FAQ’S on Actual Costing & Materials Ledger

Actual Costing is a highly sophisticated and integrated controlling concept. For a successful implementation project it is of essential importance to understand the impact of this function. This page is to give you answers to the most frequently asked questions. Q. Not Distributed Line A. After the multi-level price determination, a line "not distributed" appears in the material price analysis: price differences are not taken into account for the price determination and are not distributed to consumption or ending inventory. Here's the explanation why this is correct and how you can avoid it.

A. After multi-level price determination, a line "not distributed" appears in the material price analysis. Read here why and how this is happens: The Material Price Analysis shows a "Not Distributed" line - what is that? Posting Examples External Procurement Internal Production Background, Helpful Information Workarounds The Material Price Analysis shows a "Not Distributed" line - what is that? Actual Costing follows various rules, among which are the following two: Only costs that are covered by the inventory are assigned to the material. Costs that are not covered by the inventory remain as price differences. If in a period values are posted for a quantity larger than the cumulative quantity, only a portion of the values is distributed to material. The portion that is not distributed to material is displayed in the Material Price Analysis in the line "Not Distributed" (Figure 1). This ensures that the price determination considers only values that belong to the period's cumulated quantity (stock coverage). Internally, the calculation of the Not Distributed line is controlled with a price limiter quantity.

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FAQ’S on Actual Costing & Materials Ledger

Figure 1

Posting Examples The Not Distributed line occurs in a number of situations. The two examples below explain the concept of and the need for it. External Procurement You realize external procurement with purchase orders. In the current period, you buy and receive a total of 100pc of a raw material (that is, you post the goods receipts and the invoices). As the beginning inventory of the period is zero, the cumulative inventory is 100pc. At the end of the period, you receive further invoices for the purchased goods: Your forwarding agent invoices the shipments. The Custom's invoices the import duties. Tax Authorities invoices Luxury Tax. To post these invoices, you use the function "Debit/Credit Material" (MR22) - you subsequently debit the quantity the invoices refer to: 100pc each time. As you enter the reference quantity (100pc) with each posting you realize, the price limiter quantity increases to a total of 300pc: 100pc of the shipment, 100pc of the duties, and 100pc of the tax. During price determination, Material Ledger finds that the price limiter quantity exceeds the cumulative quantity of that period (100pc). It prorates the values posted with Debit/Credit Material: Two thirds of the value are not covered by stock and thus are categorized as "not to be distributed". You can see this value in the line Not Distributed.

In-house Production

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FAQ’S on Actual Costing & Materials Ledger

In period 1, you create a production order for 100pc of a finished material. Of this quantity, you finish and take on stock 90pc in period 1, all of which are sold immediately. The ending inventory of period 1 is zero, as is the beginning inventory of period 2. The remaining quantity of the production order is finished and taken on stock in period 2. No other goods receipts are posted during this period; the cumulative inventory is 10pc. Only now you settle the order and post the variances of the production order (100pc) to the material; posting date is in period 2. Theses variances show as single-level price differences. During the order settlement, Material Ledger has set the price limiter quantity to 100pc (the quantity for which the order was settled). During price determination of period 2, Material Ledger finds that the price limiter quantity exceeds the cumulative quantity (10pc) and prorates its value: the value that belongs to the 90pc which were taken on stock and sold in the previous period is displayed in the Not Distributed line. If the whole amount of price differences would be considered for the price determination, incorrect values would be incorporated into the price. Similar postings occur with external procurement, when materials are received and used up in one period, but invoiced in a second.

