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Author's profile photo Stefan Mueller

Active Budget Control in SAP Business ByDesign – Budget Check for Cost Centers and Projects

This is a detailed blog post  of a blog post series in context of SAP Business ByDesign capabilities related to active budget control: see main blog post Active Budget Control in SAP Business ByDesign

Overview

The emphasis of this blog post is to stress the differences in detail how the budget check is implemented. With simple examples the rationale behind these different implementations is explained. But before explaining the details I would like to show how the activated budget check veto’s the order or change of a purchase order if the budget is exceeded. Upfront, it is not spectacular but a very effective means to control spending behavior.

Example%20Budget%20Check%20-%20Budget%20Exceeded

Example Budget Check – Budget Exceeded

Cost centers and supported project types (in overhead cost management)

The budget check is available for purchasing and supplier invoice scenarios with an account assignment to:

  • Cost centers and assigned cost collector projects that automatically settle against the cost center
  • Direct cost projects
  • All other project types are not supported

Supported%20Project%20Types

Supported Project Types

 

Please note that SAP has implemented a different logic dependent on the industry and account assignment. The following tables illustrate these differences

All industries – except public sector edition

Account Assignment Budget Check Logic Comment
Cost Center* Released budget YTP – (actuals** + encumbrances**) Default Release Version
At granularity of budget category**full year
Cost Collector Project* Released budget YTP – (actuals** + encumbrances**) The check is conducted against the budget of the cost center against which the postings will be settled to. If a project cost estimate exists it is not relevant for budget check.
Default Release Version
At granularity of budget category
**full year
Direct Cost Project* Project cost estimate on project task level – (actuals + encumbrances) The check does not use budget category. It is assumed that the project manager is authorized to substitute certain categories as long as the entire spent is below the project cost estimate. Note:  there is no constraint on accounting periods.
In case a financial planning and budget release for direct cost projects exist it will be ignored.
Free cost object Not supported
Any type of customer projects Not supported

*The budget check must be activated on cost center level. Cost collector projects are subject to budget check if the cost center is subject budget check to which the cost will be settled. The direct cost projects are subject to budget check if the responsible cost center is subject to budget check. An explicit budget check activation by project is not supported.

Public sector edition

Account Assignment Budget Check Logic Comment
Cost Center* Released budget YTP – (actuals** + encumbrances**) Default Release Version
At granularity of budget category**full year
Cost Collector Project* The check is conducted against the budget of the cost center against which the postings will be settled to. If a project cost estimate exists it is not relevant for budget check.
Default Release Version
At granularity of budget category
**full year
Direct Cost Project* Released budget YTP – (actuals** + encumbrances**) The check is conducted against the released budget of the direct cost project. If a project cost estimate exists it is not relevant for budget check.
Default Release Version
At granularity of budget category
**full year
Free cost object Not supported
Any type customer projects Not supported

*The budget check must be activated on cost center level. Cost collector projects are subject to budget check if the cost center is subject budget check to which the cost will be settled. The direct cost projects are subject to budget check if the responsible cost center is subject to budget check. An explicit budget check activation by project is not supported.

Direct cost projects and budget check (except public sector edition)

The basic idea that has been implemented is that in case budget check is enabled for projects it is the project managers responsibility on project task level to execute the task within budget defined by the project cost estimate. The project responsible though can switch between different expense types if the overall project task cost estimate is not exceeded.  This assures a good balance between budget control and giving the project responsible room to adjust during execution.

The budget against which the budget check is performed is based on the entire project task planning consisting of planning

  • Work
  • Materials
  • Expenses (Other)
  • including overhead calculation

Project%20Cost%20Estimate%20on%20Project%20Task%20Level

Project Cost Estimate on Project Task Level

I’m using the report ‘Project Plan Values’ to illustrate against which estimated cost the budget check will be executed.

Direct%20Cost%20Project%20-%20Plan%20Values

Direct Cost Project – Plan Values

The budget check rule on project task level is pretty simple:

Available Budget = Project Task Cost Estimate – (Actuals + Encumbrances)

Please note:

  • No usage of budget category
  • No time constraints (like year to period or alike)
  • The budget check is only applied if on the responsible cost center of the project is budget check enabled (So if the responsible cost center is not budget check enabled the related projects are not subject to budget check as well
  • You have to have project task cost estimates in place. Otherwise, procurement of services for example will be blocked.

