Actual Costing using Material Ledger.pdf

Analysis of Material Ledger Transactions for

Actual Costing

July 3, 2003

Analysis of Material Ledger Transactions for Actual Costing

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Analysis of Material Ledger Transactions

for Actual Costing

CONTENTS AUDIENCE & AIM OF THE DOCUMENT............................................................................................. 2

AUDIENCE .................................................................................................................................................. 2 AIM ............................................................................................................................................................ 2

SECTION 1: MATERIAL LEDGER/ACTUAL COSTING OVERVIEW ............................................ 3 A. FUNCTIONS OF MATERIAL LEDGER........................................................................................................ 3

Multiple Currencies .............................................................................................................................. 3 Actual Costing....................................................................................................................................... 3

B. CONCEPT BEHIND ACTUAL COSTING ..................................................................................................... 4 Standard Price ...................................................................................................................................... 4 Moving Average Price .......................................................................................................................... 5 Actual Costing....................................................................................................................................... 7

SECTION 2 : DETAILED ACTUAL COSTING SCENARIOS............................................................ 10 A. MATERIAL LEDGER DATA ................................................................................................................... 10 B. SCENARIOS........................................................................................................................................... 12

Scenario 1: Actual Costing for a Raw Material with a Purchase Price Variance (PPV)................... 12 Scenario 2: Actual Costing for a Finished Material........................................................................... 21 Scenario 3: Actual Costing for a Raw material with Exchange Rate Difference................................ 26

APPENDICES ............................................................................................................................................. 31 APPENDIX 1: FLOW OF VARIANCES FOR SCENARIOS 1, 2 AND 3 ............................................................... 31 APPENDIX II: TERMINOLOGY.................................................................................................................... 34 APPENDIX III: STANDARD MATERIAL LEDGER REPORTS ......................................................................... 37 APPENDIX IV: ISSUES WE FACED IN ACTUAL COSTING/MATERIAL LEDGER............................................. 39 APPENDIX V: ORIGINAL PROPOSED OUTLINE........................................................................................... 40


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Audience & Aim of the Document

Audience

• Finance Business Owners who need to understand for analysis and reporting how we are doing Actual Costing through Material Ledger.

• Finance Business Users wanting to get a general idea of Material Ledger.

Aim

• Provide a framework to the Finance Business Owners and Users for understanding how Material Ledger helps to accomplish ‘Actual Costing’.

• Illustrate with pertinent examples the functioning of Material Ledger and

how it triggers allocation of Purchase Price Variance (PPV) and production variances.


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SECTION 1: Material Ledger/Actual Costing Overview

A. Functions of Material Ledger

The application component Material Ledger fulfills two basic objectives so far as we are concerned:

1. Enable material prices in Multiple Currencies 2. Enable Actual Costing

Multiple Currencies

Material inventory values are normally carried by the R/3 system in the company code currency. The material ledger component enables the R/3 System to carry inventory values in two additional currencies other than the company code currency. Therefore, all goods movements in the material ledger can be performed in up to 3 currencies. In our system, the material ledger carries inventory in 2 currencies – company code and group currency (USD). Currency amounts are translated at exchange rates valid at the time of posting. Thus material transactions may occur with different exchange rates at different points of time.

Actual Costing

Actual costing calculates an actual price at the end of every period (periodic unit price) for each material. All goods movements within a period are valuated preliminarily at the standard price. At the same time, all price differences and exchange rate differences for the material are maintained in the material ledger.

At the end of the period, an actual price is calculated for each material based on the actual value of the material transactions over the period. The actual price that is calculated is called the periodic unit price and can be used to revaluate the inventory for the period to be closed. In addition, this can be used as the standard price for the next period.


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B. Concept behind Actual Costing

As stated above, in Actual Costing all goods movements within a period are valuated during the period at the standard price. At period end, the actual price that is calculated is called the periodic unit price and can be used to revaluate the inventory for the period to be closed. Actual Costing has thus been conceptualized as a midway between using ‘standard price’ and ‘moving average price’ combining the advantages of both. Below is a brief discussion on standard and moving average prices.

Standard Price

When using the standard price, all goods movements of a material are valuated with the same price over at least one period. Therefore, the standard price ensures consistent cost management of the production process and makes variances within production transparent. A periodic price (standard price) is especially useful when working with cost management by period.

The standard price can also be used as a benchmark by which you can measure different methods of production, or compare the contribution margins of a material in different market segments in Profitability Analysis.

However, because the standard price is held constant for an entire period, it does not reflect the actual costs incurred during the period. This can lead to inexact valuation prices for materials whose procurement prices change a great deal over a period, or whose method of production changes within a period.

Below is an example of a ‘standard price’ scenario of a goods receipt followed by invoice receipt. Some typical accounts that are posted to are shown.


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Moving Average Price

With moving average price control, a new material price is calculated after every goods receipt, invoice receipt, and/or order settlement. This material price is an average value calculated from the total inventory value and the total quantity of the material in stock.