Other examples for the Not Distributed line can be found in Note 323719

Background, Helpful Information The following statements help to understand the Not Distributed Line:

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FAQ’S on Actual Costing & Materials Ledger

The price limiter is build up by transactions which post only values (no quantities), such as Order Settlement. Invoice Verification. Debit/Credit Material. Not Distributed values are calculated during single-level price determination The Not Distributed line is located above the "Cumulative Inventory", and contains only price/exchange rate differences. The line is not the same as the Not Allocated line, which is located in the category "Consumption" below the Cumulative Inventory. As with all other data above the Cumulated Inventory, Not Distributed values effect the price determination. After Period End Postings, the Not Distributed values remain on the price difference accounts; they are not distributed neither to ending inventory, nor to consumption. You can not correct the not distributed value with a correction posting with debit/credit material, as this correction posting would again build up the price limiter. Workarounds The calculation of the Not Distributed line is not a bug: it is essential for the correct calculation of the Periodic Unit Price of a material. Especially in a multi-level environment (Multi-Level Actual Costing), the effect of incorrect material prices can be hazardous: Prices are not only used for the valuation of the individual materials but are rolled up throughout the materials´ quantity structures. However, in some situations you might want to control or correct the Not Distributed values. To do that, you have the following possibilities: With external procurement, use the Logistic Invoice Verification / document type subsequent debit instead of the transaction Debit/Credit Material. The Logistic Invoice Verification does not alter the price limiter quantity to a value higher than the invoice value. If you use the transaction Debit/Credit Material, enter a quantity of zero manually. Note 335670 will change the default value from current quantity to zero. If for you are in a repetitive manufacturing scenario and use periodic settlement (instead of full settlement) price differences are posted to material in each period, and to a certain degree you avoid the situation described above. If you have Not Distributed values and want to analyze how they are calculated, you can apply Note 324754. This note describes a report which lists all documents that effect the calculation of the price limiter quantity of a material. If you find that the price limiter should be modified to include or exclude further values, you can apply the report described in Note 325406.

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FAQ’S on Actual Costing & Materials Ledger

Note 207189 describes the +/- sign of the Not distributed values.

Q. Changing Valuation Classes in a Actual Costing Scenario You want to change the valuation class of a material. If you use Actual Costing, if you to carefully choose the correct movement types, adjust the update structure of Material Ledger and choose the right point in time. A. If the valuation class of a material is to be changed in a scenario in which Actual Costing (Material Ledger) is used, the following should be considered: changes to the update structure of Material Ledger. the point in time in which the change is realized. Changes to the update structure of Material Ledger In order to change the valuation class of a material, the inventory quantity has to be zero; goods movements to achieve this must not influence the price determination at period end. The following illustrations demonstrate the problem and solution. Figure 1 shows the periodic activities: A goods receipt causes price differences of 1,000 USD, resulting in a periodic unit price of 11.00 USD. Multi-level price determination distributes the price differences to the ending inventory (400 USD) and to consumption to production (600 USD). Material Preliminary valuation price Demo CD 10 USD Preliminary Value 10,000 10,000 10,000 6,000 6,000 4,000

Quantity Beginning Inventory Receipts Purchase Cumulative Inventory Consumption Production Ending Inventory 0pc 1,000pc 1,000pc 1,000pc 600pc 600pc 400pc

Price Differences Price 1,000 1,000 1,000 600 600 400 11.00 11.00 11.00 11.00 11.00 11.00

Figure 1: Price Analysis after Multi-Level Price Determination

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FAQ’S on Actual Costing & Materials Ledger

Figure 2 shows the use of a unspecified goods issue to zero the stock and the subsequent goods receipt to build it up again: The cumulative quantity is 2,000 pc, and price differences remain untouched - resulting in a periodic unit price of 10,50 USD. This Periodic Unit Price is now the base of the distribution of the price differences: the goods issue used to zero the stock is a single-level consumption and will not be revaluated - 500 USD remain undistributed (on the price difference account). the values distributed to consumption (production) and to ending inventory are wrong. Material Preliminary valuation price Demo CD 10 USD Preliminary Value 20,000 10,000 10,000 20,000 16,000 10,000 6,000 4,000

Quantity Beginning Inventory Receipts Purchase Procurement Cumulative Inventory Consumption not distributed Consumption Production Ending Inventory 0pc 2,000pc 1,000pc 1,000pc 2,000pc 1,600pc 1,000pc 600pc 400pc