The implications:

  • Overhead costs are included in available budget
  • The project manager can decide for example to substitute internal labor by procuring 3rd party resources if available budget allows to.

Cost centers and budget check

Before I explain the budget check rules in more detail, I would like to spend a few words of the objective to introduce a budget for cost centers.

The cost center responsible has to manage to stay in the budget boundary on a periodical basis (e.g. quarterly) set by the company. And usually also the entire cost center budget is subdivided into smaller budget categories that are usually not to be interchanged by the cost center responsible. So, for example travel costs are not to be ‘traded’ against 3rd consultancy – unless explicitly approved. Therefore, the new dimension ‘budget category’ has been introduced since the G/L account level seemed to be too granular.  Moreover, the concept to ‘release’ planned budget has been introduced. This allows the accounting team to define which portion of the planned budget is released when for which type of spending. By this for example the ‘burning’ of yearly budget in the initial quarters can be avoided and blocked.

So, the rules for budget check relevant for an account assignment ‘cost center’ is significantly different than the rule for the budget check of a direct cost project.

Available Budget (by budget category) = Released budget YTP – (Actuals Full Fiscal Year + Encumbrances Full Fiscal Year)

Please note:

  • Granularity of budget check at level of cost center and budget category
  • There is an aspect of the current period in the budget check for cost centers
  • Released Budget YTP (year to period). That means that released budget in future periods is NOT considered in the currently available budget calculation
  • All actuals referring to the budget category and cost center posted in the fiscal year are considered.
  • All encumbrances of the current fiscal year are taken into consideration.

Encumbrances that refer to the next fiscal year are not taken into consideration.

Cost collecting projects and budget check

The key question is: “What is the basis of the budget check if the purchase order item account assignment is for a project task of this project type?”

The answer: “The budget check will be executed against the cost center where the cost collector project settles its costs and the respective budget category.

Please note:

  • The project task cost estimate has no relevance for the budget check of this project type
  • The account assignment in the purchase order is still the project task – but the budget check will be conducted against the responsible cost center.

Budget check affecting purchase order and supplier invoice creation

So, after you finally put all prerequisites into place by establishing a released budget, switching on the budget check for the respective cost centers or having project cost estimates in place for direct cost projects now it is time to see how the budget check affects the purchase order and/or the supplier invoice creation.

Budget Check is available in following scenarios

  • ordering of purchase order – not at save. Approve and order
  • changing quantity or purchase price of an ordered purchase order
  • entering a deviation in the supplier invoice
  • entering multiple items affecting the same cost center/project task and/or budget category
  • manual suppler invoice without purchase order invoice

The budget check veto will prompt in which combination the budget is exceeded. It also will notify how by how much the budget is exceeded. This amount is shown in company currency.

In case there is a budget check veto the order or change cannot be saved. The budget check cannot be bypassed. To resolve the issue the customer has to establish processes that suite his needs:

  • order less, other resources that potentially affect another budget category
  • request process (for example the generic tasks could be used)  to request to increase released budget, to move from one budget category to other budget category or adjust project cost estimate.
  • In very critical cases: switch off budget control on the respective cost center.
    No budget check will be in place. Be aware that these changes on the cost center master data are tracked and can be traced.

Please note: This is a known limitation in the approval case of a change of an already released purchase order. I’ll try to share a tangible example:

A purchase order item had been released

purchase order 4711
#1   10 ea 100,00 EUR -> available budget after purchase order has been released  50,00 -> encumbrances 100,,00 EUR

Change the purchase order after it had been released.

#1 14 ea 140,00 EUR -> the delta of 40,00 EUR  is checked -> no budget veto  o.k.

In case now the purchase order change is sent for approval the information of the delta is not stored. In case the approval takes place the entire amount of 140,00 would be subject to be checked and the budget check would raise an error that budget is exceeded. To avoid this it would be preferred to create a new purchase order item(#2 with 4 ea 40,00 EUR representing the adjustment after the release. In this case everything works fine.

Special case: Fixed Asset Acquisition

This type of procurement scenario requires a special treatment in terms of budget check. It is clear that a to be acquired fixed asset (example new small transport vehicle 25.000 USD) does not affect the consumed budget. Only the depreciation will do so over time.

