Notes SAP BPC BOA 340 Activity-Based Costing

Resources are used by the organizations activities and activities are undertaken because there is a reason or a demand to undertake them. - ABC allows an organization to distribute its resource costs across a range of activities. The resulting costs can then be driven on to outputs of organization to establish, for example, the cost of manufacturing a product. - ABC deals with costs that are found in an organizations general ledger and driving them down through a predefined set of activities to products, customers, and channels, giving a true reflection of the cost of a business. - ABC is a method of matching the costs incurred by an organization to its performance, combined with the drivers of resource consumption. Terminology Here are some SAP Business Objects Profitability and Cost Management key terms: - Responsibility center - Line item - Resource driver - Activity - Activity driver - Cost objects Responsibility center - Known as a cost center, department, or business unit. Structures defined to represent the organizational hierarchy of a company. - Each responsibility center owns costs defined in the general ledger. Example: Finance, Admin, Human Resources, Customer Service Line item - Also known as an account. These are usually found in the general ledger and are linked to responsibility centers. Line items can also be defined as resource costs. Example: Rent, salaries, hardware Resource driver - Resource drivers are measures of the line items and are used to drive costs forward through the model using value allocation. Example: Head count, square feet Activity - A process carried out within an organization. Each activity should be linked to the responsibility center where it is performed. Line item costs are apportioned across activities through the use of value allocations (driver volumes). Example: Processing orders, maintenance. Activity driver - Used to drive activity costs onto the outputs of an organization. Each activity should be linked to an appropriate activity driver. Drivers are normally defined in terms of the number of times something occurs that has an impact on the activity. Example: Sales volume, # orders, # calls. Cost objects - Cost objects are usually defined as the outputs of an organization, something which ultimately absorbs costs. The standard terms associated with cost objects are: a) Products: The products/services your organization makes/provides b) Customers: Your customer types, individual, mid-size, corporate c) Channels: How your product gets to the customer, Web, franchise sales ELEMENT DIMENSION SCREEN a) Euro Currency b) Finance Responsibility Center c) Fixed Rate Mortgages Line Item d) Maintaining the Network Activity e) Budget Version f) Salaries Line Item g) Full Time Equivalent (FTE) Resource Driver -

h) Number of Calls Activity Driver i) Quarter 1 Period j) Fuel Line Item, Cost Object k) April Period l) Sales Volume Activity Driver m) Existing Clients Cost Object n) Handling Complaints Activity o) Actual Version Flow of Cost and Profitability There are three basic principles associated with Activity-Based Costing: a) Activities consume resources. b) Activities have a cause mainly attributable to an external cause, for example, a customer visiting a branch. c) Cost objects (products, customers, and channels) cause different levels of activities to occur. Activity-Based Costing Flow

1. In the first stage, determine which line items belong to which responsibility centers and give each line item an account value. 2. Next, assign a resource driver to each line item. 3. At the next stage, enter a list of the activities that the responsibility center carries out. 4. Then allocate a portion of the total resource driver value to each activity. For each resource driver, enter values for each appropriate activity. When a calculation is performed at this stage, the line item cost will be distributed across the activities according to the resource driver values. 5. Assign each specific activity to an appropriate activity driver and then link the cost objects that consume that activity. The cost of the activity will then be apportioned across the cost objects according to the associated activity driver values. Determining Profitability or Gross Contribution Contribution provides a means to evaluate profit, which is normally calculated through the basic formula: Profit = Revenue Costs In an SAP Business Objects Profitability and Costing model, each of these three parameters is a characteristic of a cost object that is represented by one or more grid values. Costs associated with any cost object arise from two main sources; a) Cost object costs, which have contributing components that result from calculation, and b) External costs that are not directly connected with production of the cost object but are required for the finished product, for example packaging. External costs can be represented as a specific revenue type, which allows for a number of different kinds of cost contributor.