Price Differences 1,000 1,000 1,000 800 500 300 200

Price 10.50 11.00 10.00 10.50 10.50 10.50 10.50 10.50

Figure 2: Price Analysis after Multi-Level Price Determination and GR´s + GI´s without adjustment to update-structure

To prevent this problem, you can adjust the update structure of Material Ledger and thereby control that specific single-level consumptions appear in the category “other receipts/consumption”. This category is located above the line Cumulative Inventory, so that goods issue and goods receipt that are required for the change of the valuation class even each other out and therefore do not effect the price determination (Figure 3). Material Preliminary valuation price Demo CD 10 USD

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Quantity Beginning Inventory Receipts Purchase Procurement Other Receipts/Cons Consumption Cumulative Inventory Consumption Production Ending Inventory 0pc 2,000pc 1,000pc 1,000pc -1,000pc -1,000pc 1,000pc 600pc 600pc 400pc

Preliminary Value 20,000 10,000 10,000 -10,000 -10,000 10,000 6,000 6,000 4,000

Price Differences 1,000 1,000

Price 10.50 11.00 10.00 10.00 10.00 11.00 11.00 11.00 11.00

1,000 600 600 400

Figure 3: Price Analysis after Multi-Level Actual Costing; Goods Issue with adjustment of update structure

Steps in Customizing 1. *Copy the desired movement type (single-level consumption). Example: copy movement type 201 (consumption to cost center) to movement type 901. 2. Define a Movement Type Group Example: create movement type group “01” and name it ”Valuation Class”. 3. Assign the desired movement type to the movement type group. Example: assign movement type 901 to movement type group “01”. 4. Maintain the update-structure which you use for actual costing. Example: maintain update-structure 0001 with the following entry 5. Movement Type Process Category Category Description Group VK VP Cons. to Cost 01 Valuation Class Other Receipts/Cons. Center 6. **Create a user-defined name for consumptions. Example: 7. Controlling Level User-Defined Name 0009 Cons/ValClas 8. **Assign user-define names for consumptions. Example:

Text Consumption / ValClasses

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FAQ’S on Actual Costing & Materials Ledger

Process Category VK

Description Cost Center

Movement Type Group 01

Controlling Level 0009

Text

Consumption / ValClasses With this set-up, all postings that use the movement type 901 will be assigned to movement type group 01. This movement type group is assigned to the category Other Receipts/Consumption and displayed as a consumption for the change of valuation class.
* alternatively to defining an own movement type, you can temporary apply the described changes to a standard movement type. ** steps not necessary; they serve only for more transparency in the Material Price Analysis.

Point in time in which the change of valuation classes should be realized Financial Accounting requires transparency of account balances at any time. As the change of valuation classes typically is combined with a change in the account determination (e.g. stock and price difference accounts), and as the account determination impacts postings of Material Ledger, it is of high importance to choose the correct point in time in which the change of valuation classes is carried out. The following example demonstrates why it is recommended to do so between the period end postings of actual costing for the previous period and the shift to the next period.

Figure 4: Point in time for the change of the valuation class

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FAQ’S on Actual Costing & Materials Ledger

Period end closings for period 0 are carried out; after that, material related postings can only be realized for period 1 (1). Before any changes to valuation classes are realized, normal periodic goods receipts are entered; they debit the stock and the price difference account (2). One of the prerequisits for the change of valuation classes is that the stock quantity is zero, which is achieved by posting goods issues (see above). This action balances the “old” stock accounts that are set up in the account determination (customizing); the price difference accounts are not touched. The valuation class can then be changed. The material is taken back onto stock; this goods receipt debits the new stock account (3).

Further goods receipts are posted (4).

The new posting period is opened (5). A goods receipt for the previous period is entered and posts onto the new stock account. If for price differences a valuation class depended key is defined, new price differences accounts will be use as well (6).

