Commitment Management in SAP #1 An Overview

Commitment Management in SAP #1 An Overview

Overview

Commitment Management in SAP tracks future commitments against cost objects; this enables users to make a realistic comparison of actual cost plus committed cost against plan / budget on that cost object. Commitments are made when user creates purchasing documents to purchase goods or services at a future date. Comparing actual against budget is misleading unless you factor in the outstanding commitments that will convert to actual cost in the future.
In this blog, I will provide an overview of Commitment Management in SAP.

 

Blogs on Commitment Management

In my series of blogs on Commitment Management, I intend to explain and elaborate the concepts behind Commitment Management. I will demonstrate how Commitment Management works in SAP.

To identify the series of blog, I have categorised the blogs under SAP > Commitment Management in SAP. If you have questions/ comments/ suggestions, please send me your comments in the form below. Sharing your questions and experience using comment box below will help other readers to gain additional knowledge involved in this functionality.

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#1 Commitment Management in SAP #1 An Overview (24/05/2012)

#2 Commitment Management in SAP #2 The process (31/05/2012)

#3 Commitment Management in SAP #3 Activation (07/06/2012)

#4 Commitment Management in SAP #4 Limitations (14/06/2012)

 

Assumption for this blog

The blog refers to Cost Center as the cost object. However, any reference to Cost Center will apply similarly to Internal Order and Project as Cost Objects.

 

Commitment Management

Commitment represents a future cost committed against cost object. Cost Commitments occur when a purchasing document (like a Purchase Requisition, Purchase Order) is issued to a vendor for provision of goods or service. If purchasing document is issued specifically against a (for example) cost center, the value of the purchasing document will represent a legal and binding commitment to incur costs in future against this cost center.

If a purchasing document is issued for purchase of goods for stock, these are not commitments against a cost object; hence, such documents will not form part of Commitment Management functionality in SAP.

SAP tracks Commitments against cost objects for information and reporting purposes only. You cannot directly use commitments to prevent user from creating more commitments (or creating more Purchase Orders) against the specific cost object (that feature is falls under Availability Control in SAP).

Commitments representing unfulfilled Purchase Orders will add to the commitment amount against the cost object; commitments are incurred in the transaction currency of the purchase order and are then converted to local, group and controlling area currency for reporting.

 

The process of Commitment Management

Commitment amounts flow through 5 stages:

  • Create Commitment
  • Use Commitment
  • Fulfil Commitment
  • Report Commitment
  • Carry Forward Commitment

 

Create Commitment

Commitments are created against cost center when purchasing documents are issued for delivery of goods or services to that cost center. The commitment amount is the amount of the Purchase Order in purchase order currency. SAP converts this transaction currency to Local Currency, Group Currency and Controlling Area currency.

 

Use Commitment

Commitments are used or Commitment amounts are reduced when the goods or services against these purchase orders are received. If the goods or service receipt is a partial receipt, then the balance on the purchase order is the outstanding amount of commitment.

 

Fulfil Commitment

If the goods or service receipt is a full receipt against the Purchase Order or completes the delivery against the Purchase Order, then the balance on the purchase order is zero and the commitment is fulfilled and the outstanding amount of commitment is zero.

 

Report Commitment

Commitment amount is information available for reporting. SAP has standard reports that compare the cost object budget against actual and commitment.

 

Carry-forward commitment

At the year-end, customers should carry forward the outstanding commitments to the next fiscal year. Commitments are carried forward to the first fiscal period of the next fiscal year. For example, outstanding commitment of period 11/2011 is carried forward as commitment of period 01/2012.

 

The semantics of Commitment Management

Plan / Budget are developed on individual cost objects as part of the regular budgeting cycle. Having a plan / budget is not pre requisite to using Commitment Management in SAP.

Commitment represents the outstanding amount of undelivered or unserviced on the Purchase Order. For a newly created Purchase Order, it is the full amount of Purchase Order. Commitment amount includes delivery charges but does not include input taxes. In other words, costs that will post against cost elements in Controlling form part of Commitment amount.

Actual cost is posted against cost centers when the goods are delivered or services performed against the Purchase Order.

The total of commitment cost and actual cost represents the utilised (“assigned” in SAP terms) amount against the cost center.

The balance of amount in budget un-utilised or over-utilised is the “available” amount against budget.

 

 

 

Quantity-based or Value-based Commitment Management

For purchase orders based on quantity procured, the goods receipt or invoice receipt reduces the commitment value and increases the actual cost. For this you need quantity-based commitment management. On the Purchase Order:
• Goods Receipt indicator set: Commitment is reduced when goods are received.
• Goods Receipt Indicator is not set: Commitment is reduced when invoices are received.

If values for purchasing documents determine the reduction of a purchase order commitment, then you need value-based commitment management.

 

Commitment Reporting in SAP

Standard SAP reports can be used to report commitments against actual and plan. Below is an example of a report.

 

 

Plan amounts have been updated against the cost center 1323 as part of the planning cycle.

At the time this report was executed, the cost center has incurred actual costs of $1.225 against cost element 621030.

There are outstanding Purchase Orders worth $ 4,025 against the same cost element.

This means that the total “assigned” or utilised amount against cost element 621030 in cost center 1323 is $ 5,250 ($1,225 + $ 4,025).

This compares to plan amount of $ 2,083.24. The available amount is (negative) $ 3,166,66. This means that the cost center 1323 has over spent an amount of $ 3,166.66 against cost element 621030 for “third party fees” compared to the plan.

 

Conclusion

Commitments do not prevent user from creating more commitments against budget /plan. However, this is an important feature in SAP because it gives users real time information of how far they have spent against plan. It helps them plan and measure how much more commitments they can make before they exhaust the budget.

Commitment Management in SAP is an easy-to-setup and easy-to-use feature in SAP. In the next blog, I will demonstrate how Commitment Management works in SAP.

 

Please Share

I hope this blog has helped you understand the concept, design and configuration behind Commitment Management. Please do leave your comments below whether this article was helpful; and whether you have any suggestions/ comments; or if you would like to share your experience with document splitting.

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View my presentation on Slideshare

 

 

Index of my blogs on Commitment Management in SAP ECC

#1 Commitment Management in SAP #1 An Overview (24/05/2012)

#2 Commitment Management in SAP #2 The process (31/05/2012)

#3 Commitment Management in SAP #3 Activation (07/06/2012)

#4 Commitment Management in SAP #4 Limitations

 

_____________________________________________
Rajesh has optimised SAP Finance solutions for several customers. Rajesh has 12 years experience implementing SAP / IT / BPM Finance solutions for several customers globally; with a strong focus on Management Accounting and Reporting primarily Product Costing, Profitability Reporting and Material ledger (Transfer Pricing, Actual Costing). He also has 7 years experience working in the business in Finance and Accounting functions. His business process knowledge combined with his IT expertise enables him to provide his customers with best-of-breed advice on business process / IT implementations.

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Comments

  1. Dear Mr.Rajesh Shanbag,

    This indeed is a wonderful article. I was actually looking for same fr quite a long time.

    Thanks a lot and Regards.

    Can you please tell me from where the plan cost getting updated?

    Avinash

    • Hi Avinash

      Plan costs are updated in respective modules – like in cost centers, internal orders or projects.

      Regards

      Rajesh

  2. Dear Mr.Rajesh Shanbag,
    this material is very useful.
    Grangratulations for the quality

    Could you please verify the link of #4 document.
    Is not associated to any link

    Regards

    Osmar S Cardoso

    • Hi Omar
      Thanks.
      I did not complete that blog; so did not publish it. Hence it does not link.

      Rajesh

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