The advantage of using the moving average price is that variances occurring both for materials produced in-house as well as materials procured externally cause an update in the material price and the material stock value. Because the material price reflects the average procurement cost of a material, material issues could, in principle, be valuated with the current price.

The main disadvantage of using the moving average price is that the price used to valuate a material consumption is almost completely dependent on the time at which the goods issue is posted in the system. The moving average price also does little to guarantee consistent cost management of your production process.

Below is an example of a ‘moving average price’ scenario of a goods receipt followed by invoice receipt. Some typical accounts that are posted to are shown.


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Actual Costing

Let us look at the example above and determine what the postings would be if actual costing is used. The GL postings during the period for goods receipt and invoice receipt would be exactly the same as the ‘Standard Price’ scenario. The Material Ledger however would continue to record the price difference and exchange rate difference for every transaction.

At the end of the period, the actual costing run is done. It involves the following steps:

1. Creating a Costing Run 2. Performing a Selection

In steps 1&2, plants and materials are selected for the costing run.

3. Determining the Costing Sequence

In step 3, the system determines the sequence the costing run would follow. The system categories materials based on manufacturing levels eg, Level 1 contains raw materials.

4. Allowing Material Price Determination * 5. Performing Single-Level Material Price Determination * 6. Performing Multilevel Price Determination *

In steps 4 through 6, the system calculates periodic unit prices for the settled period and updates them (for information) in the material ledger.

7. Allowing Closing Entries 8. Performing Closing Entries

In step 8, the closing entries of the actual costing run are performed for the closed period that posts to the FI ledger. The following entries are performed.

In closed period, DR ML Accrual Account 20.00 CR Price difference Account 20.00 In current period, DR Adjustment of Standard 20.00 CR ML Accrual Account 20.00

* Price determination calculates the periodic unit price for a material. The standard price, the price variances accumulated in the period as well as input material differences are all taken into account. A level is identified by a material and its associated procurement process. Single-level material price determination is used for raw materials and takes into account the differences that arise directly when a material is procured. Multiple levels are the result of one material being used in another material. These multiple levels are reflected in the actual BOM that is created in the costing run in the step Determine Sequence.

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9. Marking Prices for Future Valuation 10. Releasing the Price

In this step, the revaluation of the material inventory takes place. The planned price can be released as a step in the costing run. Otherwise configuration can be set up so that the first material transaction for a material in the period releases the new standard price.

DR Material Inventory Account (BSX) 20.00 CR Adjustment of Standard 20.00

Thus steps 8 and 10 are the only steps in the actual costing that result in financial postings.

The above is a very simplistic example with no consumption being considered, but it provides the essence as to why actual costing has some commonality with costing based on standard as well as costing based on moving average prices.

In Actual Costing, preliminary valuation of goods movements using the standard price makes consistent and reliable cost management of the production process possible against a ‘standard’. Revaluating inventories at the end of the period with the periodic unit price is optional. Therefore, the functions of actual costing can not only be used to run actual costing itself, they can also be used for informational purposes in conjunction with other cost accounting systems. By calculating actual prices for materials, actual costing can aid in making decisions such as whether to manufacture in-house or outsource. Because, in actual costing data, is updated at the level of the plant and material, it is possible to compare different sources of supply.

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Fig 1: Actual Costing Process Flow

In the next section we are going to discuss in detail how Material Ledger helps in accomplishing Actual Costing. We will use examples to show the data that is maintained in the material ledger and the GL postings that are triggered by the Material Ledger. We will also point to some standard reports that can be of help in tracing transactional flow and analysis.

Actual Costing Process Flow

Purchase Price Variances (PPV)

Production Variances

SAP Material Ledger

Materials Viewed at Actual Cost------------------------------------

Inventory Valued at Actual Cost

- Puts PPV and Exchange Rate Variance back to specific raw materials

-Puts Production Variance and Transfer Variance back to finished/semi finished goods

Adjustments posted to inventory and consumption to reflect actual value

Exchange Rate Variances

Raw Materials(Receipts / Invoices)

Transfer Variances

Finished/ Semi Finished Materials(Process Orders)

• Records Actual Values throughoutthe period

• Materials Viewed at Standard Cost• Inventory Valued at Standard Cost

Actual Costing Run (Period End)

Inventory Revaluation


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SECTION 2 : Detailed Actual Costing Scenarios

A. Material Ledger Data The ‘Material Price Analysis’ view of the material ledger is divided into the following data categories:

• Beginning inventory: Inventory brought over from the previous period. • Receipts: Any movement of material to inventory and associated transactions that may

lead to change in the value of inventory. Example, Goods Receipt, Invoice Receipt. • Cumulative inventory: Summation of the beginning inventory and Receipts. • Consumption: Any issue of inventory. Example, Material issue to a production order,

transfer from stock.. • Ending inventory: Cumulative inventory less consumption.

