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Analysis of Material Ledger Transactions

for
Actual Costing

July 3, 2003

Analysis of Material Ledger Transactions for Actual Costing

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

Analysis of Material Ledger Transactions for Actual Costing

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.

Analysis of Material Ledger Transactions for Actual Costing

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.

Analysis of Material Ledger Transactions for Actual Costing

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.

Analysis of Material Ledger Transactions for Actual Costing

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.

Analysis of Material Ledger Transactions for Actual Costing

Analysis of Material Ledger Transactions for Actual Costing

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
CR Price difference Account

20.00
20.00

In current period,
DR Adjustment of Standard
CR ML Accrual Account

20.00
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.

Analysis of Material Ledger Transactions for Actual Costing

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.

Analysis of Material Ledger Transactions for Actual Costing

Actual Costing Process Flow


Actual Costing Run (Period End)

Purchase Price
Variances (PPV)
Raw Materials

- Puts PPV and Exchange Rate Variance


back to specific raw materials

(Receipts / Invoices)
Exchange Rate
Variances

-Puts Production Variance and Transfer


Variance back to finished/semi finished
goods

SAP Material
Ledger
Records Actual Values throughout
the period

Inventory Revaluation

Materials Viewed at Standard Cost


Inventory Valued at Standard Cost

Production
Variances

Transfer
Variances

Materials Viewed at Actual Cost


-----------------------------------Inventory Valued at Actual Cost

Finished/ Semi
Finished Materials
(Process Orders)
Adjustments posted to
inventory and consumption
to reflect actual value

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.

Analysis of Material Ledger Transactions for Actual Costing

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:

10

Analysis of Material Ledger Transactions for Actual Costing

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.

11

Analysis of Material Ledger Transactions for Actual Costing

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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Analysis of Material Ledger Transactions for Actual Costing

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)
CR 4021120 (Variance PPV(Auto))
CR 2110120 (GR/IR Reconciliation)

979.81
138.01
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)
CR 1156020 (Raw Materials)

13

809.41
809.41

Analysis of Material Ledger Transactions for Actual Costing

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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Analysis of Material Ledger Transactions for Actual Costing

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)
CR 2110150 ML Accrual Adj

39.74
39.74

In Period 4:
FI Doc # : 4700010234
DR 2110150 ML Accrual Adj
CR 4021320 ML Price Difference (Single level)
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

15

39.74
39.74

Analysis of Material Ledger Transactions for Actual Costing

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.

Formatted: Bullets and Numbering

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.

Formatted: Bullets and Numbering

Price difference = Price at Invoice Receipt* Quantity Price at Goods Receipt


*Quantity
= 979.80 841.79 USD
= 138.01 USD

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Analysis of Material Ledger Transactions for Actual Costing

FI Postings
FI Doc #: 5100020105 (Invoice receipt for PO 4500010840/10)
DR 4021120 (Variance PPV(Auto))
DR 2110120 (GR/IR Reconciliation)
CR Vendor

138.00
841.80
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
CR 4021320 ML Price Difference (Single level)
In Period 5:
FI doc #: 4800001046
DR 4021020 Revaluation of standards
CR 1156020 Raw Material

17

39.75
39.75

98.26
98.26

Analysis of Material Ledger Transactions for Actual Costing

FI doc #: 4700012426
DR 4021320 ML Price Difference (Single level)
CR 2110150 ML ML Accrual Adj
CR 4021020 Revaluation of Standards

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

18

138.01
98.26
39.75

Analysis of Material Ledger Transactions for Actual Costing

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
19

Analysis of Material Ledger Transactions for Actual Costing

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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Analysis of Material Ledger Transactions for Actual Costing

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:
21

Analysis of Material Ledger Transactions for Actual Costing

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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Analysis of Material Ledger Transactions for Actual Costing

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
CR 1152020 Finished Material
CR 4021261 Var - Transfer

4075.87
4334.69
258.82

(in plant US26)


(in plant US35)

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.
23

Analysis of Material Ledger Transactions for Actual Costing

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)
CR 1152020 Finished Material

1083.67
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
24

Analysis of Material Ledger Transactions for Actual Costing

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
Dr 4021320 ML Price Diff (single)
Cr 4021330 ML Price Diff (multi)

163.44
529.31
365.87

Period 6
FI doc #: 4800001299
Dr 4021020 Revaluation of Standards
Cr 1152020 Finished Materials
FI doc #: 4700012520
Dr 2110150 ML Accrual Adj
Cr 4021320 ML Price Diff (single)
Dr 4021330 ML Price Diff (multi)
Cr 4021020 Revaluation of Standards

172.56
172.56

163.44
356.75
365.87
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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Analysis of Material Ledger Transactions for Actual Costing

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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Analysis of Material Ledger Transactions for Actual Costing

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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Analysis of Material Ledger Transactions for Actual Costing

DR 1156020 Raw Materials


CR 2110120 GR/IR Reconciliation
CR 4021120 Variance PPV

10530.00
9047.68
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
12600.20
9047.68
1383.16
292.73
1876.63

CR Exxon Mobil
DR 2110120 GR/IR Reconciliation
DR 4021120 Variance PPV
DR 6011260 FX Unrealized loss
DR Input tax

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Analysis of Material Ledger Transactions for Actual Costing

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
406.80
406.80

DR 4031020 Material Consumption


CR 1156020 Raw Material

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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Analysis of Material Ledger Transactions for Actual Costing

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
Dr 4021320 ML Price Diff (single)
Cr 6011250 FX Unrealized gain

115.44
86.98
202.42

Period 5
FI Doc #: 4700001641
Dr 4021320 ML Price Diff (single)
Dr 6011250 FX Unrealized gain
Cr 2110150 ML Accrual Adj
Cr 4021020 Revaluation of Standards

1098.60
202.42
115.44
1185.58

Revaluation Entry
FI Doc #: 4800000056
Dr 4021020 Revaluation of Standards
Cr 1156020 Raw Materials

1185.58
1185.58

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Analysis of Material Ledger Transactions for Actual Costing

Appendices

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

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Analysis of Material Ledger Transactions for Actual Costing

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Analysis of Material Ledger Transactions for Actual Costing

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Analysis of Material Ledger Transactions for Actual Costing

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
Material Ledger Settlement
Periodic Unit Price
Price Difference

Exchange Rate Difference


Multi Level Price Determination
Price Control
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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Analysis of Material Ledger Transactions for Actual Costing

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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Analysis of Material Ledger Transactions for Actual Costing

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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Analysis of Material Ledger Transactions for Actual Costing

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 materials 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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Analysis of Material Ledger Transactions for Actual Costing

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 singlelevel 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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Analysis of Material Ledger Transactions for Actual Costing

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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Analysis of Material Ledger Transactions for Actual Costing

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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Analysis of Material Ledger Transactions for Actual Costing

* 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.

41