Using Results Analysis to Get the Most Out of the PS Module

Project Profitability: Using Results Analysis to Get the Most Out of the PS Module by Sam Stinnett, Senior PS Consultant Editor’s Note: SAP Managers face tough ROI questions on each project initiative. When there's an unused piece of R/3 functionality that can offer an immediate cost savings, it deserves some serious attention. PS expert Sam Stinnett has uncovered one such piece of functionality. In this well-illustrated white paper, Sam guides us through use of the PS and CO modules for "Results Analysis." Appropriately used, Results Analysis allows SAP users to calculate Revenue and Cost of Sales for customer projects and automate the month-end closing cycle, providing a quick return on investment sure to please even the most budget-conscious CIO. How are most Engineer-to-Order or Customer Projects’ revenue recognition and cost of sales calculated? More often than not, they are in spreadsheets or in legacy systems. Wouldn't it be preferable to calculate these numbers from within the SAP® system? Wouldn't it be ideal if this time-consuming accounting process could be automated to help reduce the month end closing cycle? SAP has continually enhanced the Project System (PS) module so that Revenue and Cost of Sales for customer-oriented projects can be calculated consistently and automatically—all by accessing the data that is accumulated throughout the period in PS. Financial accounting helps increase a company’s success by improving information flow and supporting strategic decisions. Thus, fast accounting closes are of the highest priority in today’s global economy. By reducing and automating the closing cycle, this SAP functionality has an immediate return on investment. SAP Results Analysis (RA) is functionality within the Controlling (CO) module that calculates Work in Process, Cost of Sales, and Calculated Revenue. Results Analysis has been prevalent in SAP manufacturing environments for several years, but now the same functionality is being utilized for more and more PS implementations. RA is one more example of existing SAP functionality that is “ready and waiting” for SAP users who want to get more analytical power out of their existing SAP infrastructure. In this white paper, we'll take a detailed look at how companies can use the PS module to leverage Results Analysis functionality. For our case study, we'll focus on a specific type of Results Analysis: the Cost-Based Percentage of Completion Method for SAP Projects. After we finish the “Period 4” case study, we'll touch on the highlights of configuring PS to utilize Results Analysis functionality. One nice aspect of the 4.x RA configuration is the pre-configured RA methods. There are a couple of User Exits that may need to be utilized, but the use of these will ensure that all customer specific programming will be retained during the next SAP upgrade. This case study utilizes generic SAP configuration without any user exits involved. Although the screen shots used in this white paper are from a 4.6C environment, SAP users running 3.1 and higher can also benefit from much of the same Results Analysis functionality. Result Analysis valuates long-term customer projects for the following purposes: Controlling (CO-PC) • • •

the planning values in summarized form (that is, the planned costs, planned revenue, planned profit, planned loss) the actual costs incurred and actual revenue earned up to the current period changes to the actual costs incurred and the actual revenue earned for each period

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module The data calculated in Results Analysis is updated in the project systems module under secondary cost elements (cost element type 31) and can be analyzed in the information system at any time. You can also summarize the calculated data over all projects that meet certain search criteria. Profitability Analysis (CO-PA) •

Results Analysis can calculate the following values for every billing element by period, regardless of the valuation method: o o o

calculated revenue, that is, the revenue calculated by RA that corresponds to the actual costs posted on the billing element reserves for unrealized losses, revenue surpluses and unbilled receivables cost of sales, that is, the costs that can be considered expenditure in accordance with the revenue earned for the billing element

For companies that use the PS module to manage customer projects, this data can be passed from the WBS Billing Element in PS through settlement to Profitability Analysis Profitability Segments (another CO Object), so that CO-PA allows you to examine revenue and expenses from multiple modules in a single report. Each WBS element must have a settlement rule to a profitability segment, which is the settlement receiver whose PA settlement structure contains the Results Analysis cost elements for the relevant data. Please note that there is a user exit that will allow certain CO-PA characteristics to be automatically derived. In the following period, Results Analysis calculates the changes to this calculated data and creates delta entries to update financial accounting. No accruals are posted to the general ledger until the settlement process passes the changes on to FI and CO-PA. The objective for calculating RA is to determine the value of manufacturing activity or services provided at the end of a financial period and to properly reflect this value on the financial statements.

2 SAP Tips before we begin •

If you aren’t utilizing the SAP Notes Assistant with transaction SNOTE, then immediately start having the individuals applying OSS notes examine this functionality.

•

Transaction Code “SEARCH_SAP_MENU” allows you to type in text like “BUILDER”— this will show the menu path and transaction code for the Project Builder (SAP transaction code CJ20N).

