Use Functional Areas to Enhance Your Cost-of-Sales Reporting
- by Paul Ovigele, ERP Financials Consultant
- September 9, 2011
Learn the definition of cost-of-sales reporting and how it is distinguished from period-based reporting. Follow the steps to define and derive functional areas to facilitate cost-of-sales reporting. Discover the benefits of cost-of-sales reporting by functional area and how it contrasts with other methods of cost-of-sales reporting that are more commonly used in the SAP system such as costing-based Profitability Analysis (CO-PA) and cost center reporting.
Functional areas save you hours of reconciliation time every month when trying to tie your managerial accounting (CO) reports (e.g., from cost centers or Profitability Analysis [CO-PA]) with the general ledger. You also can streamline the number of reports you need to create and use, as the functional area scenario is now part of the SAP General Ledger. This functionality already exists in your system as part of the FI/CO module, so you do not need to pay for anything extra other than the time it takes to set it up.
Cost-of-sales accounting is an alternative way of reporting your profit and loss (P&L) results. The traditional way of performing P&L reporting is by using the period-based approach in which you match sales with the costs for that period, according to what elements of cost were incurred. Elements of cost are basically represented by P&L accounts, such as salaries, travel expenses, maintenance, electricity, and so on. The cost-of-sales approach matches sales with costs for a period according to where the costs were incurred. This approach groups your costs into “functional areas” such as production, sales expenses, marketing, and administration. Therefore, the period-based approach identifies what costs were incurred, whereas the cost-of-sales approach identifies where the costs were incurred. When mapped correctly, the period-based and cost-of-sales accounting statements should be fully reconciled, with the only difference being how the costs are classified (Figure 1).
Period accounting statement mapped to cost-of-sales accounting
Almost every organization uses the period-based approach as this approach is represented by P&L accounts and cost elements. Also, many organizations also use some form of cost-of-sales accounting by using cost centers, Profitability Analysis (CO-PA), or general ledger accounts (creating several accounts for a single cost type, to represent the different functional areas they are incurred in, such as payroll – production, payroll – R&D, and payroll – sales).
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