Using the transaction ‘Material price analysis’ (CKM3), it is possible to see values of material transactions for a particular material in a specific plant in each of the data categories above in every period. It also shows the price and exchange rate difference for each transaction. Below is a screenshot of the material analysis screen:


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The ‘PrelimVal’ (Preliminary Value) column represents the value of the transaction quantity based on the current standard price of the material. Preliminary Value = Quantity * Standard Price The ‘Price diff’ (Price Difference) column represents the difference in value of the transaction quantity due to a difference in the actual unit price of the material. The difference may be with respect to the standard price or price on another document. Examples: Price difference at goods receipt = price at goods receipt*goods receipt quantity – standard price * goods receipt quantity Price difference at invoice receipt = price at invoice receipt*invoice quantity – price at goods receipt * goods receipt quantity The ‘ExRt diff.’ (Exchange Rate Difference) represents the difference in the value of the transaction due to change in exchange rate at different points of time. The ‘Price’ represents the ‘Actual Price’ that the Material Ledger calculates at period end taking into consideration the price and exchange rate differences. The values for ‘price’ in the scenarios described in the next section are shown as ‘per 100 KG’. With this brief introduction of the data categories and information maintained in the material ledger, let us take a few materials and analyze how their transactions have been recorded in the Material Ledger. Specifically, the aim of this detailed analysis would be two fold:

1. Show how Material Ledger calculates Actual Cost 2. Point out the Financial Postings (GL postings) that are associated

with these transactions. Some of these are due to material movements and associated value flow. Others are triggered by the Material Ledger during the last step of the actual costing run.


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B. Scenarios

Scenario 1: Actual Costing for a Raw Material with a Purchase Price Variance (PPV) Scenario details: We are going to use material number 1041 [Polyether Polyol (Voranol 220-110N)] in Plant US47 and analyze the material ledger transactions for this material from period 3 to period 5. Material 1041 is a raw material. In plant US47 this material has goods receipt and invoice receipt with PPV. It also has consumption to production order. Some of the characteristics associated with this scenario are:

• Goods receipt and invoice receipt are in different periods (Period 3 and Period 4) • Most of the goods received had been consumed before the invoice receipt • The standard has been kept unchanged from period 3 to period 4. It has been

updated with a value different from the ‘periodic unit price’ of the previous period at the beginning of period 5

Period 3


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1. Beginning Inventory: Beginning inventory of 100.244 KG is valuated with a standard price of USD 156.53 per 100 KG. The Preliminary Value is 156.91 USD (100.244 * 156.53). [All price units are expressed per 100 KG]

2. Receipts: Goods receipt for purchase order 4500010840 of quantity 625.957 KG

at a price of USD 134.48/100 KG. The Preliminary Value is calculated as (625.957*156.53) = 979.81USD The Price Difference is calculated as (156.53*625.957 – 134.48*625.957)/100 = 138.01 USD. This represents the purchase price variance for this material for this transaction. FI Posting FI Doc #: 5000030729 (Goods Receipt for PO 4500010840/10) There is a posting of 979.81 USD to the Material Inventory Account and USD 138.01 to the Price difference (PPV) Account. DR 1156020 (Raw Materials) 979.81 CR 4021120 (Variance – PPV(Auto)) 138.01 CR 2110120 (GR/IR Reconciliation) 841.80

3. Cumulative Inventory: Quantity = Beginning inventory + All receipts during the period = (100.244 + 625.957) KG = 726.201 KG Price = (Prelim Value + Price difference + Exchange Rate difference) for

beginning inventory and all receipts/ Quantity = (156.91 + 979.81 – 138.01 + 0)*100/ 726.201 = USD 137.53 USD

4. Consumption: There is a goods issue of 517.095 KG to production order 1016953. The Preliminary Value is calculated as (517.095*156.53) = 809.41 USD FI Posting FI Doc #: 4900070099 (Goods Issue for order 1016953) There is a transfer of 809.41 USD from the Raw Material to the Consumption account. DR 4031020 (Material Consumption) 809.41 CR 1156020 (Raw Materials) 809.41


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5. Ending Inventory: After the end of the period, the actual costing run is performed. Steps in this run are ‘price determination’ and posting closing entries. Price determination: Through price determination, the system calculates the periodic unit price. It apportions the cumulative price difference of the period to consumption and ending inventory in the ratio of quantities consumed during the period and the ending inventory. SAP allows price differences from component materials to be taken into account while calculating the price for a finished material or semi-finished material. This is accomplished through ‘multilevel price determination’. For raw materials, the price difference is entirely generated during procurement and there is no price difference from further ‘lower’ levels to take into account. This is allocated through single level price determination The Unit Price calculated for the ending inventory includes the portion of the price difference that is allocated to the ending inventory through price determination. This is called the ‘Periodic Unit Price’. It is stored in the Material Master in the ‘Per Unit Price’ field in the Accounting 1 view. If desired, this price can be used to revaluate the beginning inventory for the next period by going through the inventory revaluation step in actual costing. Otherwise, the inventory value can be kept unchanged, or revaluated with a completely different price. The calculation below demonstrates how the system calculated the periodic unit price in the price determination step. Quantity = Cumulative Inventory – Consumption = 726.201 – 517.095 = 209.106 KG Preliminary Value = Prelim value of (Cumulative Inventory – Consumption) = 1136.72 – 809.41 = 327.31 USD Price Difference = (-138.01) * (209.106/517.095) = (-138.01) *.404386 = -39.74 USD [The remaining price difference (98.27 USD) is allocated to consumption.] Periodic Unit Price = (327.31 – 39.74)*100/209.106 = 137.52 USD Posting closing entries: In this step (the last step in the costing run), FI postings take place. (1) The price differences allocated to the ending inventory are accrued in the closing period. (2) In the current period, the inventory is revalued using the new standard price. This is done by marking and releasing the new standard price. (3) In the current period, the accrual is reversed and price difference adjusted based on inventory revaluation.