I will share the practice we recommend:

  1. Create a purchase order with items for the acquisition of the fixed asset and assure already that individual materials are assigned. By this the system will know it is a fixed asset acquisition and skip the budget check. If individual materials are not created the system has to assume it a regular procurement and assigned to consumption incl. budget check.
  2. Use a dedicated budget category and product category for fixed asset acquisition
  3. Encumbrances for the acquisition are still created. If they are shown on a dedicated budget category it is clear that this is about a pending fixed asset acquisition. At goods and service receipt the fixed asset will be capitalized, and the encumbrances be reduced or cancelled out.
  4. In case you enter a manual supplier invoice with item type IMAT it will also be interpreted as a fixed asset acquisition and the budget check will be skipped

Summary

In this blog post the budget check rules are explained and how the budget check is activated. Moreover, the differences in implementation between public sector and non-public sector were highlighted. Finally, also the special treatment for fixed asset acquisition is illustrated.

Have you implemented active budget control? Are you intending to use it? Please share your thoughts and experiences.

Back to main blog post: Active Budget Control in SAP Business ByDesign

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      21 Comments
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      Author's profile photo Aaron Ogden
      Aaron Ogden

      I totally like your gave limits as the post you passed on has some uncommon information which is totally essential for me.

       

      GarageBand

      Author's profile photo Stefan Mueller
      Stefan Mueller
      Blog Post Author

      Thank you for the feedback. I hope this shared information provides guidance to customers and partners how it can be used and which preparation needs to be done upfront before activating it. I hope the other related blog post are equally helpful.

      Author's profile photo Yannick Kuhn
      Yannick Kuhn

      Hi Stefan,

      regarding to the budget check for direct cost projects: Is it still possible to record times, if the budget is not available for a projejct task or did the employee then get an error message?

      Example:

      I planned a task of a direct cost project with an service and employee with 5h and a cost rate of 100 €. The employee now records 6h of time on this project task. So the budget based on the 5h and 100 € is 500 €, but the recording of 6h/100 € is 600€. For the last our of work the budget shouldn't be available.

      I hope this is understandable for you.

      Best regards

      Yannick

      Author's profile photo Stefan Mueller
      Stefan Mueller
      Blog Post Author

      Hello Yannick,

      valid question. Short answer right now - I will elaborate next week in more detail on third party.

      1. Internal time recordings are not subject to budget check.
      2. These time recordings 'consume' budget that cannot be spent for third party in upcoming and future  purchase orders or supplier invoices.
      3. If budget already had been exceeded the time recording still can be posted.

      Hope this quick answer clarifies the budget check related question.
      Best regards
      Stefan

      Author's profile photo Yannick Kuhn
      Yannick Kuhn

      Hi Stefan,

      thanks for you quick answer. Looking forward to more details about the third party topic.

      Best regards

      Yannick

      Author's profile photo Stefan Mueller
      Stefan Mueller
      Blog Post Author

      Hello Yannick

      In general there are multiple complementing means in place to support our customers to control the spending / time recording on projects:

      • Project settings for time recording
      • Settings in the purchase order
      • Active budget control (only for direct cost and cost collector projects

      In this reply for time recording and NOT exceeding planned hours I would like to draw your attention to a settings for projects where a customer can decide you to treat that situation.

      Project%20Settings%20to%20Control%20Time%20Recording

      Project Settings to Control Time Recording

      In my next reply I'll try to share my view on third party labor for direct cost projects.
      Hope this helps
      Thank you
      Stefan

      Author's profile photo Stefan Mueller
      Stefan Mueller
      Blog Post Author

      Hello Yannick,
      here my slightly delayed (due to vacation) continued answer. In the screenshot before you see the option to choose 'Exceeds Planned Work', in case the customer opts for 'Not Allowed' what will happen?

      1. at purchase order release for the 3rd party services a budget check will be conducted.
      2. if the purchase order had been released the encumbrances would be created
      3. during project execution supplier invoices with reference to the purchase order will be posted.
        In case the quantity exceeds the ordered quantity the user will get a warning. It is NOT a hard stop preventing the posting of the supplier invoice.
        The customer has to implement a process in case this happens to:
        - either reject the invoice and ask for a corrected version
        - accepts and posts the invoice with the potential to 'overspend' the planned budget.