Material Ledger handles the period end activities of Actual Costing. In the given example, the material is revaluated: The new stock account is debited, and the new price difference account for single-level differences (transaction key PRY) is credited. Note that in order to consolidate the price difference accounts (transaction keys PRD, PRY, and PRV), you have to include the balances of the old PRD accounts (7).

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Remarks The valuation class of a material is period depended. This is relevant if the valuation class is changed after period shift and before closing entries: If during closing entries of actual costing the valuation class in the previous period differs from the valuation class in the current period, the revaluation of the previous period and the correction posting of the current period will be realized on different accounts. Apply Notes 0362411 (Valuation Classes and Material Ledger) and 0160970 (Purchase/Production Orders), and check the OSS for others.

Q. Transaction Based Price Determination (Key "2") for Raw Materials? Actual Costing only works for materials for which single-/multi-level price determination is set (key "3") - and consequently are standard price controlled. Is it reasonable to choose transaction based price determination and moving average price control for raw materials? It is a prerequisite that for materials, for which actual price shall be determined, the price determination key is set to "single-/multi-level" ("3", in material master). For all these materials, the price control has to be set to standard price. Before using Actual Costing, many companies have chosen the moving average price as price control for raw materials. These companies now raise the question whether they have to change the price control for raw materials when Actual Costing is implemented. This page gives you some background information to internally discuss the questions. The list of arguments is not complete, and some arguments might not be true for your business. Technical Background During the flow step "Selection" in a costing run, all materials with price determination "3" are selected for single- and multi-level price determination; all other materials are disregarded. Thus, if you accepted to apply Actual Costing only for semifinished and finished materials, it is no problem to use the moving average price (and transaction based price determination) for raw materials. However, you should take into account various business aspects if you decide to do so. Business Aspects Page 10 of 19 http://managementaccountant.blogspot.com

FAQ’S on Actual Costing & Materials Ledger
As described above, it is possible to use transaction based price determination and moving average price for specific materials, however, these materials would not be included in a costing run. It is for business and controlling reasons why for raw materials single-/multi-level price determination should be used, the following statements will make this reasonable.

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FAQ’S on Actual Costing & Materials Ledger
V-Price Control is not the same as Actual Costing The functionality Actual Costing is to determine actual periodic material prices in a multilevel production environment. The tool to do so is Material Ledger, which is based on the concept of recording preliminary values and differences during the period and of distributing values at the end of a period. This logic differs from the V-Price logic in ways and means: Only data that is known at the point of time of a posting can be considered ("transaction based"), a reference to correct periodic values and / or quantities is not given. As a result, postings may be wrong (i.e. price difference postings where not necessary, wrong price calculations) some times, but will always be different from the correct values determined by Actual Costing. Benchmarking in Cost Object Controlling The consequential use of standard prices allows performance controlling of internal processes without obnubilating them with external factors like price fluctuations. The values of cost objects (i.e. production orders, or product cost collectors) become more transparent and are comparable over a long range of time - as long as the standard prices remain unchanged. This supports benchmarking methods for internal processes. Controlling by Area of Responsibility With Actual Costing, it is possible to better differentiate responsibilities of costs and variances.

With standard price controlled materials, external factors like price fluctuations do not obnubilate internal processes; areas of responsibilities like procurement and production are separeted more clearly: Price differences of materials are not shown on cost objects but rolled up directly to the next material level. With the possibility apply actual activity prices directly in Material Ledger instead of revaluating cost objects, differences from cost center accounting are also passed on directly to materials instead of obnubilating cost object´s performances.

No influence on Periodic Unit Price The Periodic Unit Price (actual price of a material for a closed period) is determined by taking into account both preliminary values and price differences between preliminary and actual values. Example: The actual price of a procured material is 30 USD; 10pc are received.

