Cost Control by Commitment Monitoring
This document explains how you monitor a company's purchase commitment (so-called 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 analyze whether you will reach your 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 is used for non-inventory control; that is, services, not goods. One example is marketing expenses.
When
Commitment monitoring should be a continuous process.
How
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 seem to be under control and all expenditures are well within the budget margins. However, if the value of all open PO lines is included as a committed expenditure, the situation may look completely different:
| 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
You begin by creating the following budgets in 'Budget. Open' (BUS100):
- One expenditure control budget, normally by cost center or department. By including specific expenditure accounts, you 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), you activate the calculation of committed expenditures and specify:
- 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
- Whether to block a user from entering a purchase order (PO) for which there is no budget margin left.
Updating Budgets
The control budget is updated the usual way: through budget value generation, decentralized budgeting, allocations and so on.
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).
Committed values are posted based on the application of accounting rules PP10-903 and PP10-910. However, if an accounting string was entered manually by pressing F11 in any of the following programs, this accounting string overrides those accounting rules: '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 is monitored from the point a department enters a purchase requisition for a non-inventory item. If the accounting string used is included in the control budget, the following calculation is done automatically:
- (Budgeted value) plus (Manually entered overspend) minus (Actual year-to-date value for the accounting string) minus (Committed value).
The exchange rate type used in the calculation is retrieved from the budget for manually entered overspending, if such exists. Otherwise, the exchange rate type is retrieved from the control budget.
If the result is an amount greater than the PO line amount, it is added to the general ledger balance file for the budget reserved for committed values. (If the purchase order line is to be deleted afterwards or the status changed from definitive to preliminary, the procedure is reversed.) When the goods are received or the invoice is recorded, the committed amount is deducted automatically.
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).