Valuation with the Moving Average Price

In the following example, inventory is valuated with the moving average price. The system analyses how stock coverage and stock shortage affect prices.
For more information on the standard price and moving average price, see
Price Control with and without the Material Ledger

Problems with Stock Coverage

Example 1:
Stock Coverage at Goods Receipt

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/pc.

Goods receipt 3: 100 pieces at \$1/pc.

Valuation data for the material:

Inventory quantity: 300 pieces Inventory value: 300 Moving average price: \$1

2. A goods issue occurs for 180 pieces of this material.

Valuation data for the material:

Inventory quantity: 120 pieces Inventory value: 120 Moving average price: \$1

3. In the invoice receipts for the goods receipts above, the invoice price varies from the purchase order price in all three cases:

Invoice receipt 1: 100 pieces at \$1.20/pc.

Invoice receipt 2: 100 pieces at \$1.20/pc.

Invoice receipt 3: 100 pieces at \$1.20/pc.

Because in all three cases there was adequate stock coverage at the time of the invoice receipt (inventory quantity is at least as large as the invoice quantity), the price variances from all three invoices are completely debited to inventory. In total, the remaining inventory quantity is debited with a variance of \$60. The individual orders do not check whether the remaining inventory quantity is also debited by other orders

Valuation data for the material:

Inventory quantity: 120 pieces Inventory value: \$180 Moving average price: \$1.50

The result is an excessively high valuation price for the material stock and subsequent material consumption, as all price variances from the various goods receipts flowed into the price.

Example 2:
Stock Coverage at Order Settlement

During the settlement of variances on manufacturing orders, the system checks whether a corresponding stock coverage exists for the respective material. If multiple manufacturing orders were completed during a period and the material stock at the end of the period is smaller than the sum of the receipts from production orders, variances from all production orders are allocated to the material stock, assuming adequate stock coverage.

The individual orders do not check whether the period ending inventory was already debited with variances from another order!

1. One piece of material FERT is produced per day for 10 days in one period and delivered to stock at a price of \$100.
2. Valuation data for the material:

Inventory quantity: 10 pieces Inventory value: 100 USD Moving average price: 10 USD

3. There is only 1 piece left in material stock at period end. A variance of \$10 is calculated for each production order. Each individual production order checks stock coverage and determines that the variances can be posted completely to stock.

Valuation data for the material at period end:

Inventory quantity: 1 piece Inventory value: 200 USD Moving average price: 200 USD

The ending inventory of 1 piece is debited by \$100 and the moving average price for material FERT becomes \$200.

Thus, the remaining material inventory is charged with variances that it didn't even cause, resulting in an unrealistic price. Subsequent consumption is also valuated using this inflated price. The material stock value no longer reflects the actual cost of goods manufactured.

The system reacts differently if it discovers a stock shortage.

Problems with Stock Shortage

Example 3: Stock Shortage at Invoice Receipt

If the invoiced amount of an externally procured material is less than the amount with which the goods receipt is valuated, the invoice receipt should correct the material price by reducing the value of the material stock. If, however, there is a stock shortage at the time of the invoice receipt, the stock value is only reduced proportionally; the remaining amount is posted to the price difference account in Financial Accounting.

Example 4: Stock Shortage at Order Settlement

Goods Receipt for the Order:

1. One piece of material FERT is produced per day for 10 days in one period and delivered to stock at a price of \$100.

Valuation data for the material:

Inventory quantity: 10 pieces Inventory value: 100 USD Moving average price: 10 USD

2. There is 1 piece left in material stock at period end. A variance of \$10 is calculated for each production order.

The variances of a manufacturing order, 100 USD, should be settled with a lot size of 10 pieces. There is only 1 piece of the material left in stock.

Thus, the material stock is only partially debited (with 10 USD).

Valuation data for the material:

Inventory quantity: 1 piece Inventory value: 20 USD Moving average price: 20DM Price difference account: 90 USD

No Goods Receipt for the Order:

If variances were calculated for a manufacturing order in one period even though there were no goods receipts for that order in that period (such as with follow-up costs) the entirety of these variances are posted to the price difference account. Here, it cannot be guaranteed the material stock value reflects the actual position.