Case 1: Standard Price: 10 USD The preliminary value of the total quantity is 100 USD, the value of price differences is 200 USD. Periodic Unit Price: (100 USD + 200 USD) / 10 pc = 30 USD Case 2: Standard Price: 25 USD http://managementaccountant.blogspot.com

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FAQ’S on Actual Costing & Materials Ledger
Recommendation This list of pro-statements is not complete, neither can the arguments be generalized. But for the above listed reasons, SAP recommends to use Standard Price and single-/multi-level price determination for raw materials, if you decide to make use of Actual Costing / Material Ledger. Q. Releasing Standard Price for Materials with single- / multi-level Price Determination If a material's price determination is set to single-/multi-level, you have to obey some rules for the release of new standard price. A. No matter if you want to change standard prices frequently or just once a year: Actual Costing sets some restrictions to when this can be done. Restrictions Whether or not it is possible to release a new standard price depends on a material's period status, which is controlled by Material Ledger. You can release a standard price if the material has one of the following status: New objects The material is was created in this period. No postings have been realized. Period opened By opening a new period in Materials Management, Material ledger master data was created for the posting period. Price change completed The valuation price of the material was changed in this period. With any other period status, it is not possible to release a new standard price. All valuation relevant postings (e.g. goods movements, order settlements, material ledger closing of the previous period) change the period status so that a price release is not possible. The right way If you want to release a new standard price, you should do so immediately after a period shift; at this point in time, the status of all materials is "period opened", and a price release is possible. To prevent that postings are realized before the new prices are released, you can Page 13 of 19 http://managementaccountant.blogspot.com

FAQ’S on Actual Costing & Materials Ledger
activate the dynamic price release. The system will then automatically release a new price with any valuation relevant transaction (i.e. goods movement, order settlement, or invoice verification). The dynamic price release is activated in customizing of Material Ledger; the activation is carried out by plant. If more than one valid future price exits, the prices are handled with the following priority: 1. Marked standard cost estimate 2. Manually maintained future valuation price Note that if a material is not touched during the whole period, the future price will not be released unless you manually do so; hence, the dynamic price release is no substitution for the traditional price release! Also note that if dynamic price release is activated, and the period status of a material does not allow the price release, the posting that triggers the dynamic price release will give out an error message. This case can occur when you mark future prices with a validation date in the middle of a month. The Periodic Unit Price as a new Standard Price If you want to use the periodic unit price as a new standard price, you can typically do so only with the delay of one period: Normally, period end activities for a period are carried out after postings are realized for the next period. In this case, the period status of the materials does not allow the immediate release of a new price; the periodic unit price can only be released for the period next but one. The following illustration explains this scenario:

1. Period 2 is opened; material's status is "period opened". 2. Postings for period 2 are realized, the status of the material changes to Page 14 of 19 http://managementaccountant.blogspot.com

FAQ’S on Actual Costing & Materials Ledger
"quantities and values entered"; a price release in period 2 is no longer possible. Period end activities for period 1 are carried out; the periodic unit price for period 1 is determined and marked as a future valuation price for period 3. Period 3 is opened; material's status is "period opened". the marked future price is released, and the period status changes to "price change complete". Postings for period 2 are realized, the status of materials changes to "quantities and values entered"; a price release in this period is no longer possible. Period end activities for period 2 are carried out; the periodic unit price for period 2 is determined and can be marked as a future valuation price for period 4.

3. 4. 5. 6.

What you should never do The above mentioned restrictions apply for all materials with single-/multi-level price determination ("3"); for materials with transaction based price determination ("2"), the traditional rules for price releases are valid. Please note that you must not under any circumstances switch the price determination key from "3" to "2", release a future price, and then change the price determination key back to "3"! Actual Costing for that period will result in wrong results, as required data is lost during the changes; further, the material price analysis of Material Ledger will not display the correct / complete data. You can not repair or recreate the damaged data and will miss a whole period of Actual Costing. Q. WIP in an Actual Costing Scenario The way Work in Process (WIP) is determined does not change when you activate Actual Costing - but you should know about some issues! How can I calculate WIP when I use Actual Costing? If you are using Actual Costing and want to calculate WIP, you apply the standard functionalities; there is no special way or procedure for the combination of Actual Costing and WIP. For determining the most accurate WIP value, we recommend to calculate WIP periodically at target costs. In that case, the accuracy of the target cost calculation depends on the degree to which the cost estimate (bill of material, routing) reflects the actual costs, as the most recent cost estimate is used for the calculation.