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In this case, there is no inventory revaluation. So the reversal entry is exactly opposite of the accrual. FI Postings: FI Doc # s: 4700010233 & 4700010234 In Period 3: FI Doc # : 4700010233 DR 4021320 ML Price Difference (Single level) 39.74 CR 2110150 ML Accrual Adj 39.74 In Period 4: FI Doc # : 4700010234 DR 2110150 ML Accrual Adj 39.74 CR 4021320 ML Price Difference (Single level) 39.74 In Summary, for Period 3: Standard price 156.53 USD Periodic unit price 137.52 USD Current stock 209.10 KG Current stock value 327.31 USD Inv. value using periodic unit price 287.57 USD


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Period 4

The only activity in this period is the receipt of the invoice for PO 4500010840. The Goods Receipt was posted in Period 3. 1. Beginning Inventory: As mentioned before, no update of standard price/revaluation of inventory was done. Preliminary Value and Price Difference are the same as the Ending Inventory of the last period. 2. Receipts: The only receipt in this period is a vendor invoice. This has a different price than the PO/Goods receipt. Hence the price difference is booked to the PPV account.

Price difference = Price at Invoice Receipt* Quantity – Price at Goods Receipt *Quantity = 979.80 – 841.79 USD = 138.01 USD

Formatted: Bullets and Numbering

Formatted: Bullets and Numbering


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FI Postings FI Doc #: 5100020105 (Invoice receipt for PO 4500010840/10)

DR 4021120 (Variance – PPV(Auto)) 138.00 DR 2110120 (GR/IR Reconciliation) 841.80 CR Vendor 979.80

3. Cumulative Inventory: The quantity of the cumulative inventory is the sum

of the beginning inventory and receipts. Since there is only an invoice receipt during the period, the cumulative inventory is the same as the beginning inventory. The unit price in the invoice was different from the beginning inventory, therefore the price of the cumulative inventory is calculated as follows.

Price Difference = (– 39.74) + 138.00 = 98.26 USD Price = (327.31 + 98.26)*100/209.106

= 203.52 USD 4. Consumption: No consumption during this period. 5. Ending Inventory: Same quantity as cumulative inventory since there is no

consumption. During the actual costing run after the end of period 4, (1) The entire price difference is allocated to the ending inventory by the single level price determination since there is no consumption during the period. (2) The entire price difference is accrued in period 4 (3) The beginning inventory for period 5 is revalued (standard price is changed from 156.53 USD to 137.52 USD). Consequently, a revaluation posting is booked in period 5. (4) The reversal posting for the price difference accrual adjusts for the revaluation while posting to the price difference account in period 5.

Steps (2) to (4) above take place during the ‘post closing entries’ step in the actual costing run after close of period 4. The FI postings mentioned in these steps are illustrated below. FI Postings In Period 4: FI doc #: 4700012425 DR 2110150 ML Accrual Adj 98.26 CR 4021320 ML Price Difference (Single level) 98.26 In Period 5: FI doc #: 4800001046 DR 4021020 Revaluation of standards 39.75 CR 1156020 Raw Material 39.75


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FI doc #: 4700012426 DR 4021320 ML Price Difference (Single level) 138.01 CR 2110150 ML ML Accrual Adj 98.26 CR 4021020 Revaluation of Standards 39.75 In Summary, for Period 4: Standard price 156.53 USD Periodic unit price 203.52 USD Current stock 209.10 KG Current stock value 327.31 USD Inv. value using periodic unit price 425.57 USD


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Period 5

In this period, the standard price is updated to 137.52 USD. This is different from the periodic unit price of period 4 (203.72 USD). As a result the entire price difference was not transferred to the beginning inventory in period 5. 1. Beginning Inventory: As mentioned before, the inventory is revaluated at the

beginning of the period with standard price of 137.52 USD. The change in material price resulted in a Preliminary Value becoming 287.56 USD. Result is a posting of 39.75 (-) USD to Revaluation Account. The price difference was adjusted to 138.01 (98.26 -(- 39.75)) USD.

