How materials are valuated in the SAP system essentially depends on the price control that was set for the material in the material master. You can choose between a valuation at the standard price (S price) or at the moving average price (V price).
When using the Material Ledger, you have the possibility of combining the advantages of standard price control and moving average price control. For more information, seePrice Control and Material Price Determination.
Standard Price versus 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.
With standard price control, goods movements are valuated with a price that remains constant for at least one period. The standard price that is assigned to a material is usually the result of a standard cost estimate.
The main difference between the two valuation procedures is that the moving average price represents a current delivered price while the standard price is based on planned values and not actual values. Differences between the planned price and the actual prices are not assigned to the material stock in Financial Accounting, but rather are assigned to a price difference account. When using the moving average price, however, the material stock value in Financial Accounting can reflect the prices actually incurred.
The moving average price has its disadvantages, however, in many situations. These situations will be discussed in greater detail in the following text.
Use the component Actual Costing/Material Ledger to ensure a method of cost management that uses the most current data to calculate your actual material costs. You can use this component to calculate an average price at the end of the period using the actual costs incurred in that period. You can then use this average price to valuate the material stock in the period in question. The standard price is used for preliminary material valuation in the Actual Costing/Material Ledger component(see also:Actual Costing / Material Ledger).
In the following text, problems that could result from valuating materials with the moving average price are illustrated in conjunction with a comparison of advantages and disadvantages of both methods of price control. You can avoid the problems that arise when using the standard price for material valuation by using the component Actual Costing/Material Ledger. In addition, there will be some recommendations from SAP as to which price control to use.
Advantages of the 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.
Disadvantages of the Standard Price
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.
This problem increases in multilevel production with each new production step. This means that the costs for the finished product may not reflect the most recent data.
The material stock value does not reflect the current procurement costs, as variances from the standard price are collected in a price difference account in Financial Accounting and do not lead to a correction of the material stock account. The variances collected in the price difference account can no longer be assigned to the individual material.
If you use split valuation for materials, please note that you can only release the material price at the header level of a material (not at the level of the valuation type) when calculating a material price in Product Cost Planning.
Advantages of the Moving Average Price
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.
Only in special cases are variances allocated to a price difference account in Financial Accounting rather than to the material stock.
The advantages of the moving average price are seen only if: you are looking at the material valuation data at the lowest production level; all variances occur immediately; the material price is not distorted by the sequence of postings by the system.
Disadvantages of the Moving Average 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. If, for example, an invoice receipt is posted in the system after a goods issue was entered, that invoice value is not reflected in the value of the material issued. The material is therefore not valuated with its actual procurement cost.
The moving average price also does little to guarantee consistent cost management of your production process. The effect of changes in the production process, for example, are not recognizable in the finished product, and comparing results from different areas in Profitability Analysis is not really meaningful due to lack of a benchmark.
The fact that the moving average price is not dependent on the period can also lead to incorrect material valuation, as goods movements that are posted to a previous period are not valuated with the price from that period, but rather with the current moving average price. Another problem with the moving average price is that any mistake entering data can cause immediate and unwanted changes in the material price. Any goods issues posted following this error will be valuated immediately with this incorrect material price.
In particular, the moving average price can lead to unrealistic material prices in cases of multi-level production or when there are variances that do not appear immediately. Such unrealistic prices occur, for example, when, in the context of stock coverage, a subsequent adjustment to the material stock occurs using an incorrect base quantity. For more information, seeValuation with the Moving Average Price.
Price Control with the Material Ledger
When using the application component Actual Costing/Material Ledger, you only use the standard price as a preliminary valuation price in the current period. At the end of the period, you can use this component to calculate an average price for the material using the actual costs incurred in that period. You can then use this average price 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.
If you use Actual Costing/Material Ledger, you should also use standard price control of raw materials and trading goods to ensure consistent cost management of your production process. Only in this way are variances completely transparent within production!
You can find more information about the goals of Actual Costing/Material Ledger underActual Costing / Material Ledger.
Price Control without the Material Ledger
The following example represents postings in Financial Accounting resulting from a goods receipt or an invoice receipt, whereby the invoice price varies from the purchase order price for the material. In the first example, the postings occur for a material valuated with the standard price; in the second example, the material is valuated with the moving average price:
In these examples, it is clear that material stock value and material price reflect the procurement costs of a material with a valuation at moving average price, whereas these actual costs are not reflected in a valuation at standard price. A valuation at standard price does not account for price changes or changes in production methods during the period. Variances between the standard price and the actual procurement/manufacturing costs are collected in a price difference account in Financial Accounting and cannot be allocated to the individual materials any longer.
The moving average price, therefore, is more useful if you want your material stock values and material prices to reflect the most up-to-date data.
The moving average price appears advantageous in the above example primarily, because the material is externally procured and the example stuck to a single-level perspective.
When dealing with materials produced in-house and when looking at valuation data on a multilevel basis, the moving average price shows its limitations in that it can lead to unrealistic prices for semifinished and finished goods. In the case of multilevel production, the finished product cannot be valuated with the most current actual prices, as the actual price for the semifinished product is first calculated at period end after settling the manufacturing order. Thus, any valuation errors grow as the production process gets longer.
The problems described above show that the moving average price, despite its advantages can lead to problems. In particular, the moving average price can cause unrealistic valuations of material inventory when materials are produced in-house or when variances do not appear immediately.
On the other hand, the standard price does not take any actual procurement costs into account, which can be a problem, for example, with externally procured materials with highly variable prices.
For these reasons, SAP recommends using the moving average price only for raw materials and trading goods. The standard price should be used for semifinished and finished products.
See also:Price Control and Material Price Determination.