once the activity is saved and activated, the Activity User can access the Dynamic Rules screen.

The Activity User can use this screen to

      a.  maintain dynamic rules,

           

      b.  execute them,

           

      c.  and check the results interactively.

           

I would like to highlight one more thing. When the “Group by Rule” switch is off, the rules are displayed in the same format as they would be for uploading and downloading as a .csv file. If you turn the switch on, the rules are shown in a condensed form, which may be more convenient for manual editing.

For further information to the dynamic rules please refer to this link: Dynamic Rules

Conclusion

In conclusion, the Profitability and Cost Allocation sample content consolidates complex profitability and cost calculations into one simple content. By breaking down revenues and costs from high-level information into lowest granularity, users can identify profitable products and services, pinpoint bottlenecks and make strategic marketing decisions. This sample content is an ideal starting point for anyone who wants to become more familiar with SAP PaPM Cloud Universal Model capabilities and for those new to the topic of Profitability and Cost Management.

Thank you for joining me in this introduction to the SAP PaPM Cloud Universal Model Profitability and Cost Allocation sample content.