2. No Receipts. Cumulative inventory same as beginning inventory. 3. No consumption during the period. 4. Ending Inventory: Same as cumulative inventory. In Summary, for Period 5: Standard price 137.52 USD Periodic unit price 203.52 USD Current stock 209.10 KG Current stock value 287.56 USD Inv. value using periodic unit price 425.57 USD


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Thus because of the revaluation, the inventory value (reported in financial statements) changed though the inventory value using periodic unit price remained unchanged from the previous period. A couple of things to note in this scenario:

• As mentioned at the very beginning of the scenario, the standard price has not been updated with the periodic unit price in either period 3 or 4. By not updating the standard price, the entire price difference for the period was not transferred to the inventory account. However the part of the price difference that is applicable to the inventory is accrued so that the net balance sheet and P&L effects are reflected correctly at month end.

• The goods receipt (GR) and invoice receipt (IR) not being in the same period affected the value of the periodic unit price. In this example, when the goods receipt happened, the price difference of (-)138.01 USD was spread over 726.20 KG of inventory and consumption. The impact was that the periodic unit price calculated (137.52 USD) was different from the standard (156.53 USD) by about 20 USD. In the next period, the invoice had an equal and opposite price difference (138 USD). But the inventory coverage was only 209.1 KG. Hence, instead of correcting the periodic unit price back to near the standard (156.53 USD), the new periodic unit price was calculated to 203.52 USD. If this price is used to update standard, it has the effect of distorting the cost of the product. Thus special attention has to be paid with respect to inventory coverage and inventory revaluation in situations where GR and IR are not in the same period.


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Scenario 2: Actual Costing for a Finished Material We are going to use material number 4546 [DION@ FR9300-00] in Plant US26 and analyze the material ledger transactions for this material for period 5. The basic principle involved in calculation of actual cost is the same as the last scenario. The additional features that you would notice in this scenario are:

• Price differences rolling up from components – this being a finished material, price difference from the components would roll up to this material when a multilevel price determination is done

• Transfer from another plant in the same company code – a price difference shows up in this case as the material has different standards in the sending and receiving plants

• Sales to inter-company customers (plant) and goods return. Sales to external customers.

Period 5

1. Beginning Inventory:


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• There has been a change in material standard price from 264.65 USD in period 4 to 264.28 USD in period 5. This has resulted in the inventory revaluation of 9.85 USD (Change in standard price * Quantity). Revaluation Value = (264.28 – 264.65)*2662.585/100 USD = (-) 9.85 USD

• The beginning inventory shows a price difference (304.01 USD). The system calculates the ‘price’ for the opening inventory as 252.86 USD/100KG taking the price difference of 304.01 USD into the calculation.

The FI postings associated with the revaluation and the reversal of the price difference accrued in the last period are done after the end of the last period as part of the actual costing run and the release of the planned standard price of the material.

2. Receipts: There are 3 line items under Receipts. All of them relate to a stock transfer from another plant in the same company code. ML document 1000297516 represents value of stock transfer and ML document 50000811134 represents value of price difference transferred.


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• ML document 1000297516 (2nd and 3rd line under receipt) represents the value of stock transfer from plant US35 based on the standard prices of the material in the receiving and sending plants. Standard price in plant US35 for material 4546 is 248.50 USD and in plant US26 is 264.28 USD. As the standard price is different in the two plants, values [(-) 258.82 USD and (-) 64.70 USD] show up under price difference in the material ledger for these lines (Difference in standard price * quantity of transfer). Let us see how these values are calculated for line 2 under receipts. Value of Material 4645 transferred from plant US35 = 248.50* 1640.189 USD = 4334.69 USD Difference in standard price for material 4645 between plants US35 and US26 = (248.50 – 264.28) USD = (-) 15.78 USD Quantity of material transfer in line 2 = 1640.189 KG Price Difference = 1640.189* (-)15.78 /100 KG = 258.82 USD FI posting

FI Doc #: 4900068952

DR 1152020 Finished Material 4075.87 (in plant US26) CR 1152020 Finished Material 4334.69 (in plant US35) CR 4021261 Var - Transfer 258.82

Price difference for line 3 is calculated similarly and a similar FI document is

generated.

• The other ML document 50000811134 is generated with the stock transfer. This document carries the price difference (USD 357.47) associated with the material in the sending plant to the receiving plant. This will be a part of the total price difference in the cumulative inventory in the receiving plant and can be distributed to consumption and ending inventory as part of the actual costing run at month end.

3. Cumulative Inventory: As before, this is a summation of the beginning

inventory and the receipts.

4. Consumption: • The consumption for this material in this period is sales to intercompany

customer (plant in Mexico) and sales to external customers. There is also a return from the intercompany customer. The sales are posted with a movement type of 601 (goods issue out of inventory) and the return with a movement type of 602.


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• None of the consumption transactions have any price difference. The reason is that these transactions took place with the current standard price.