      If there is a very tight budget control regime in place I would recommend to split internal services from external services either by using different services or using a more granular project structure splitting internal labor from external services.

      These type of business modelling options are pretty common. We are curious to learn from initial live feedback you customers will use the initially offered capabilities.

      Best regards
      Stefan

       

      Author's profile photo Hua Hsien Hsieh
      Hua Hsien Hsieh

      Hi Stefan,

      Thanks for sharing the post. Please kindly review my question regarding to the budget check,

      Does the system have any configuration that can control certain budget categories not be checked?

      For example, while entering a purchase order or supplier invoices, item for "budget category - other" will go through budget checked, but "budget category- travel" will not.

      Please feel free to reply back.

      Thanks for your time.

      Peeta

      Author's profile photo Stefan Mueller
      Stefan Mueller
      Blog Post Author

      Hello Peeta,

      the budget check and the budget categories in the procurement or supplier invoice related processes are derived by the product category settings or settings in the material master data or service master data. So only these are the budget categories that are subject to budget check. So we think that a kind of configuration is not necessary to control which budget categories should be subject to check or not.

      if you have other budget categories that are populated by non-procurement processes these usually are not subject to budget check (e.g. processes based on ERM expense and reimburse management or FXA fixed asset management)

      To summarize:

      • All derived budget categories in procurement / supplier invoicing are subject to budget check.
      • budget categories used / derived in other business processes are not subject to budget check
      • budget categories currently do not have a 'switch' to turn on/off budget check.

      Hope this helps to clarify your question.

      Best regards
      Stefan

       

      Author's profile photo Hua Hsien Hsieh
      Hua Hsien Hsieh

      Hi Stefan,

      Thank you very much for the prompt reply. Really helpful!

      Best regards,

      Peeta

      Author's profile photo Deepali Shenaoy
      Deepali Shenaoy

      Hi Stefan,

       

      Thanks for your detailed explanation in this blog regarding Budget for Cost Center and Project.

      I have one question. Is the budget applicable for Cost Collecting Project and Direct Cost Project only?

      If yes why it is not applicable for other project types?

       

      Regards

      Deepali

      Author's profile photo Stefan Mueller
      Stefan Mueller
      Blog Post Author

      Hello Deepali,

      here a short and honest answer.

      a) the active budget control topic started in the public sector area including dimension of fund/grant.
      In the public sector the focus has been on overhead budget only.

      b) we were running out of time to specify / discuss with customers what are reasonable criteria for other project types to apply active budget control. Here more sophistication is required to our mind than what we have currently in place

      b1) T&M project tasks - should there be a budget limit?
      b2) Project sales with an n:m relationship between project tasks and sales items?
      b3) very specific handling if revenue recognition is in place would be required.

      Hope I was able to share some of our discussions why the limitation for the currently supported project types is in place.

      Stefan

      Author's profile photo Deepali Shenaoy
      Deepali Shenaoy

      Hi Stefan,

       

      Thank you for your quick reply.

      a) Yes, T&M project task should have a budget limit. For eg there must be direct proportional relation to cost and revenue.

      b) If we are targeting service industry, customers would insist on having Active Budget Control in Project types like "Customer Project with sales integration" specifically for Fixed Cost with Time & Material.

      c) Is there a possibility to extend this functionality in future for other project types?

      d) Also, I have a question regarding segregation of cost in different areas of cost center and its utilization. How can we show the segregation in SAP Business ByDesign system?

       

      Regards

      Deepali

      Author's profile photo Stefan Mueller
      Stefan Mueller
      Blog Post Author

      Hello Deepali,

      concerning your questions here my short comments.

      ad a) T&M project task
      I think a activation of budget check or not for these type of projects should be at project task level.  The sales type of projects are not supported though.

      ad b) targeting service industry
      I think you refer to fixed price projects. No question, active budget control would help to stay in budget. But currently this project type is not supported

      ad c) Future enhancement to other project types
      It is a question in which direction our customer base wants us to primarily invest. With this new capability just made available is to early to say where the investment focus has to be. It really depends on the adoption rate and real life feedback of those customer implementations.