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When Actual Costing is used and WIP occurs, the rolling up of price and exchange rate differences may under certain circumstances lead to unexpected results. Two different scenarios are to be distinguished: Process (production order, ...) with WIP and output quantity. Process with WIP but without output quantity. Scenario1: Process with WIP and output quantity. Bill of Material For the production of 100 pieces of a finished material, 100 pieces of a raw material are required (Figure 1). Production At period end, the production order is not completed: Though 100 pieces of the raw material are taken from stock, only 90 pieces are produced. 10 pieces of the raw material are still on the production line (WIP) (Figure 2).

Fig1

Fig2

During the period, the Material Ledger collects variances for the raw material ∆ between its planned and its actual price. At the end of the period, these variances are rolled up to the finished products.

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FAQ’S on Actual Costing & Materials Ledger
Expected Postings The roll-up one would expect would assign price differences both to the finished material and WIP. This assignment is expected in the ratio in which the raw material is used up for the delivered goods and is still on the production line (Figure 3). Actual Postings However, during the period, Material Ledger is updated based on goods movements from the point of view of materials. It interprets that the whole quantity of issued raw materials (100 pieces) was used for the production of the delivered goods (90 pieces). As a result, the price differences from 100 pieces raw materials are rolled up to 90 pieces finished goods (Figure 4).

Fig3

Fig4

Scenario2: Process with WIP but without output quantity. Bill of Material For the production of 100 pieces of a finished material, 100 pieces of a raw material are required. (Figure 5). Production At period end, no goods are delivered to stock. The whole quantity of issued raw materials (100 pieces) is WIP (Figure 6).

Fig5

Fig6

During the period, the Material Ledger collects variances ∆ for the raw material between its planned and its actual price. At the end of the period, these variances are rolled up to the finished products.

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Expected Postings The roll-up one would expect would assign price differences which belong to the issued raw materials to WIP (Figure 7). Actual Postings However, Actual Costing can only revaluate multi-level consumption, which in this example does not exist: though the process has input material, no output material is produced. As a result, the price differences from 100 pieces raw materials remain on the price difference account (Figure 8).
Fig7 Fig8

Recommendation. Currently, no solution for obtaining the expected postings is being developed. Release History of Actual Costing / Material Ledger Material Ledger was first available with Sap's Standard Release R/3 4.0. Since then, new functionality was added with each release, culminating in the Actual Cost Component Split in Release 4.6c. Get the details.

Material Ledger was first available with Sap's Standard Release R/3 4.0. Since then, new functionality was added with each release, culminating in the Actual Cost Component Split in Release 4.6c. Release 4.0 Material-Ledger for the first time is general available. Single-level actual costing with Material Ledger. Brazil only: Availability of CUSTOS, and integration with Material Ledger. Release 4.5 Development News Multi-Level actual costing allows roll-up of variances. Single-level calculations for valuated sales order and project stock. Brazil only: Material-Ledger plus specific report replace CUSTOS. Page 18 of 19 http://managementaccountant.blogspot.com

FAQ’S on Actual Costing & Materials Ledger
Release 4.6b Development News Iterative calculation of cycle processes. Materials can be revaluated with actual activity prices during multi-level price determination. Full multi-level functionality for sales order stock and project stock. Release 4.6c Development News Actual cost component split. Integration with CO-PA. Logistic invoice verification closes gaps to old invoice verification Remaining Gaps after Release 4.6c Revaluation of single-level consumption (e.g. to cost center, sales order, cost object hierarchy) is not possible. Revaluation of WIP with actual material prices is not possible. No actual costing for active ingredient materials available. Material Ledger can not be activated in Retail Systems.

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