Below is the FI posting generated from one of the consumption transactions (ML document 1000277078). Similar FI documents are generated from each transaction under consumption in this scenario. FI posting FI Doc #: 4900065321

DR 4011020 (COGS @ Standard) 1083.67 CR 1152020 Finished Material 1083.67

5. Ending Inventory: As part of the actual costing run, the price difference is apportioned between consumption and ending inventory in the ratio of the quantities by the single/multilevel price determination. As a result of this, out of (-) 270.06 USD variance, (-) 106.62 USD goes to consumption and (-) 163.44 USD goes to finished goods inventory. This (-)163.44 USD is accrued and postings done to the P&L to adjust the variances booked during the period. Two entries are


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made to the next period as part of the actual costing closing entries – one to revaluate inventory and the other to reverse the accruals and adjust price difference posting.

FI Documents

Period 5 FI doc #: 4700012519 Cr 2110150 ML Accrual – Adj 163.44 Dr 4021320 ML Price Diff (single) 529.31 Cr 4021330 ML Price Diff (multi) 365.87 Period 6 FI doc #: 4800001299 Dr 4021020 Revaluation of Standards 172.56 Cr 1152020 Finished Materials 172.56 FI doc #: 4700012520 Dr 2110150 ML Accrual – Adj 163.44 Cr 4021320 ML Price Diff (single) 356.75 Dr 4021330 ML Price Diff (multi) 365.87 Cr 4021020 Revaluation of Standards 172.56

The (-) 106.62 USD price difference [in the consumption line in the screenshot above] that is apportioned to consumption stays in the variance account in the P&L. We run another program to re-classify the price difference belonging to consumption other than sales (mainly scrap) into an inventory adjustment account. The functional area ‘COS Material Variance (MATV)’ is assigned to all the variance accounts. Thus, through functional area reporting, these remaining variances show up as an adjustment to cost of sales.


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Scenario 3: Actual Costing for a Raw material with Exchange Rate Difference We are going to use material number 2640 [Phthalic Anhydride, Molten] in Plant GB01 and analyze the material ledger transactions for this material for period 4. This scenario illustrates the actual costing when there is an exchange rate difference. The last two scenarios discussed had price differences, but all material transactions were in the currency of the company code. As a result there was no currency translation involved and consequently no exchange rate difference. In the current scenario, the company code currency is GBP but the material is procured from vendor 26728 [Exxon Chemicals Limited], who has order currency of EUR. The transaction currency is EUR. Due to variations in the exchange rate between EUR and GBP at the different times of material transaction, exchange rate differences appear in the material ledger. In this scenario we are going to focus on the exchange rate difference and how the actual costing run allocates the exchange rate difference. Period 4


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1. Beginning Inventory: • There is -.01 GBP exchange rate difference showing up in the beginning

inventory. This seems to be due to rounding differences. • Inventory is not revalued with a new standard price at the beginning of the period.

Hence, the price difference (USD -1838.42) brought forward from the last period is not transferred to inventory.

2. Receipts: There are a number of goods receipts (GR) and invoice receipts (IR) during this period for a number of purchase orders (PO). Let us analyze the GR and IR for PO number 4500014164. GR: Goods Receipt for 4500014164/10 There is a PPV of 2199.60 EUR (1482.32 GBP) on a Raw Material receipt of 15631.20 EUR (10530 GBP). There is no exchange rate difference at this point. FI Document FI doc #: 5000051790 (Goods Receipt for 4500014164/10) GBP


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DR 1156020 Raw Materials 10530.00 CR 2110120 GR/IR Reconciliation 9047.68 CR 4021120 Variance – PPV 1482.32 IR: Invoice Receipt for 4500014164/10 There is a PPV of 1989.00 EUR (1383.16 GBP) on a total vendor invoice of 18119.21 EUR (12600.20 GBP). There is a variance of 292.73 GBP due to a change in exchange rate between goods receipt and invoice receipt (Exchange rates changed on 3/25 and 4/24). FI doc #: 1000245659 (Invoice Receipt for 4500014164/10) GBP CR Exxon Mobil 12600.20 DR 2110120 GR/IR Reconciliation 9047.68 DR 4021120 Variance – PPV 1383.16 DR 6011260 FX Unrealized loss 292.73 DR Input tax 1876.63


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3. Cumulative Inventory: Includes beginning inventory and all receipts during the period. 4. Consumption: The consumption for this material is to production orders as an

ingredient for several other materials. Let us take the consumption of 904 KG of 2646 for manufacturing material 4877. The FI entry is as follows:

FI Document FI Doc#: 4900003823 GBP DR 4031020 Material Consumption 406.80 CR 1156020 Raw Material 406.80

The consumption for the period includes price difference and exchange rate difference. These were allocated during the actual costing run at the end of the period (the price determination step) based on quantities consumed vs inventoried at the end of the period. FI entries associated with that are discussed in step 5.


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5. Ending Inventory: The value of the ending inventory is the cumulative inventory less consumption during the period. • The price difference and exchange rate difference are calculated during the

single level price determination as part of the actual costing run. The price determination step apportions the total price and exchange rate difference (588.59- GBP and 1369.11 GBP) between consumption and ending inventory in the ratio of the quantities consumed vs. inventoried. Within consumption, the values are further allocated to the individual materials using material 2646 as an ingredient in the manufacturing process.

