Requirement for Material Ledger by Company
In this blog post, we will see why Material ledger is required by the company to do the actual costing. So we will be discussing the Price control and inventory valuation without ML by taking several scenarios.
Material Ledger is SAP sub-ledger that collect transaction data for material movement in multiple currencies or multiple different approaches which forms the basis of actual costing. But in this blog post we will not talk about definition, configuration or functionality of Material ledger rather we will understand why Material Ledger implementation is required by some companies.
Before starting discussion with example, we should know what is Price control in material master. Price control defines the way system does material inventory valuation and it is of two types:
- Standard Price (S) : Material is valuated at constant price over a period of time
- Moving Average Price (V) : Material price recalculated after each GR and IR.
Lets explore each of them respectively followed by scenario
1. Standard Price:
Example: Lets consider you have raw material RM with standard price 10 rs per unit. You create PO for 100 units of RM with PO price as 12 rs per unit
Then you receive 100 units in inventory and accounting entry will take place on receipt
Now Vendor send the invoice with the price of 11 rs per unit for PO based 100 unit
Now if material is issue for consumption it will be issues at 10 rs per unit but it can be observed that actual price of material is 11 rs per unit
Therefore, standard price is unable provide expected actual cost of material
2. Moving Average Price (V):
Here we will take two example to understand MAP in a better way
Example 1: lets consider you have raw material RM where price control is V . You create PO for 100 units with PO price 12 rs per unit.
Now you receive vendor invoice for 100 units with price as 11 rs per unit
in above example MAP values changes and actual price of material is achieved
Now we will take one complex scenario
Example 2: Lets consider you have raw material RM.
Suppose you have PO 1 for 100 units with PO 1 price set as 13 rs per unit and you have another PO 2 for 100 units with PO 2 price set as 15 rs per unit
Now you receive 100 units of PO 1 and PO 2 respectively making your total inventory 200 units
Now you have a Good issue of 100 units of RM based on MAP.
(1300 + 1500) / 200 = 14 rs per unit
you enter vendor invoice for PO 1 related to 100 units at the price of 20 rs per unit. Total 100 units are available at the time of invoice receipt.
Calculation- (20 – 13)*100 units = 700 rs
Now you enter invoice of PO 2 related to 100 units with price 20 rs per unit.
calculation- (20 – 15)*100 units = 500 rs
as you can see that price difference is absorbed by inventory in case of MAP
in above image you can see that MAP is 26 rs per unit because inventory absorbed all the price variance. This caused MAP to have incorrect value of 26 rs per unit even both the invoices have 20 rs per unit price.
Therefore, we can say that even MAP does not meet actual cost of material as expected.
By reviewing above mentioned examples it can be concluded that both Standard Price and Moving Average Price may fail in providing actual cost of raw material. When neither method (Standard price and Moving average price) can be used to have actual cost of material, there we have Actual costing/Material ledger as a option.
This is my first blog post and tried to do my best. Kindly tell me if you have any suggestion as feedback is always welcome.
- all the images attached are own by me
- referred Book “Actual costing with SAP Material Ledger” by Vanda reis . this book explained Actual costing/Material ledger in detailed and in simple manner.