Detailed Example: The Cost-Based POC Method for Projects This white paper will focus on just one of the many Results Analysis methods available from standard, out-of-the-box SAP, the ’03 Cost-Based POC Method’. (POC means Percentage of Completion). Other Results Analysis methods that are available include: • 01 Revenue-Based Method with Profit Realization • 02 Revenue-Based Method without Profit Realization • 07 POC Method Using Progress Version • 09 Completed Contract Method Copyright © 2003 by Klee Associates, Inc. www.SAPtips.com

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module There are currently 15 standard valuation methods, and several user exits within these methods to accommodate most specific business requirements. For example, RA Customer Enhancement 1 allows the customer to modify the standard Results Analysis functions. This is appropriate when the customer method deviates only slightly from the standard methods. The corresponding method is selected in Customizing. The program reads the data, calculates the values according to the selected standard method, branches to the customer enhancement, performs the individual calculations programmed by the customer, returns, and saves the data. This is a user exit, so all customer programming will remain intact during a SAP upgrade. The Cost-Based POC Method for Projects allows you to calculate revenues affecting net income, based on the percentage of costs incurred on the project. This method assists with the matching principle of accounting: to match revenue recognized with costs incurred. This method will also calculate ‘Unbilled Revenues,’ or, as SAP refers to them, ‘Revenue in Excess of Billings.’ It will also calculate ‘Revenue Surplus’ when the project has billed more revenue than it has actually earned based on the Cost-Based POC method. The SAP Modules used within this example are: Project System (PS), Profitability Analysis (COPA), integration with Finance and Controlling (FI/CO), and Sales and Distribution (SD). CALCULATION of POC = Actual Cost / Planned Cost Cost of Sales always equals the actual cost incurred. Calculated Revenue = POC * Planned Revenue This scenario we're examining assumes that the Sales Order is assigned to the top level WBS Billing Element, and that all costs are planned and charged at the PS Network level. If the actual revenue billed to the customer is less than the calculated revenue determined by RA, then the system will create an accounting entry for “Unbilled Revenues.” If the actual revenue billed to the customer is greater than the RA calculated revenue, then the system will create an accounting entry for “Revenue Surplus,” debit the income statement, and credit the balance sheet with this revenue reserve. White paper Example Data: This is a Simple Project (Project # A-000052) with a single Billing WBS element and one Network with four activities. There are milestones included in the project for Milestone Billing purposes for the integration between SD and PS. The billing WBS has a Results Analysis key defined on it, and a settlement rule to Profitability Analysis. Please note that the Network Activities do not settle up the hierarchy because they have a settlement profile that doesn’t allow settlement. The only settlement and Results Analysis calculations occur on the billing WBS element. All charges from lower levels in the PS structure are determined during the RA calculation. This settlement Copyright © 2003 by Klee Associates, Inc. www.SAPtips.com

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module scenario can be automated with the transaction CJB2 “Generate Settlement Rules: WBS Elements” which will create the settlement rules for the WBS and Network, and also place the RA Key on the WBS element. There is configuration required to achieve this result, but this periodic process will definitely simplify month end settlement. Note that in this white paper, I perform “individual transactions,” but most SAP transactions also have a counterpart “collective transaction” that will execute multiple projects at a time. In our example, the SD Sales Order has Planned Revenue of $200,000 and the network activities have Planned Cost of $120,000. There is a Planned Contribution Margin of $80,000 or 40%.

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module Period 1 In period one, the project incurs $20,000 of costs for travel expenses on the network activity. The project has just gotten under way, so there are no billings to the customer yet. These are the SAP RA Transactions: KKA2 for RA Individual Processing or KKAJ for Collective Processing.

Planned Rev = $200,000 Planned Cost = $120,000 Planned Profit = $80,000 Actual Rev = $0 Actual Cost = $20,000 Cost of Sales = Actual Charges incurred or $20,000. Results Analysis Calculations POC = 20,000 / 120,000 = 16.67% complete Planned Rev $200,000 * 16.67% POC equals the calculated revenue of $33,333.33 Calculated Profit = $33,333.33 less 20,000 = $13,333.33. You can verify these numbers by calculating the Planned Contribution Margin of $80,000 * 16.67% complete to equal 13,333.33. Please note that no financial entries are recorded until the project is settled.

