Author: Tony Zhang COPA Position Paper North America

IBM GBS (Houston)

SAP Finance Implementation

1 PROBLEM DESCRIPTION

1.1 ABC INC process & requirements

2 RECOMMENDATION

2.1 Description

2.2 Solution approach

2.3 ABC INC data flow

2.4 Open questions

3 APPENDIX A

3.1 Proposed ABC INC Product hierarchy

4 APPENDIX B

4.1 Proposed ABC INC COPA data flow details

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IBM GBS (Houston)
SAP Finance Implementation

1.1 ABC INC OTC process & requirement

Legacy Systems (COP/UMS/WIS/LOGNET/ORS) will continue to provide relevant information for wholesale
goods sold to SAP to feed SAP FI/AR and SAP CO/PA at the level which will be required to produce margin
analysis.

On Industrial project, For export: Legacy Order/Invoicing systems will provide line item level data (serial number)
at invoice time, interface to SAP - AR sub-ledger with details needed for recording and reporting various values
and dimensions ,which reconcile the receivable account in SAP-GL and posts information required in COPA
[direct & derived information]; For domestic: Legacy order/invoicing system will directly provide line item level data
to SAP G/L, and then posts information required in COPA.

Since the information related to serial number level is very important for CO-PA, interfaces to SAP for updating of
material master data is required. This data must always be filled in all CO-PA relevant lines, for which the data is
analyzed at that level including Revenue/Sales and/or cost of goods sold.

COPA is basically to provide Commercial Margin Analysis and as an alternative to the existing COMMARG and
alternative to replace Financial data warehouse.

Chart 1 Proposed reporting in COPA and BW

Type Of Report COPA BW

Commercial Margin Reporting X
Sales Allowance Reporting X
Warranty Reporting X
Freight Reporting X
Domestic Receivable Reporting X
Company Inventory Reporting X
Dealer Inventory Reporting X
HFM Reporting X
Export Receivable Reporting X

2.1 Descriptions

ABC INC NA Industrial Project chose to implement SAP CO-PA, to provide Profitability Analysis on many different
segments and characteristics that can be analyzed from different angles and viewpoints.

Standard SAP use CO-PA in branch of industry (wholesale & parts) and with any form of production, the data can
be analyzed by period, or by order or project.

The application CO-PA produce profitability of segments of ABC INC brand-structured according to products,
customers, orders, and summarizations of these and other characteristics and organizational units such as
company codes or product line.

Profitability Analysis is intended to provide ABC INC NA with the ability to evaluate the profitability of individual
market segments (Profitability Segments). By collecting and storing transaction data, PA provides the user with
the ability to slice and dice data to meet reporting requirements. PA reports provide profitability views for
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SAP Finance Implementation

combinations of attributes specified in configuration, such as: customers, products, orders, strategic business
units, locations and any others defined.

Profitability Analysis Methods

Two forms of Profitability Analysis are supported: costing-based and account-based.

(a) Costing-based Profitability Analysis is the form of profitability analysis that groups costs and revenues
according to value fields and costing-based valuation approaches, both of which you can define yourself. It
guarantees you access at all times to a complete, short-term profitability report.

Costing-based Profitability Analysis serves primarily to display costs and revenues with regard to Characteristic
profitability. Assignment of cost responsibility is accomplished by assessing data to the appropriate
Characteristics in PA. Costs can be assigned to the customer, product, sales channel, or any other Characteristic
responsible. In Costing-based, PA Value Fields, instead of G/L accounts, are used to represent profitability detail.

(b) Account-based Profitability Analysis is a form of profitability analysis organized in accounts and using an
account-based valuation approach. The distinguishing characteristic of this form is, its use of cost and revenue
elements. It provides you with a profitability report that is permanently reconciled with financial accounting.