Main Elements of the SAP Business Objects Profitability and Cost Management System There are eight main elements of the SAP Business Objects Profitability and Cost Management system: a) Dimensions b) Assignments c) View Builder d) Data Explorer e) Books f) Security g) Navigator h) Rules Manager Dimensions The structural data of the model, including lists of line items, responsibility centers, and so on, are held within dimensions. There are three key dimensions, each of which must be populated with at least one item. They are: a) Versions: A copy of the complete model is normally used for comparison purposes, for example, actual, and forecast. b) Periods: A subdivision of the model across time usually determined how often reporting is carried out, for example, quarterly or monthly. c) Responsibility centers: These represent an organizational department or cost center. Dimension screens can be accessed in three ways: a) From the Dimension group bar on the left-hand side of the main application window b) From the Dimensions option on the icon toolbar c) From the Model menu by selecting dimensions There are three main areas in each dimension screen: a) Main Hierarchy: This is where items defined within each dimension are displayed. The hierarchical structure created can incorporate different consolidation types, depending on user preference. b) Attribute Hierarchy: Attributes can be used to define alternative structures for dimension items. This is useful for reporting purposes. Attributes also allow placing the same item in more than one group, which is not possible in the main hierarchy. c) Detail area: This area of the dimension screen provides further information on the selected item. It allows adding information, such as a memo, to any item in the main hierarchy. Users can also see alternative names for items in the Aliases area of the detail area.

Assignments Assignments are used to define relationships between the structural elements of a model. They also indicate how costs should flow through the model. There are four types of assignment within profitability: a) Resource Drivers Assignment: Used to link line items to an appropriate resource driver b) Responsibility Centers/Activities Assignment: Used to define which responsibility centers carry out which activities c) Activities Reassignment: Used to reallocate activity costs to other responsibility centers/activities d) Cost object Assignment: Used to define how activity costs are to be distributed across cost objects and which activity driver is being used. Assignment screens are accessed from the Dimension group bar, the Assignments option on the icon toolbar, or via the Model menu. View Builder The View Builder allows creating views (grids) for entering and viewing data values. These values can be either: a) Manually entered or imported b) Rule-based calculations c) Consolidated calculations (subtotals and grand totals) View Builder uses drag and drop functionality to customize the visible dimensions and the types of value to display. Grids are mainly built for use in books, so it is important to remember that the end user may have limited knowledge of the model. Therefore, grids must be clear and easy to understand. Data Explorer - Data Explorer allows to display tabular views of data records. Selections can be made from hierarchies within Data Explorer, allowing to target specific records easily. - Because Data Explorer uses database tables as a basis for displaying records, the layout options are more limited than those in View Builder. Books - The books element of profitability allows producing customizable views of data that can then be distributed to others within the organization. - Books are Web pages that should be designed to either collect data or report on results. - Once books are created, they need to be published before they are to other users. Security There are five predefined user groups within the profitability system: a) Everyone: All users of the system are automatically added to this group. b) Administrators: Administrators are responsible for user/group security but have no access to models (unless they are also members of the model builders group). c) Model Builders: Model builders have full access to the model builder interface, including books. d) Book Builders: Book builders can only log into the book builder interface; users have access to View Builder, books, and the Web. e) End Users: End users only have access to the published books that are assigned to their group. These can be viewed either over the Web or via Book Viewer. Rules Manager - The Rules Manager screen allows accessing all of the rules in your model in one window. It allows you to see which hierarchy items have rules against them, and provides three different forms of script editor that enable the creation or editing of rules. - Rules Manager is accessed from the icon toolbar or via the Tools menu.

Screen Structures of the Model Builder Interface

The following provides an overview of the screen structures within the Model Builder interface. This topic is split into the following areas: a) Dimension screens b) Assignment screens c) Books d) View Builder e) Data Explorer f) Model administration

Dimension screens - Each dimension screen contains three areas: Main Hierarchy, Attribute Hierarchy, and the Detail area. The following table provides a description of each section.

Assignment Screens There are four types of assignments within the Model Builder interface, each with a different screen structure. a) Resource Drivers Assignment Screen Enables to link Line Items to a Resource Driver that will then be used to pass costs onto Activities. b) Responsibility Centers/Activities Assignment Screen Allows defining where activities occur by assigning them to specific responsibility centers. c) Activities Reassignment Screen- Allows to reassign activities to other responsibility centers/activities and to select an appropriate reassignment driver to pass the cost on. The screen is split into two main areas: Source: Activities to be reassigned should be chosen from this area along with their associated responsibility center and an appropriate reassignment driver. Target: The responsibility centers and activities which absorb the reassigned cost should be chosen from this area. d) Cost Object Assignment Screen Allows defining how activity costs are to be distributed across cost objects and which activity driver should be used. Line items and services can also be assigned to cost objects in this screen. Only line items with the attribute Cost Object Type Line Item will appear in this screen. Books Screen Books are accessed via the group dimension bar. When a book is opened within a model the screen is shown split into two areas: The Design Window The Property Panel View Builder View Builder is used to build layouts (grids) for value data for data entry and reporting purposes. View Builder is accessed either from the icon toolbar or via the Model menu. The View Builder screen is split into the following areas that are detailed below: Toolbar Grid Area Available Dimensions Grid Values Pivot Bar Formula Editor The View Builder toolbar displays various options for actions that can be carried out within a grid. Data Explorer - Used to view value data within a model. You do this by choosing an appropriate data table and making selections from the associated dimensions. - Differs from View Builder in that dimension trees are shown as part of the view and value data is displayed in the lower half of the screen.