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module

Settlement Cost Elements are entered on the WBS element as DR and CR’s (CE #’s 772053 and 772054 established in RA Config. of the Update of RA Calculation) and the Receiver Profitability Segment (Profitability Analysis details) get the Cost Elements established in PS to PA Settlement (CE#’s 772060 and 772061). Accrued Values in FI: •DR Balance Sheet Account 72012 (Rev in Excess of Billings or Unbilled Revenue/Receivables) and CR P&L Acct 601612 (to add the revenue into the P&L) •Costs affecting net income in the amount of the actual costs $20,000 •Rev affecting net income arising from the formula Calc Rev = Act Cost/Planned Cost * Planned Rev = $33,333.33 •Rev in Excess of Billings with the formula Rev in Excess of Billings = Rev Affecting Net Income – Actual Rev = $33,333.33 •You settle the Calculated Revenue with the actual costs to Profitability Analysis. •You settle the Revenue in Excess of Billings (Unbilled Revenue) to FI. Copyright © 2003 by Klee Associates, Inc. www.SAPtips.com

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module

Project Actual Line Items: note that Report CJI3 shows a Net Profit of $13,333.33, matching the calculations from RA.

This is the PS Cost Element Report for Project Results. This shows Unbilled Rev of $33k and COS of $20k.

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module Period 2 In Period 2, the project incurs $60,000 more expenses on the network activity, and the first milestone is completed, so $100,000 is billed to the customer. Thus, we have billed $100,000 and incurred $80,000 in expenses. So far, the project is looking profitable. But what does Results Analysis have to say about that? Calculation of Results Analysis: POC = $80,000 / $120,000, or 66.67% complete Cost of Sales = Actual charges or $80,000 Planned Rev $200k * 66.67% equals the Calculated Revenue of $133,333.33 Calculated Profit equals $133,333 minus $80,000 = $53,333 The system is telling us that we should have $133,333 of recognized revenue, but only $100,000 has been billed. Thus, we have unbilled revenue. Revenue in Excess of Billings = Calculated Revenue minus billed revenue = $33,333.

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module In Settlement Period 2, we now have $40,000 more in Profitability Analysis. This totals $53,333, which comprises $13,333 from Period 1 and $40,000 from Period 2 and equals the RA calculation of Profit.

There are no accrued values in FI for Period 2. Calculation: Rev in Excess of Billings = Calculated Rev $133,333 minus actual billed revenue of $100,000, which equals $33,333. This was the amount calculated in Period 1, so no adjustment needs to be made in Period 2 because there is already $33,333 on the Balance Sheet of Unbilled Receivables.

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module Period 3 During Period 3, the project incurs $10,000 more of expenses on the network activity. A second billing occurs when milestone #2 is completed, so $90,000 is billed to the customer. Thus, we have billed $190,000 and incurred $90,000 in expenses. This is the way that you hope all projects go: “More billed than costs incurred.” Calculations: POC = 90,000/120,000 = 75% complete Planned Rev $200k * 75% equals the Calculated Rev of $150,000 COS goes to $90,000. This is the actual cost incurred to date. Calc. Profit = 150,000-90,000=60,000 Rz = Rev in Excess of Billings Goes to 0 because we have billed more than we have earned. Thus, we now have a $40,000 Revenue Surplus, which is R(r).

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module

PS Actual Line Items Report This report shows $90,000 of costs charged to Cost Element 1410 and $190,000 of revenue billed to Revenue Element 500101. The Cost Elements 772060 and 772061 are used in the settlement from PS to CO-PA (Profitability Analysis). Note that the $40,000 Revenue Surplus is the net result of all of these entries.

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module

Therefore, our key numbers through Period 3 are: • • •

Calculated Revenue of $150,000 Revenue Surplus of $40,000 Cost of Sales of $90,000

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module Period 4 The project is now in its final phase. There is an actual cost increase to $130,000, so there are additional charges of $40,000 in this period. The final delivery to the customer occurs and another milestone billing of $10,000 closes out the final bill, for a total of $200,000 that was billed. The Project Status is set to Technically Complete (TECO). POC Calculation: Ignored because of TECO Status. All accruals and reserves are set to 0. Actual data is recognized in the system for all of the calculations. Realized Profit = 200,000130,000=70,000. Rz = Rev in Excess of Billings Goes to 0 and the Rev Surplus goes to 0. COS goes to $130,000 which is the amount spent on the project.

Please note that no RA calculations are posted to FI until settlement occurs. This is the settlement from the WBS Billing Element to PA (specifically the profitability segment). This passes an additional $40,000 of cost over to PA and $50,000 more of revenue. The Period 3 RA Calculated Revenue was only $150,000 so $50,000 more needs to go to PA. Period 3 COS was only $90,000 so an additional $40,000 of cost needs to be settled in Period 4.

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module

PS Actual Line Items Report This report shows that there are no values on the project anymore. There are no FI accrued values because of the TECO status, and all values have been settled to PA.