• During the ‘post closing entries’ step in the actual costing run, the price and exchange rate difference postings are made to the P&L to transfer a portion in inventory and these are accrued in the ML – Accrual adjustment account. During the same step, the accrual is reversed in the next period and postings are made to the price difference and exchange rate difference accounts based on material revaluation (change in the material standard price, which in this case changed from 45.00 GBP in period 4 to 41.89 GBP in period 5).

FI Document Period 4 FI Doc #: 4700001640 Dr 2110150 ML Accrual – Adj 115.44 Dr 4021320 ML Price Diff (single) 86.98 Cr 6011250 FX Unrealized gain 202.42 Period 5 FI Doc #: 4700001641 Dr 4021320 ML Price Diff (single) 1098.60 Dr 6011250 FX Unrealized gain 202.42 Cr 2110150 ML Accrual – Adj 115.44 Cr 4021020 Revaluation of Standards 1185.58 Revaluation Entry FI Doc #: 4800000056 Dr 4021020 Revaluation of Standards 1185.58 Cr 1156020 Raw Materials 1185.58


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Appendices

Appendix 1: Flow of Variances for Scenarios 1, 2 and 3


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Appendix II: Terminology Below we define expressions and terms that have been used in the document that we deem require additional explanation. The explanations used in this section are based on SAP On-line Help. Costing Sequence Exchange Rate Difference Material Ledger Settlement Multi Level Price Determination Periodic Unit Price Price Control Price Difference Single Level Price Determination

Costing Sequence

Costing Sequence is the sequence in which materials are costed during the actual costing run.

The step ‘determine costing sequence’ is performed before the single level price determination. In this step the system calculates the sequence that the costing run will follow.

The system shows a list of the manufacturing levels (for example, level 1 contains raw materials, level 2 contains semi-finished goods, and so on) with a hierarchical list of the materials that were processed by the system. This sequence results in the difference being rolled up from raw materials through semi-finished products to finished products during multilevel price determination.

Exchange Rate Difference

Exchange rate difference arises when the transaction is being carried out in a currency different than the company code currency. The exchange rate difference represents the change in the value of a material due to fluctuation in exchange rate at different points of time. For example, when there is a fluctuation of exchange rate between the time the PO is generated and the invoice is received, exchange rate difference results.

In Material Ledger, the exchange rate difference is shown in the ‘Material Price Analysis’ view of the Material Ledger (CKM3).

Material Ledger Settlement

The Material Ledger Settlement is synonymous with Actual Costing. This includes the procedure in material valuation using the material ledger in which the system:

• Valuates inventories of a material in multiple currencies • Calculates a new valuation price in multiple currencies


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• Posts differences that arise through transactions to material stock accounts where this is possible and, for multi-level material settlement, assigns them to consumption

Multi Level Price Determination

Multilevel price determination calculates the periodic unit price for a material. The standard price, the single-level differences cumulated in the period, the differences between planned and actual prices, as well as input material differences are all taken into account while calculating the periodic unit price.

A level is identified by a material and its associated procurement process. Multiple levels are the result of one material being used in another material. These multiple levels are reflected in the actual BOM.

In multilevel production, both single-level and multilevel price differences exist. If one material is used in another material, and single-level price differences exist for the input material, this results in multilevel price differences. In this way, differences are rolled up from raw materials through semi-finished products to finished products.

Periodic Unit Price

The periodic unit price is calculated by dividing the value of the material by the quantity of that material in inventory. It references the base unit of measure and price unit in the material master record. The price is recalculated when single-level or multilevel material price determination for the material is performed.

The periodic unit price is used in single-level and multilevel material price determination to valuate the materials for the closed period. For the current period, the material is still valuated using the standard price.

Price Control

Price control in SAP refers to whether the system is using Standard Price or Moving Average to valuate inventory, handle price variance and monitor price changes.

When using actual costing, only standard price is used as a preliminary valuation price in the current period. At the end of the period, an average price is calculated for the material using the actual costs incurred in that period. This average price is used to valuate the material stock in the period in question. Actual Costing/Material Ledger, therefore, combines the advantages of price control using the standard price and the moving average price.

Periodic unit price can be carried in up to three currencies and three valuation views.

Price Difference


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Price difference represents the difference in value of a transaction due to difference in the actual unit price of the material in the transaction from the standard price. This is shown in the ‘Material Price Analysis’ view of the Material Ledger (CKM3). Examples: Price difference at goods receipt = price at goods receipt*goods receipt quantity – standard price * goods receipt quantity Price difference at invoice receipt = price at invoice receipts*invoice quantity – price at goods receipt * goods receipt quantity

Depending on how the differences arise, they are booked to different accounts. The different accounts are Purchase Price Variance (PPV) Account, Process Variance Account and Transfer Variance Account.

