REALISE THE POTENTIAL OF SAP MATERIAL LEDGER

TABLE OF CONTENTS

MATERIAL LEDGER OVERVIEW 3

MATERIAL LEDGER VALUATION 12

8 TRADITIONAL VALUATION APPROACHES

19 ACTUAL COSTING

MATERIAL LEDGER OVERVIEW

Does your Organisation want to value Inventories in multiple currencies in real-time?

Does your Organisation want to value Inventories at Standard Cost and also want to evaluate Inventories at Moving Average Cost?

Does your Organisation want to amortize purchase and production variances over the life of the Inventories?

Does your Organisation want an effective Transfer Pricing mechanism between your various businesses within the same legal entity? (covered in a separate presentation)

If you have answered yes to any of the above, then implementing SAP Material Ledger will automate the process and significantly improve productivity for your Organisation.

Factors driving the implementation of Material Ledger

Multiple Currency Allows Inventory values and Inventory transactions to be valuated in local currency and

group currency

Multiple Valuation Combine the benefits of Standard Price Control for preliminary valuation and Moving

Average Price Control for Balance Sheet valuation

Enable accurate periodic valuation

Settle proportionate price variances to period end inventories

Roll up price variances throughout the production process

Enable Transfer Pricing for intra-company transfers

Material Ledger : Features

What Is Material Ledger?

The term "Material Ledger" is a misnomer; it is not a "financial" Ledger but a capture-and-report mechanism of Inventory values

It is an enhanced sub-ledger for Materials. Material Ledger tables are the base tables that capture Material valuation data like goods movements, price changes, variances.

If Material Ledger is set up for multiple currencies and these currencies are aligned with currencies in Financial Accounting, then Material Ledger values reconcile with Financial Accounting values in all aligned currencies.

Multiple Currency Views Of Material Master

Activating Material Ledger (ML) allows you to view Material Master Inventories and transactions in multiple currencies. It is recommended to map FI and CO currencies to ML. This will allow easy reconciliation between the various ledgers. In the above example, company code currency is the legal view and group currency is used for group costing and profit center (Transfer Price) view

ML generates 6 views: • current period/ current year• previous period/ current year• Last period/ previous year• Future Costing Run• Current Costing Run• Previous Costing Run

In this example, all Material movements post in 2 currencies (EUR, AUD) and 3 valuations (legal, group, profit center) in Financials and ML.

TRADITIONAL VALUATION APPROACHES

Organizations had to choose between Standard Cost and Moving Average Cost as the basis for valuing Inventories

Both methods had its advantages and disadvantages. Neither solved the issues faced by Organizations in a dynamic market place

Organizations were looking for a hybrid of Standard Cost and Moving Average approaches

Material Ledger allows organizations to value Inventory and transactions at Standard Cost during the month. It provides Periodic Moving Average price as information during the month and (optionally) as a basis for re-valuing inventories at the end of the month

Traditional Valuation Approaches

Moving Average price is adjusted with every receipt and hence gives a real-time value for materials. However, this value is distorted when variances and price differences are settled to Inventories.

Material Valuation: Moving Average

Period 1 Period 2

Settlement of Variances to Inventories

Standard Price allows comparison of actual costs with standard and hence better evaluation of variances. However, using standard price to valuate inventories provides poor visibility of actual costs. There could be significant lead time before standard prices could be adjusted. Selling prices dependant on out-of-date standard cost could lead to lower margins.

Material Valuation: Standard Cost

Period 1 Period 2

Settlement of Production Variances to P&L

MATERIAL LEDGER VALUATION

A Periodic Moving Average price is the moving average price of that period. This price avoids the fluctuations seen in Traditional Moving Average price and is more dynamic than Standard price.

Organizations can choose to valuate their Inventories at Standard Price as preliminary valuation during the month. Periodic Moving Average price is available as analytical information in Material Ledger

Periodic MAP = (Cumulated Receipts at Standard Price) + (Cumulated Price Differences)