Account-based Profitability Analysis is primarily used by organizations to ensure reconciliation between FI and PA.
This method provides management with an internal view of costs and revenues based on the Chart of Accounts
(COA). Cost elements provide the financial detail, mirroring General Ledger accounts, compared to using Value
Fields in Costing-based PA. The objective of Account-based PA is to simultaneously post to both FI and PA, via
a settlement structure. Other costs are assessed to PA via assessment cycles. Simultaneous postings enable
reconciliation between FI and PA.

ABC INC choose to implement costing-based profitability method with cost-of-sales accounting method to be in
industrial project.

Reasons for Position or Decision:

Technically uniform system environment.
So as to provide sales, marketing, product management and corporate planning departments with
information to support internal accounting and decision-making.
o Accrual accounting can only be used in PA.
o ABC INC may partially implement SD, and the data will flow to costing-based PA too.
o Costing-based PA is generally used by sales management as an instrument to control sales (external
view of profitability, i.e. customer, product).
o Costing Based PA features are, firstly, the use of value fields to group cost and revenue elements,
and, secondly, automatic calculation of anticipated or accrual data (valuation)
o A standard cost approach to COS can be used with Costing-Based PA to provide a real time view of
profitability. .
o When using Product Costing, only Costing-based PA supports the module.

2.2 Solution Approach.

PA entities:
Operating Concern
Characteristics
Derivation
Profitability Segment
Value Fields

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SAP Finance Implementation

We will have one operation concern and one controlling area, and the currency we will use is USD. In a situation
where an organization has an external billing system and does not use the Sales and Distribution (SD) module,
custom Characteristics are often used. Without using either the A/R or SD module fields cannot be read from
master records to populate Characteristic values. Though when used in conjunction with the SD and A/R
modules, standard SAP Characteristics can provide a great deal of value.

When defining client dependent Characteristics, logic should be used in the naming convention to
enable users to more easily choose the attributes for which to post data. When manually posting
transactions in Financial Accounting (FI) users will need to select Characteristics to post data to in
PA. In some instances the user will not be able to provide values for all of the Characteristics
defined. For these instances the SAP system provides derivation functionality.

Derivation enables a user to enter certain Characteristic values, and then derive missing values
from those already entered. For instance, if a user is only able to enter a value for sales region
and product group and does not know the value for sales group. The SAP system can derive the
value for sales group from the other values entered. Another advantage to the derivation
functionality is that the user can save time when entering values. In other instances,
Characteristic values could default from the master record of the object in the transaction (i.e.
Company Code, Region). SAP has a standard derivation structure and also allows for
customization of a client dependent structure. After configured in the IMG, derivation structures
will enable Characteristics to be derived from one another.

Example
The following occurs in the PA table for derivation structures. The source field containing the
Characteristic values provided by the user and the target containing the Characteristic value to be
derived. A derivation structure and rule need to be set up prior to using the derivation function.
Derivation Structure
Source: Sales Region, Product Group
Target: Sales Group
Derivation Rule
When Sales Region 01 and Product Group XYZ give you Sales Group S01.

Chart 2 ABC INC Characteristics & value fields

(The following chart is not comprehensive and need to be modified in the future)

Characteristics
North Latin
V/C CMR HFM Australia Europe
America America
Derived from Profit Center
HFM Brand C X X X X
Logistic Brand C X X X X
HFM Market C X X X X
Deliver to Country C X X X X
HFM Base Entity C X X X X
Division (Industry) C X X X X
Source Plant C X X X X

Material Related (MARA)

HFM Product Line C X X X X
Model Description C X X X X
Mode Code C X X X X

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SAP Finance Implementation

Warranty Tracking Model C X X X X

Commodity C X X X X
Standard Product Line (In
C X X X X
Europe this Product Type)
Horse Power Product Line C X X X X

Customer Related
Channel C X X X X
Customer C X X X X
Trading Partner C X X X X

FI Related X X X X
Company code C X X X X
Profit center C X X X X
Flow type (Transaction type) for
C X X X X
Balance Sheet accounts only
Document type (credit note,
C X X X X
auto-invoice, etc.)
Transaction Date (Posting date) C X X X X
Period of origination (Document
C X X X X
date)
Source System C X X X X
Fiscal year C X X X X
C