Total Revenue = $200,000 Cost of Sales = $130,000

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module

Simple Profitability Analysis Report

Results Analysis Calculation for a Loss (either from the beginning of a project or during the course of a project): If the planned costs are greater than the planned revenue, Results Analysis calculates a loss for the same amount as the difference, just like it calculates an expected profit when planned project revenue is greater than the planned cost. This loss is passed on to Financial Accounting. If the planned values change, a portion of the loss can be reversed, or more loss can be created.

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module SAP Configuration for Results Analysis

RA Method: “03” Cost Based POC Method Transaction Code OKG3

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module

Transaction Code OKG8 Note that the POC Method utilizes RA Category POCI and POCS, which stand for Revenue In Excess of Billings and Revenue Surplus respectively. The detailed configuration for Controlling Area “US01” is: Profit &Loss account 601612 “P&L RA POC Method Account” Balance Sheet account 72012 “B/S RA POC Method Account” Above are screen prints of the main RA configuration, but you also need to configure the following in the IMG (Menu Path: Reference IMG Main Page > Project System > Revenues and Earnings > Automatic and Periodic Allocations > Results Analysis): • Maintain Results Analysis Key (Transaction Code OKG1) • Maintain Results Analysis Versions (OKG2) • Define Valuation Methods for Results Analysis (OKG3) • Define Line Ids • Define Assignments for Results Analysis (OKG5) • Define Update for Results Analysis (OKG4) • Define Posting Rules for Settlement to Accounting (OKG8) You can use the system and user statuses to divide the life cycle of a PROJECT into specific stages, which provide different calculations in results analysis: PS differentiates between the following five main statuses for Customer Projects: • Released As soon as a project has the status Released, you can post actual costs and revenue to it. From this point onwards, Results Analysis can valuate the project on the basis of the actual revenue and actual costs. • Final billing Once the status for the project is set to Final Billing, you cannot enter any subsequent invoices. You can specify that from this point onwards, all inventories and reserves for imminent loss, for example, are canceled. • Technically completed Once the status for the project is set to Technically Complete, all reserves, unbilled receivables, WIP, etc., are completely reversed. The actual costs and actual revenues determine the RA calculations, and the project result is the actual revenue minus the actual costs. • Closed Once the status for the project is set to Closed, you can no longer execute Results Analysis, perform settlement, invoice the customer, or make any other financial entries to the project. • User Statuses Please note that in the RA Expert mode, you can configure RA to perform certain calculations based on a specific customer defined project user status.

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module Summary Results Analysis is a periodic process which determines the costs and revenues for a period, based on planned costs and revenues and the percentage of completion (POC). Comparison of the period-related values with the actual values allows correction or delta accrual postings in financial accounting (COS, WIP, reserves, revenue surpluses, etc.). RA is a sophisticated tool within the Controlling module that computes and analyzes the value of cost of goods sold, calculated revenue, unrealized losses, unbilled receivables, etc. The objective for calculating RA is to determine the value of manufacturing activity or services provided at the end of a financial period and to properly reflect this value on the financial statements. Results Analysis valuates long-term projects by period for the following purposes: • • •

to calculate the cost of sales or a calculated revenue for Profitability Analysis to calculate work in process for Financial Accounting to calculate unbilled receivables, revenue surpluses, and unrealized costs for Financial Accounting

This data can be passed on to Financial Accounting and Profitability Analysis when settlement is carried out.

For more information: SAP Online Help

http://help.sap.com/

Specifically, SAP Library > Financials > Controlling > Product Cost Controlling > Cost Object Controlling > Product Cost by Sales Order > Period End Closing in Product Cost by Sales Order > Results Analysis Please note that there is RA documentation in the PS section of the help files, but there are more details in the above section.

Sam Stinnett has over eight years of experience in the SAP Project Systems Module and has been involved with over 25 implementations and upgrades. He is a Certified Public Accountant and is a certified FI/CO consultant. He is a regular speaker at the Project System ASUG conferences. He can be contacted at [email protected] or Cell #404.229.8004.

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Project Profitability: Using Results Analysis to Get the Most Out of the PS Module The information in our publications and on our Website is the copyrighted work of Klee Associates, Inc. and is owned by Klee Associates, Inc. NO WARRANTY: This documentation is delivered as is, and Klee Associates, Inc. makes no warranty as to its accuracy or use. Any use of this documentation is at the risk of the user. Although we make every good faith effort to ensure accuracy, this document may include technical or other inaccuracies or typographical errors. Klee Associates, Inc. reserves the right to make changes without prior notice. NO AFFILIATION: Klee Associates, Inc. and this publication are not affiliated with or endorsed by SAP AG. SAP AG software referenced on this site is furnished under license agreements between SAP AG and its customers and can be used only within the terms of such agreements. SAP AG and mySAP are registered trademarks of SAP AG. All other company and product names used herein may be trademarks or registered trademarks of their respective owners.

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