How to Perform Product Profit Margin Calculations in ECC
- by David Burns, Owner and Managing Partner, Prime, LLC
- April 17, 2015
Take a tour of the product profit margin capabilities in SAP ERP Central Component (ECC) 6.0. Learn what your options are to measure, improve, and track your company’s profitability down to the lowest common denominator. Use this experience to formulate a long-lasting strategy that ensures a return on your investment (ROI) and guarantees your organization’s ongoing success.
By reading this article, you will learn how to:
- Implement pricing procedures with profit margin subtotals
- Distinguish the dollar and percentage margins using formula values
- View the margin calculation in the sales order header and line items
- Drill down into a pricing condition to see the formula value routine assigned
- Assign a profit margin to standard subtotal fields in tables VBAP and VBRP
- Use profitability analysis (CO-PA) and product costing to achieve margin results
Leverage your knowledge of ECC 6.0 capabilities to enhance a long-term strategy that may utilize additional data warehouse and analytics software
SAP ERP Central Component (ECC) is the backbone of your solution for finance and accounting solutions, with significant capabilities in profitability analysis (CO-PA), margin analysis, and product margin calculations. Even if you use other software for analytics, ECC is the online transaction processing (OLTP) database that houses with core financial data and, therefore, needs to be a solid platform design for additional software and databases. To effectively manage a long-term software strategy that works for measuring product margins, you must be aware of ECC’s core capabilities and solutions for margin analysis.
There are several important considerations to weigh in creating your product profit margin strategy. The purpose of this article is to provide a comprehensive understanding of the data sources, integration, and configuration options and considerations.
You will learn some quick win strategies to make profit margins appear on your sales order header and line items using VOFM routines. Through the examples presented, you will learn how to configure profit margins and account for returns and refunds. You will learn about the essential components of profitability analysis (CO-PA) and product cost controlling (CO-PC) and the roles they play. In addition, you will gain a greater understanding of the interplay of CO-PA, CO-PC, FI, and sales and distribution (SD) and the contribution each makes to profit margin calculations.
Last, I will discuss other innovations in SAP profitability analysis, such as the CO-PA Accelerator software. You will gain insights into SAP’s roadmap for profitability analysis and the role played by SAP HANA, analytics software, and more.
Let’s begin with a discussion of business objectives. The profitability of a company is measured at three primary levels: gross profit, operating profit, and net profit. These numbers are provided on a company’s profit-and-loss statement (P&L). The first measure, gross profit, is fundamental to setting prices and sales targets. Gross profit is sales net revenue minus cost of goods sold (COGS). In essence, it is total net sales minus the cost of producing goods or services. COGS is composed of labor expense, raw materials, and manufacturing overhead. Gross profit provides insight into the cost of labor, cost of raw materials, and manufacturing efficiency. As a ratio, gross profit margin is gross profit divided by revenue multiplied by 100.
The second profitability measure, operating profit, is calculated by subtracting selling, general, and administrative (SG&A) expenses from gross profit. It is a pretax calculation and generally understood to be a key measure of management effectiveness. Financial analysts consider operating profit a key measure of management effectiveness because managers have greater control over SG&A than, say, the cost of raw materials or labor. As a ratio, operating profit margin is operating profit divided by revenue multiplied by 100.
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