Data Explorer is accessed either from the icon toolbar or via the Model menu.

Building a Model Structure

Creating a New Model - The first task facing a model builder is to build structures that represent the infrastructure, financial data, resources, and drivers of the model using dimensions. - When a new model is created, create the appropriate dimension structures, define groupings and identify consolidation types. Each model requires some structure in the key dimensions of versions, periods, and responsibility centers. Points to note when creating a new model: a) Create structures that are easy to manage and make use of attributes and consolidation. b) Keep an appropriate level of detail for activities. Defining Activities The work carried out within an organization can be categorized at four levels: a) Business Line: The inherent basis of the organizations mission, linked to external customers b) Process: A sequence or network of related and interdependent activities performed in support of the business; processes have identifiable outputs c) Activity: What people do in the organization; activities consume resources to provide a service or produce an output d) Task: Work steps performed by individuals; the level at which cycle time analysis is performed - Tasks are too detailed for ABC purposes. A task may be something as small as printing training materials. This amount of information would be difficult to maintain in a model. - Activities are the day-to-day things that people do, e.g., the process of delivering a training course is made up of delivery and preparation activities. - A process will support the business line comprises activities. E.g. delivering a training course is made up of several activities. - It is important not to provide a highly detailed level of information as this can prove difficult to maintain. However, a balance should be maintained between too much and too little. For example, an activity called meetings does not provide enough information for ABC purposes; this should be broken down to the meeting type. - It is helpful to name your activities with a verb/noun combination, for example, Conduct Client Surveys and not just Surveys. - When defining activities, think about the resources they need, for example staff, salaries, and PCs. - Most activities have outputs, but some are business-sustaining, such as the annual general meeting. - Activities performed within an organization should support the organizations overall mission and strategy, also known as the business line. Key Dimensions First stage in the model building process is to populate the key dimensions within the model. The key dimensions are Versions, Periods, and Responsibility Centers and must be populated with at least one item. a) Versions: A copy of the complete model, used for comparison purposes b) Periods: A subdivision of the model across time c) Responsibility Centers: An organizational department or cost center Default Items Within the Resource Drivers dimension, two default items exist: a) RD Unassigned - Should be used when no relevant driver exists for a line item. b) Direct Activities Driver for internal use only. Within the Activities dimension, two default items exist a) Spare Resource - used to represent any resource cost that has not been allocated to activities. b) Activity Unassigned - used to record the base costs in a responsibility center that are not assigned to any activities, either from line items that have no assigned resource driver or an assigned resource driver value that is zero. Using Hierarchical Structures - Hierarchies are parent-child relationships. - Childs can be added by selecting the appropriate item and dragging it to the parent. Hierarchies can also be created using the Add Child function from the context menu.

Items belong to one hierarchy group within main hierarchy. There are no restrictions on the number of members in a hierarchy or the number of levels within a hierarchy. Good practice to minimize the levels of hierarchy used in the dimension structure and to use attributes wherever possible for reporting purposes. When a hierarchy is created by adding or moving lower-level items, a new detail item will be created automatically. Detail level is used to store costs that may have been associated with an item prior to it becoming a parent. Parents cannot hold their own cost, as they are at a consolidated level; therefore, all cost is moved into the detail item. If the detail item is not required, it can be deleted from the hierarchy.

Using System- and User-Defined Attributes

To make the model more realistic and to allow alternate groupings of items, make use of attributes in some of the dimensions. Attributes can be added to each dimension so that an alternate structure can be displayed. There are predefined attributes within some dimension screens. Applying these attributes to dimension items can change how the items associated cost flows through the model. Applying Consolidation Types - When hierarchies are created, each item is assigned a consolidation type. This is displayed to the left of the item name and is shown by one of the following symbols: +, -, or .

