Cost control by commitment monitoring
Use this process to monitor a company’s purchase commitments, also known as purchase budgeting.
Outcome
- You have constant access to information about the current budget situation compared to the actual and committed expenditures per cost center or department.
- Use this information to evaluate progress toward financial goals.
- The actual values used in the calculation are saved in local currency in the FBAVAL file.
- The MPLINC file is updated with the value of purchase order (PO) lines with order line status greater than or equal to 15 that are included in the budget reserved for committed expenditures.
Before you start
Financial Management and General Management must be enabled and configured.
Purpose
The purpose of commitment monitoring is to help controlling overhead and capital expenditure. It applies for non-inventory control; that is, services, not goods. One example is marketing expenses.
When applied
Commitment monitoring is a continuous process.
Workflow
Commitment monitoring is made possible by including the value of goods ordered but not yet invoiced by the supplier as a cost in your cost follow-up.
The traditional expenditure control consists of calculating the difference between budgeted expenditures and accumulated, actual expenditures on a regular basis:
| Cost center | Budgeted expenditures | Actual year-to-date expenditures | Difference |
|---|---|---|---|
|
AAA |
70,000 |
53,000 |
+17,000 |
|
BBB |
50,000 |
27,000 |
+23,000 |
|
CCC |
20,000 |
18,000 |
+2,000 |
|
Total |
140,000 |
98,000 |
+42,000 |
In this example, the financials appear to be within budget, and all expenditures are reported as under control. However, if the value of all open PO lines is treated as committed expenditure, the financial picture may change significantly:
| Cost center | Budgeted expenditures | Actual year-to-date Expenditures | Commitments | Difference |
|---|---|---|---|---|
|
AAA |
70,000 |
53,000 |
17,000 |
0 |
|
BBB |
50,000 |
27,000 |
19,000 |
+4000 |
|
CCC |
20,000 |
18,000 |
8,000 |
-6,000 |
|
Total |
140,000 |
98,000 |
44,000 |
-2,000 |
With this information available, the company is able to act at an early stage to prevent such budget deficits.
Enabling commitment monitoring
Start by creating these budgets in 'Budget. Open' (BUS100):
- One expenditure control budget, normally by cost center or department. By including specific expenditure accounts, you can control which kind of purchases to include in the commitment calculation.
- One empty budget reserved for committed expenditures.
- One budget for manual entry of overspending, but only if additional costs are approved.
Then, in 'Settings – General Ledger' (CRS750/G), activate the calculation of committed expenditures and specify these parameters:
- Which budgets to use.
- Rules for comparing and down-dating (reducing) commitment values.
- Which accounting dimensions to check during purchase order entry for cost control.
- Choose whether to block a user from specifying a purchase order (PO) when no budget margin is available.
Set parameter 620 in 'Purchase Order Type. Open' (PPS095) to either 1='Not stock' or 2='Yes' to enforce manual entry of the accounting string in 'Planned Purchase Order. Open' (PPS170) or 'Purchase Order. Open' (PPS201). This setting ensures that the accounting string is captured correctly for commitment monitoring and aligns with the control budget.
Updating budgets
The control budget is updated using standard methods such as budget value generation, decentralized budgeting, allocations, and other approved processes.
The commitment budget is updated overnight with committed values by M3 Job Scheduler. Old values are thus continuously replaced by new values. If needed, you can trigger the update manually for a period in 'Commitment. Calculate' (PPS970).
- 'Purchase Requisition. Open' (PPS180)
- 'Planned Purchase Order. Open' (PPS170)
- 'Purchase Order. Open' (PPS200).
Only the accounting dimensions selected for cost control in (CRS750/G) are used for the account entry.
Online commitment control
Commitment monitoring begins when a department specifies a purchase requisition or a purchase order line for a non-inventory item. If the accounting string is included in the control budget and is manually specified using F11, unless it is enforced by the purchase order type, the system performs this calculation automatically:
(Budgeted value) plus (Manually entered overspend) minus (Actual year-to-date value for the accounting string) minus (Committed value)
If manually specified overspending is available, the exchange rate type is retrieved from the budget. Otherwise, it is retrieved from the control budget.
If the calculated amount exceeds the purchase order (PO) line amount, the excess is added to the general ledger balance file for the budget reserved for committed values. If the PO line is later deleted or its status is changed from definitive to preliminary, the system reverses the entry. When the goods are received or the invoice is recorded, the committed amount is automatically deducted.
However, if the calculated amount is lower than the PO line amount, then the purchase order is either blocked and receives status 14 or a warning is issued, depending on your selection in (CRS750/G).
Display results online
By including the budgets used for commitment monitoring in a column template, you can display the current situation online for the affected cost centers or departments in 'GL Balance File. Display' (GLS215).