Value fields
North Latin
V/C CMR HFM Australia Europe America
America
List Price (Europe) V X X X X X X
Contractual Discount
V X X X X X X
(Europe)
Dealer Net (Sales
V X X X X X X
Revenue)
Freight Revenue V X X X X X X
Other Revenue V X X X X X X
Sales Allowance Expense V X X X X X X
Standard Cost/COGS V X X X X X X
Policy Expense V X X X X X X
Warranty Expense V X X X X X X
Freight Expense V X X X X X X
Other Variable Selling
V X X X X X X
Exp
Exchange. (Foreign
V X X X X X X
exchange variance)
Sales Allowance
V X X X X X
Reserves
Warranty Reserves V X X X X X
Freight Reserves V X X X X X
Account Balance for each
warranty account that this
report is run on (to be
listed when COFA is

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SAP Finance Implementation

done)

2.3 ABC INC Data Flow into PA

Chart 2 ABC INC Data Flow into PA

Financial Accounting (FI)

In FI direct postings to Profitability Segments are made by posting revenues, sales deductions, or costs to
Characteristic Values. Upon posting data a settlement structure transports G/L accounts to PA Value Fields.
Settlement structures are used in both Account and Cost-based PA. Though, postings are made simultaneously to
PA via cost elements when using Account-based. PA receives revenue and contra revenue data from FI at the
time of invoicing in Accounts Receivable (A/R).

Transferring External Data: As the Sales and Distribution (SD) module is not operational in ABC INC NA, you can
transfer billing data to Profitability Analysis using an external interface. COPA will post to G/L after accrual
calculation through extension.

Please refer to Appendix B for the detail explanation of the process.

Valuation Strategy

A valuation strategy controls the overall valuation process. You need to enter your costing sheets in a valuation
strategy in order for them to take effect. The good way is to use the condition technique to calculate values in CO-
PA that, although relevant for analysis purposes, such as calculating a contribution margin at each level, are not
yet established when the document posting occurs.

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IBM GBS (Houston)
SAP Finance Implementation

Costing Sheets.
In a costing sheet, you specify which conditions should be used to calculate anticipated values. This is also where
you determine the sequence in which the conditions are to be considered and the dependencies between them.

Condition Types, Condition Tables, and Condition Records

A condition type represents one step in a costing sheet. Condition types can Determine fixed amounts and
calculate additions and deductions (percentage or quantity-dependent); Each condition type can be assigned one
access sequence (or none, depending on the condition category). This access sequence in turn can access one
or more condition tables.

A condition table can be used in more than one access sequence. Moreover, it can store more than one condition
record. You want to calculate a percentage surcharge based on what material group is involved in a transaction.
NOTE: COPA only shadows postings to P&L accounts. No B/S accts postings will be in COPA.

Accrual accounting Process

SAP will calculate the accrual amount base on the percentage multiplied by the gross sales; the percentages
need to be provided by ABC INC commercial controllers. The revaluation has to be run whenever percentages are
updated in the condition tables. Discount accruals will be made using the queries that were put in per period.
Define discount percentage
o Load discount table
o Verify the loading discounts
Discount revaluation
Discount accruals
o Extraction of the input file
o Creation of accounting batch
o Launch the batch

Chart 3 ABC INC Accrual Accounting flow chart

Sales Discount / allowances / deductions

Dis/All/Dedu are to be recorded at serial # level as for industrial Books. If the Original sale to dealer is Invoice
Document or Credit note then, it should be linked to the original sale to dealer.

Volume bonus
Serial # or Model Code is lowest level in reporting element as for Industrial Books.

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SAP Finance Implementation

Source of Information would be thru email/spread sheet from IBS system which is set up in Europe and or
commercial controller for spare parts or exports.