Currently some of the dimension items are set to no consolidation (). This must be changed to positive consolidation to allow viewing totals and subtotals in the model. Consolidation can only be applied to child items so that they have a parent to consolidate into. Positive consolidation should be applied to the following dimensions: a) Versions b) Periods c) Responsibility Centers d) Line Items e) Activities Note: No consolidation change will be made to the Resource Drivers dimension, as no logical result will be obtained from consolidating these items.

Activity Costing
Completing Basic Assignments - Creating a Resource Driver Assignment - Assignments specify the relationships between dimension items and their drivers. These relationships indicate how costs should be distributed through the model. - Once all the relevant assignments are created, enter value data via View Builder. - View Builder allows you to create grid layouts and enter value data against dimension items. At this point, define the value of each line item and enter resource driver values, which indicate how the cost is to be apportioned across activities. - Once the assignments are made and the relevant value data is entered, build grids to show the calculated activity costs for the model. - There are two questions that can help deciding how to assign resource costs to activities: a) Who performs the activities? b) What percentage of time is spent on each activity?

Setting a Responsibility Centers/Activities Assignment within the model indicates where activities occur and therefore where line item values should be passed. It is possible to assign all activities to all responsibility centers, but this is not recommended as multiple records with zero values are created. The Responsibility Center/Activity Assignment information is also used at cost object level to determine how cost is apportioned.

Using View Builder to Input Values

- View Builder allows you to create grid layouts that are used for data entry and analysis. Each view can be saved for use in books. - Grids are created by selecting relevant items and using drag and drop functionality. - In order to complete an activity cost calculation there are several types of values against which information needs to be entered. They are: a) Line item values: The general ledger costs; these will be the total values that are then broken down across activities and cost objects b) Resource driver values: The total amount of resources available c) Resource driver splits: The value of a resource driver apportioned to each activity As not all activities are performed by every responsibility center, build more than one resource driver split grid. Note: Where an under- or over-allocation of resources occurs, the resultant calculation will be shown against the spare resource item in the Activities dimension.

Using View Builder to View Results

Creating a Grid in View Builder to View Results There are three different grid values that can be used to view results; each shows a different level of detail: a) Summary Activity Value: shows the total activity costs within each responsibility center. b) Activity Line Item Value: breaks down activity cost by a specific line item. c) Activity Value: shows a specific activity cost broken down by line item within a specific responsibility center. When deciding which the appropriate grid value to use is, it is useful to picture the grid from an end-user perspective. - What information does the end user require? - What level of detail does the end user want to see?

Analysis: Tracing Activity Costs Back to Line Items Activity costs can now be determined within the model. It is possible at this stage to see how the cost has been calculated by tracing it back up the model to line items. Within View Builder, there is a range of icons available on the icon toolbar that alters the appearance of data within the layout.

Context Menus Several context menus are available within View Builder, and each contains functions that are specific to its location.

Range Coloring on Grids There are several options available for applying color ranges to grids. Range colors can be set for the following areas of a grid: Columns: Right-click on the column header and select Set Range Colors. Rows: Right-click on a row header and select Set Range Colors. Formula: Right-click in the formula bar and select Setup Range Colors. Value: Right-click on a grid value and select Set Range Colors. Global: Click on the Set Range Colors icon from the View Builder toolbar.

Creating the Remaining Model Structure To build the model on the cost object costing level, create the appropriate dimension structures, define groupings, and identify consolidation types. New models are created with a number of predefined items in their dimensions. These items are useful for defining how cost should flow through the model when no organizational data is available. Points to note when creating the model structure: a) Create structures that are easy to manage and make use of attributes and consolidation. b) Keep an appropriate level of detail for activity drivers.

Understanding Activity Drivers and Cost Object

Cost Object Assignments - A cost object assignment defines how activity costs are to be distributed across cost objects, and which driver values are to be used. - Line item costs that have no relationship with activities can also be distributed using a cost object assignment. The various types of cost object assignment can be defined using the following terms: a) Single Dimension: Activity costs are assigned to one cost object using one activity driver. b) Multidimensional: Activity costs are assigned to more than one cost object dimension using one activity driver. c) Cascading: Activity costs are assigned to more than one cost object dimension using more than one activity driver.