Cumulated Receipt quantity

Example = (126 tonnes * 900 AUD) + 2,106.90 AUD = 916.72AUD/tonne 126 tonnes

Periodic Moving Average Price

Material Valuation: Periodic Moving Average Price

Settlement of Production Variances to P&L

Period 1 Period 2

Revaluation of Standard Cost based on PMAP

Period end

Periodic Moving Average Price

Standard Cost

Material Price Analysis – In Group Currency

Allows you to view the report in multiple currencies/ valuation

Real-time valuation at

Standard Cost

Periodic Moving

Average Price

Material Price Analysis – In Company Code Currency

ML calculates Periodic Moving

Average real-time

Now in Company Code (Legal)

currencyTraffic Light

display whether ML closing has

run

Material Price Analysis – Cost Component View

Actual Costs split by Cost Components in

real-time

Material Price Analysis – Price History View

Price History view

ACTUAL COSTING

During the period, materials movement are valued at standard price. Material Ledger stores all price differences as they occur. This allows Material Ledger to produce reports (Material Price Analysis) that evaluate the Periodic Moving Average Price of the material in real-time

Actual Costing Process Flow

MATERIAL LEDGER• Records Actual Values

throughout the period• Inventory Valued at Standard

Price• Materials reported at Standard

Price and Periodic Moving Average Price

Raw Materials(Receipts / Invoices)

Purchase Price Variances (PPV)

Exchange Rate Variances

Finished/ Semi Finished Materials

(Process Orders)

Production Variances

Transfer Variances

Actual Costing (period end)

Single-level Price Determination

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

Multi-level Price Determination

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

Post Closing (optional)

• Posts adjustments to inventory and consumption to reflect actual value

What Is Price Determination?

Price determination is the process whereby Material Ledger calculates and assigns the Periodic Moving Average price of materials to consumption and Inventory

Single-level price determination of component material is calculated based on the standard price of the material, and its price variances

Multi-level price determination of built materials is calculated based on the standard price of the material, its price variances, single level price differences, and input material differences

Determination Of Periodic Unit Price

In this step, Material Ledger assigns the Periodic Moving Average Price to closing Inventory. This is only a calculation and does not result in adjustment to Inventory values.

Material Ledger Closing (Optional)

Material Ledger allows (as an optional period close activity) revaluation of Inventories at Periodic Moving Average price.

Technically, SAP switches the Price Control for the material from S (standard) to V (Periodic Moving Average) for the period for which the Material Ledger is closed

This activity generates price change accounting document in Financials

The Price Control for the next period remains at S (standard). Hence, the price change document posted in the previous period (that was closed) will be reversed automatically in the next period.

Material Ledger Closing (Accounting Entries)

BI 0.00GR 80,589.60CE 301.35

Material Stock

CO 63,960.00 IR 82,050.00

GR/IR Clearing

GR 82,050.00

Accounts Payable

Price DifferenceGR 1,460.34 CE 301.35

Material Consumption

CO 63,960.00

Tonne EUR Std Cost Price Diff Tonne EUR EUR@ STANDARD COST @ PERIODIC MAP

Beginning Inventory (BI) 0 639.60 0.00 0 639.60 0Goods Receipt (GR) + Price differences

126 651.19 80,589.60 1,460.40 126 651.19 82,050.00

Periodic MAP 126 651.19 82,050.00Consumption (CO) 100 639.60 63,960.00 1,159.00 100 651.19 65,119.00Ending Inventory (EI) 26 639.60 16,629.60 301.40 26 651.19 16,931.00

IR 82,050.00

AMORTIZATION OF VARIANCESML transfers back to Balance Sheet that portion of variance as relates to Inventory at hand. This amortized variance will post to P&L in the month this inventory is consumed/ sold

After Material Ledger Close

Material Ledger Accounting Entries (Closed Period)

In company code currency

In Group currency

Material Ledger Accounting Entries (Next Period)

In company code currency

In Group currency

Verity provides the vision, and the framework for a successful Finance process and technology transformation and re-engineering.

We at Verity believe we have the experience to make success happen for our clients. This belief comes from our track record of successfully engaging customers in their pursuit of the best-of-class business solutions. We believe that this search with Verity is short because of our past experience, and fruitful because we do not simply deliver an end-result, but strive to deliver value-added service that earns us the trust and confidence of our customers.

Verity Business Solutions

Rajesh is an accomplished and successful Finance professional with over 20 years’ experience in Finance processes and related technologies.

He is a qualified accountant, and he has worked in Finance departments of multinational companies. With this strong foundation in Finance, he has managed to successfully implement best-in-class Finance processes in IT (primarily SAP).

Over the last few years, Rajesh has led Finance teams on large SAP implementations and provided his insights and experience to provide a workable and an improved solution for his customers. Rajesh is a SAP Certified Application Professional.

Presented by Rajesh Shanbhag

CONTACT US

VERITY BUSINESS CONFIDENTIAL 30

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