In today’s world business needs to maintain completive edge over competitor have become a key to the survival , where the focus is on both maintaining the cost efficiency, maintaining of the profit and passing some of these profit back to the customer in the form of incentives, promotions in order to gain more business.
Many companies would like to have their product costed at real time price i.e. moving average price. But when it comes to resources being highly volatile and it’s a fast moving product, business would like to have to be on their toes to get their product cost right and pass on that gain or loss forward in the supply chain. Material Ledger in SAP does help to certain extend but useful for product where manufacturing lead time is more. In case of food processing industry or retail were the processing time is minimal and incentives plays a vital role, so definitely the business would like to have proper data to evaluate which product provides them with real profit on a short period so that they can sell more of them.
So what is Moving Average Price? Challenges faced and how to overcome these
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.
1. In the current period, there are a number of goods receipts for a material that is valuated with the moving average price:
Goods receipt 1: 100 pieces at $1/pc.
Goods receipt 2: 100 pieces at $1.5/pc.
Goods receipt 3: 100 pieces at $2/pc.
Valuation data for the material:
Inventory quantity: 300 pieces Inventory value: 300 Moving average price: $1.5
2. A goods issue occurs for 120 pieces of this material.
Valuation data for the material:
Inventory quantity: 120 pieces Inventory value: 180 moving average price: $1.5
Valuation using a moving average price results in the following:
Goods receipts are posted at the goods receipt value.
The price in the material master is adjusted to the delivered price.
Price differences occur only in exceptional circumstances.
Manual price changes are usually unnecessary. However, they are possible.
If a material is assigned a moving average price (MAP), the price is automatically adjusted in the material master record when price variances occur. If goods movements or invoice receipts are posted using a price that differs from the moving average price, the differences are posted to the stock account; as a result, the moving average price and the value of the stock change.
What are the risks involved:
Following were the area of concern while implementing MAP.
- Month end settlement creates havoc and may impact price drastically.
- If labor and overheard cost needs to changed at the month end it would change the MAP prices drastically.
- If there are entry error, that would affect the MAP
How to mitigate the risk involved:
- Daily settlement of production order or process order if possible.
- Never allow negative stocks for materials carried at the moving average.
- Discipline in the process is the key for the success of MAP.
- Prices of the product need to be monitored diligently.
- Any error identified needs to be fixed immediately taking into consideration its downstream impact.
Advantages of the Moving Average Price:
• 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.
• Only in special cases are variances allocated to a price difference account in Financial Accounting rather than to the material stock.
Disadvantages of the Moving Average Price:
• Price used to valuate a material consumption is almost completely dependent on the time at which the goods issue is posted in the system
• Mistake entering data can cause immediate and unwanted changes in the material price.
Note 185961 – Moving Average Price Calculation
Note 79483 – MM-IM: Creating the moving average price
Note 209864 – Moving average price is disproportionately large