Profitability Reboot

02 Feb Profitability Reboot

Matt Christensen

Today’s environment of rapidly increasing input costs and uncertain supply chain performance will stoke a reevaluation of sales profitability. Do we need to make pricing adjustments? Shift our limited resources to a different product line? Prioritize or even end relationships with particular customers?

The good news is that there is a wealth of tools available in your SAP system to more confidently answer these questions. This may be the ideal time to revisit your profitability decision support framework. The techniques I outline below have been available for many years, so likely wouldn’t require any software or licensing upgrades. Some may require setup, but the key element as usual will be strong master data and business processes.

Purchasing Conditions

It will be a challenge to maintain accurate purchasing master data as supplier pricing is quickly changing. This could be a chance to automate or interface pricing updates. Also, consider purchasing conditions or additive costs for a more comprehensive insight into your purchased part costs. Are you maintaining conditions for inbound freight? What about intercompany freight, duties, or other costs associated with the movement of a product?

Standard Costing

The standard costing process is well known for annual or quarterly updates. It may be worth considering more frequent cost rolls as factors change. Consider using an alternate version to simulate “what if” scenarios. Accurate scrap factor maintenance could become more important as the cost of inputs increases. Do you have more than one way to make the same product? Review the use of alternate routings and bills of material in costing.

Activity Allocations

Labor and machine hours are often applied to production processes as a part of standard costing. Ensuring these planned quantities and rates are accurate is important in developing the standard cost. Consider using fixed and variable rates to add another dimension to capacity decisions. Recording actual time spent and potentially expanding the scope of activities considered in costing could be a valuable undertaking. Activity allocations could be used outside of direct production as well, such as tracking research and development activities.


For those costs that can’t feasibly be tracked through direct activity allocations, consider applying overheads via a costing sheet. This expands the scope of direct cost to include indirect cost centers. Several cost centers could be credited separately in a production process. Again, fixed and variable visibility is a useful feature.

Actual Costing

Through the use of a material ledger, it is possible to move from standard to actual costing visibility at a transactional level. Cost center over/under absorption is passed along through the maintenance of actual activity rates. Both purchasing price variance and manufacturing variance are automatically distributed through the actual bill of materials. Variances become more insightful as they move from a high-level percentage to a precise cost on a particular sale.

Pricing Conditions

Sales pricing conditions can be used for much more than just determining what the customer owes on a particular invoice. If you have rebate, commission, or trade promotion agreements, this is a great way to capture an initial estimate of these costs. Rebates even offer special functionality to retroactively correct the estimate to match actual costs. Outbound freight can also be captured at this point through either an estimate or an interface with your partners.

Cost Center Allocations and Top-Down Distributions

Even cost centers that aren’t a candidate for direct activity allocations or overhead may be included in product cost through the use of allocations and distributions. This is also a great way to spread any over/under absorption that remains in a cost center. Percentage of sales revenue is a common driver, but there are other options such as weights, quantities, or costs.

Project Systems or Internal Orders

Special initiatives may be required to address the changing business environment. Track costs of these efforts using temporary cost collectors and then allocate to the specific product lines or customers for whom they were intended.

As you can see there are many traditional tools available to add instant value to profitability decisions. A key design consideration is to keep each layer of cost separated through unique account numbers. This enables each concept to be included or excluded from analysis depending upon the decision being considered.

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