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You can use the inventory cost estimate to create valuation bases for the tax-based and commercial inventory valuation of products. You can carry out inventory costing shortly before the balance sheet is prepared, in order to determine a valuation price for the materials for the tax balance sheet and the commercial balance sheet.

The inventory cost estimate valuates the current quantity structure with the tax-based and commercial inventory prices.

You can transfer the results of the inventory cost estimate into the accounting view of the material master record as the commercial price or tax-based price. For more information, see Price Update and Tax-Based and Commercial Prices .


You create a cost estimate based on a costing variant. For inventory cost estimates, you must have made the following settings in the costing variant:

  • You have specified in the costing type that the results of the cost estimate can be updated as the tax-based or commercial price or as other planned price in the material master.

  • You have specified in the valuation variant that the valuation of the

    • materials is carried out with a tax-based or commercial price.

    • internal activities are carried out with conservative prices

  • In the valuation variant, factors relevant to costing have been defined.

For detailed information about these and other settings see Updating Tax-Based and Commercial Prices .


The inventories of externally procured materials (raw materials, purchased parts) and in-house products must be displayed in the year-end closing balance sheet in accordance with commercial law and tax law. The law requires that the inventory is displayed according to the lowest value principle. This means that from the various valuation methods (delivered prices or cost of goods manufactured, stock exchange or market prices, valuation price on the key date) you must use the lowest value. This ensures that with price fluctuations, book profits (for example where market prices are rising) are not displayed, but reserves for imminent loss (for example where prices are falling) are included.

The following graphic illustrates the role played by inventory costing in determining tax-based and commercial prices:

This graphic is explained in the accompanying text.

Step 1:   Lowest Value Determination for Raw Materials and Purchased Parts

First, the determination of lowest value is made in MM for raw materials and purchased parts. Material stocks are devalued at year-end closing according to the lowest value principle. This method valuates the existing stocks as conservatively as possible using the recognition-of-loss principle. The results are transferred to the material master as commercial or tax-based prices.

A valuation price can be calculated in the following ways in Materials Management (MM) :

  • According to current market prices

    If the current market price is higher than the procurement price, a profit is expected. However, this profit can only be reflected in the balance sheet if it is actually realized. The material continues to be valuated with the procurement price.

    If the current market price is lower than the procurement price, the planned loss must go into the balance sheet. The material is valuated with the market price.

  • According to movement rate or range of coverage

    Materials can also be checked for movement rate and range of coverage by the system. If the movement rate is low or the range of coverage is high, the value of the material is adjusted because it is assumed that the material is no longer needed in the future.

You can find additional information under MM Material Valuation in the documents Material Valuation , Determination of Lowest Value , and Lowest Value Principle .

Step 2:

Inventory Costing for Semi-Finished and Finished Products and Transferring the Results to the Material Master

The inventories of raw materials and material components are valuated according to the lowest value principle, meaning the materials (such as raw materials, purchased parts) are devalued in MM and corresponding prices planned or determined. Based on this, the semi-finished and finished products can then be costed using inventory costing for balance sheet valuation in accordance with commercial law and tax law.

You can transfer the results of inventory cost estimates as commercial or tax-based prices 1 to 3 in the material master.

For further information, see the following:

  • Price Update

  • Tax-Based and Commercial Prices

  • Updating Other Prices

    Note Note

    Reference Variant and Transfer Control

    You can use an existing cost estimate (such as the standard cost estimate) as a reference for inventory costing. To do this, you define a reference variant in the costing variant. There you can specify via the transfer control precisely which existing cost estimate is to be used as a reference, and in addition which costing items are to be revaluated or transferred. The system accesses the quantity structure of the standard cost estimate, without having to determine it again.

    End of the note.

    Example Example

    The main reason for using inventory costing is to valuate the material inventories; the valuation of internal activities does not differ from the standard cost estimate. Therefore, you can specify in the reference variant that only the material items and material overhead are to be recalculated, but not the internal activities and subcontracting items.

    For more information, see:

    End of the example.

Step 3:   Determination of the Inventory Value for the Financial Statements

Finally, you can execute the function Lowest value per account in the MM Valuation menu. The system determines for each G/L account the difference between the inventory value as per price control and a comparison value (such as tax-based price 1, 2 or 3). The comparison value can have been calculated by the lowest value determination in accordance with market prices (such as raw materials and purchased parts) or by inventory costing (such as materials produced in-house).

For more information about inventories, see MM-Inventory Management in the documents Physical Inventory and Physical Inventory Process .