Single Level Price Determination Single-level material price determination is used for calculating the periodic unit price for a material in actual costing/material ledger. This is a step in the actual costing run. During the period, the transactions take place at standard cost and the price differences are maintained in the material ledger. The single level price difference takes the standard price and the cumulative single-level differences of the period while calculating the periodic unit price. A level is identified by a material and its associated procurement process. Procurement processes are used to determine procurement costs and to present those costs. Single-level and multilevel procurement processes are differentiated according to different types of procurement and consumption of materials. Purchase Order, for example, is single-level procurement.

Single-level material price determination needs to be performed for all materials for each posting period, regardless of whether any material movements have occurred for the relevant materials. Single-level price determination is a prerequisite for multilevel price determination.



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Appendix III: Standard Material Ledger Reports SAP standard actual costing reports are identified in three categories:

• Object Lists providing overview information for specific analysis purposes • Detailed Reports providing reports for the analysis of the causes of price

changes and the development of material prices through multiple periods • More Reports providing reports that were not assigned to another category, for

example reports on price change and material ledger documents. Below are some reports identified by the actual costing team for inclusion in this document. A brief description of the suggested use for these reports is also provided from SAP standard documentation. Object Lists

1. Prices and Inventory Values (Transaction Code: S_P99_41000062 )

This report provides an overview of the prices and inventory values of materials in a period. In the basic setting, the inventories are grouped according to material type and subtotals of inventory values are displayed.

This report is also useful in the analysis of materials with regard to prices (for example, comparison of the standard price and the periodic unit price) or inventory values (for example, analysis of the price and exchange rate differences of the ending inventory).

Detailed Reports

2. Material Prices and Inventory Values Over Several Periods (Transaction Code: S_ALR_87013181)

This report displays material ledger data of multiple periods. The report can be used to analyze the change in a material’s price and inventory over a given period of time.

3. Material Price Analysis (Transaction Code: CKM3)

Material price analysis shows the valuated transactions and the results of material price determination with price and exchange-rate differences for a given material in a plant in a period within a price determination structure. Data is displayed according to process categories and procurement alternatives.

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4. Cost Components for Price (Transaction Code: MLCCSPD)

This report lists the cost component split for the price according to cost components across all levels of production.

You can display the actual cost component split in accordance with the period status in all set currencies and valuations. If you perform the actual cost component split after single-level price determination, you receive a display of the cost component split for the current periodic unit price. Before single-level price determination, the periodic unit price of the previous month is displayed.

5. Transaction History for Material (Transaction Code: S_ALR_87013182)

This report shows you the business transactions for a material over a period of time and can only be used with the material ledger.

The report gives a precise analysis of all business transactions that could be responsible for price changes within the Material Ledger. A history of all relevant transactions for a material is generated in the Material Ledger. Using this report, you can analyze the causes of the price changes and take the appropriate corrective measures.


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Appendix IV: Issues we faced in Actual Costing/Material Ledger Below are the issues identified by the actual costing team:

1. Price differences generated in the month with no cumulative inventory (or insignificant cumulative inventory). This is caused due to following reasons:

• PPV generated at the time of invoice receipt, which is posted in different month compared to GR

• Goods movement on the process order in a subsequent month after the order has been fully received

2. Incorrect actual cost component split due to rounding amounts in ending inventory.

3. Actual cost for current third party materials is incorrect.


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Appendix V: Original Proposed Outline

1. Material Ledger Usage for Actual Costing [The overall picture, high level diagram]

[Topics to be included: • Material Ledger Functions – Multiple currency, Actual Costing • Consolidating pertinent information from SAP Online help to provide

introduction to ‘Actual Costing’ in SAP]

2. Trace pertinent transactional flow in Material Ledger [Details of material ledger calculations, debit/credit posting to accounts using pertinent scenarios]

• Material ledger description and analysis

[Topics to be included: • Categories of data for a period in material ledger: Beginning

Inventory, Receipts, Cumulative Inventory, Consumption, Ending Inventory

• How material ledger calculates the periodic unit price – illustrate with example]

• Postings in Finance and PCA triggered by Material Ledger

[Topics to be included: • How PPV and production variances are allocated back to raw

materials, finished goods & P&L – illustrate with pertinent examples and debits/credits to different accounts

• Revaluation of inventory at month end & change of standard price – illustrate with pertinent example]

Appendix:

I. Terminology [Help to define critical terms associated with Actual Costing] II. Identify standard Material Ledger reports in R3

III. Some issues faced by us with respect to Material Ledger analysis & the solution approaches [Most issues related to understanding of Material Ledger would be addressed by the previous sections. Some specific issues would be discussed here e.g., reconciliation issues related to timing (different periods), currency translation, user error in upstream transactions. This is going to be a ‘living section’ with updates based on user experiences] **


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* This will be developed interactively with Business Owners, We propose a 1 hour meeting to identify the terms needing definition. ** Based on our closing experience and how these issues are being addressed.

Note: ‘Pertinent’ examples would need to be agreed on between Business and IT.

Actual Costing using Material Ledger.pdf

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