Warranty
Lowest level in reporting element for Warranty is serial # and if not would be Model code. Source of Information
for Costs are 95% would be from legacy systems besides Recharges & Vendor Recovery. And with regards to
Accrual for Base Warranty, its Rate per Unit. For Campaign, Quality Department is source of information.

Inventory information
Requirement to maintain Inventory Information in COPA are Cost of Sales and Inventory Evaluation& deprecation.
Lowest Level in Reporting element is Serial #. Source of Information for Cost of Sales are Invoicing System or
Manufacturing system. And for Depreciation need to contact Ann.

Allocations
For Warranty and Margin no Costs are to be allocated. Serial # & Model Code should come from Legacy. In
Europe There are no Allocations.

4 Appendix B

In FI direct postings to Profitability Segments are made by posting revenues, sales deductions, or costs to
Characteristic Values. Upon posting data a settlement structure transports G/L accounts to PA Value Fields.
Settlement structures are used in both Account and Cost-based PA. Though, postings are made simultaneously to
PA via cost elements when using Account-based. PA receives revenue and contra revenue data from FI at the
time of invoicing in Accounts Receivable (A/R).

PA receives revenue and contra revenue data from FI at the time of invoicing in Accounts Receivable (A/R). Cost
of Goods Sold (COGS) is posted to PA during the period using either a standard value or actual data at the end of
the period. Keep in mind that when posting data to PA either first or at the same time as another cost object, data
posted to PA is real and all other posting are statistical in CO.

When posting transactions in FI a user is required to specify Characteristics on a segment screen for which to
post. On the segment screen the user has the option of using derivation functionality to obtain values for
Characteristics they are unable to enter. Derivation functionality can also be used to save time when entering
Characteristic Values.

Cost Center Accounting

There are a number of ways in which data can be transported from CCA into PA. We should be careful of
statistical postings to CCA resulting from actual postings directly to PA. This will hinder allocations within CCA
and activity price calculations.

Costs can be allocated from CCA to Profitability Analysis via PA assessment cycles. When using standard costs
variances occurring on either production orders or cost centers can be posted to PA, accounting for variances in
COGS. Also internal activities performed on a cost center can be directly allocated to PA.

For instance, activity costs on a cost center related to a specific customer can be allocated to that customer
Characteristic in PA. At the end of each period all overhead expenses and non-operating income and expenses
can be posted to a Value Field(s). In the segment of the assessment cycle Value Fields and Characteristics for
the transfer of costs is defined.

Planned data can also be transferred from CCA to PA. Assessments for transfer of planned data are created and
executed in PA. Prior to assessing planned data the integration indicator for planning can be set in configuration.
If planned data already exists for cost centers the indicator can be set using the active integration function, found
in the planning menu of CCA.

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SAP Finance Implementation

Orders/Projects.

At the end of an Order/Project, costs can be settled to PA in order to analyze profitability. The settlement of
orders/projects is determined by the settlement rules specified on the master record of the order or project.
In order to settle data from orders to PA the following steps must be performed.
First a settlement structure must be set up in order to route cost elements to Value Fields.
Next, a settlement profile should be setup in order to establish the rules for settling specific order types. Number
ranges for settlement documents must also be defined. Upon completing the configuration settings, settlement
rules must be setup on the master record of the orders/projects.

In the master record a settlement profile, structure and receiver(s) must be specified.
Additionally, if planned data needs to be transferred from orders or projects indicators must be set. In
configuration planning integration indicators for each order type and project profile need to be set. Settlement
functionality exists enabling planned order data to be settled to PA.

OTC Process:

Transferring External Data: If the Sales and Distribution (SD) module will not be operational in ABC INC NA, you
still can transfer billing data to Profitability Analysis using an external interface.

A log for the transfer is generated so that you can easily identify and rectify any errors that occur.
Recommendation: You can set up the transfer of actual data to CO-PA in such a way so that the system also
generates a batch input session, along with the output file, for importing corrected data. For this, use the Batch
Input option under Expert Mode.

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