      ad d) Segregation of cost in different areas of cost center and its utilization
      I'm not 100% sure what you mean by this.
      d1) you can group the G/L Accounts by
      - budget categories
      - or defining a structure on top of G/L accounts
      d2) Utilization
      - if you need to analyze the target account assignment for allocations, distributions or time confirmations you can use in the cost center - line item report the 'offset cost center' , offset production lot, offset project task informations.  These represent a from 'cost center ' to 'xyz' relation. But since this particular topic does not relate to active budget control may I ask you not to discuss this topic here further

      Regards
      Stefan

      Author's profile photo Deepali Shenaoy
      Deepali Shenaoy

      Hi Stefan,

      I really appreciate your immediate response and your reply has cleared my doubts. Thanks a lot for the answer.

      I have 2 generic doubts:

      1. Are there any plans for a detailed session/demo to highlight the features of Active Budget Control?
      2. Is there any new report available in the system after this budget release?

      Thanks and Regards

      Deepali

      Author's profile photo John Kearns
      John Kearns

      Hi Stefan

       

      One of your section headings is

      Direct cost projects and budget check (except public sector edition)

      Is this to indicate that budget checking against direct cost project task estimates is not supported in the Public Sector version?  If not, this would be one more example of the disconnect between the functionality of standard ByD and Public Sector

      Author's profile photo Stefan Mueller
      Stefan Mueller
      Blog Post Author

      Hello John

      this is to indicate that in the public sector edition the basis of active budget check is different.
      In the public sector edition:

      1. a financial planning including FUND and FUNCTION is required.
      2. the process of budget release including FUND and FUNCTION is required, too

      Note: the project task cost estimate is not the basis of the budget check in the public sector edition.

      Hope that clarifies that in the section you refer to 've been describing the implemented logic for the non public sector where the project task cost estimate serves as basis for the calculation of available budget.

      Regards
      Stefan Müller

      Author's profile photo John Kearns
      John Kearns

      Thank you for the clarification Stefan.  That is too bad and once again an example of inconsistencies between the ByD versions.  Having a budget check also include fund and function is useful, but it does not address user needs to budget by project and would force those users to then create a separate cost center per project if they wish to have budget control to the project level, unlike in the non public sector version.

      Author's profile photo Stefan Mueller
      Stefan Mueller
      Blog Post Author

      Hello John,

      I would like to comment on your statement on 'inconsistencies'. There are differences in scope and implementation of the public sector and non-public sector version. That is true. For the topic of active budget control this was introduced in public sector first with strong involvement of customers in this sector. So how does active budget check work for a public sector customer?

      a) a budget check for direct cost projects is available. You have to have a financial planning in place for the direct cost project task. Subsequently a budget  release or multiple budget releases are required. The budget check is conducted against:
      Available budget = 'released budget YTD - (actuals + encumbrances)

      b) in the public sector edition the project cost estimate has no use for the active budget check.

      For the non-public sector (that is less regulated in the area of budget spending) SAP choose  to take the project task cost estimate as basis for the available budget. We also knew that the capability of budget release for these type of project would not be in place for the non public sector. These decisions were made after collecting feedback from customers and partners in the non-public sector.

      To sum it up: Yes - there are differences between the public sector edition and non-public sector in the area of active budget control. But these are NOT inconsistencies.

      Author's profile photo John Kearns
      John Kearns

      Hi Stefan

       

      Thank you for your reply.  Can you clarify your statement re "financial planning in place for the direct cost project"?  Thus far I have been testing in the non public sector version.  Are you stating the the public sector version provides the additional dimension of project task for the excel based financial planning template?  I just want to understand where financial planning for direct cost project would take place if it is somewhere other than a cost center.

      Author's profile photo Stefan Mueller
      Stefan Mueller
      Blog Post Author

      Hello John,

      in case you have a SAP Business ByDesign Public Sector edition in front of you can download in the financial planning xls templates for P&L planning that will offer input dimensions like:
      G/L Account
      Budget Category
      Cost Center
      Project Task
      Fund  (public sector specific)
      Function (these sector specific)
      Profit Center

      So using this template you can create a financial plan for the direct cost project in the default plan version for example. Thereafter you need to release the budget.

      As mentioned - this serves as basis in public sector edition for the active budget check.

      Hope that clarification helps.
      Stefan