Recently a client company of mine had a surprise when its auditors asked for proof of the G/L stock balances. When the company researched this data, it found a difference between the G/L stock balances and the quantities of stock on hand according to Materials Management (MM) tables. The company took a simple approach to verifying stock balances, which was to take all stock balances and multiply by the standard price. The client company found two key issues with this approach. First, the simple stock value calculation did not work for my client in R/3. Second, the company had configured a custom process incorrectly, which resulted in stock values not being recorded in the G/L.

In standard R/3 configuration (Releases 1.0 to 4.7), return stock is non-valuated and is only valuated after passing through Quality Management (QM). My client company worked in the retail jewelry trade in which returned items have a high value even if they are broken, so it wanted returns valuated immediately on receipt, not after QM. The company had changed R/3 configuration to do this, but had not updated the configuration of ancillary MM movement types such as cycle count adjustments. The result was all cycle count adjustments of returned stock were non-valuated and over a period of years the small differences had built up to 1 million USD.

I'm going to show you how to use transactions and reports, e.g., MB5L, to validate your G/L to stock balances. I will identify a little-known report, RM07MMFI, and explain how to add this to your system if you do not have it already. Then I'll explain how to correct any imbalance. First, though, to understand why this type of problem can occur, you need to consider the following questions:

• How is stock valuated?
  
  
• What materials should be reflected in the FI-GL stock balance?
  
  
• How does an individual MM transaction update the stock balances?
  
  
• How do you determine the total stock balance?
  
  
• Why do differences occur between MM and FI stock balances?
  
  
• Which value is correct?

How Is Stock Valuated?

A simple description of your stock value should be the number of items in stock times the standard cost for each material. Unfortunately, the calculation of stock balances in SAP is not quite this easy when you have to deal with many complex business processes that do not fall into this simple equation (e.g., vendor consignment stock).

What Materials Should Be Reflected in the FI-GL Stock Balance?

Not all stock quantities held in the MM module are reflected in the FI-GL balance because not all stock is valuated stock. In general, most of the stock that a company holds is valuated, but stock may not be valuated in these two situations:

• Process exemption: A business process may result in materials that are normally valuated not being valuated. For example, a return in standard SAP return stock is not valuated when QM is active. A record of the quantities returned is kept in MM, but the value is not posted to FI-GL until after the return stock has passed quality inspection. Another example is vendor consignment stock that needs to be counted but cannot be shown on the balance sheet until it is purchased from the vendor.

• Material type exemption: Certain material types may be configured to be non- valuated. An example is vendor-owned packaging that needs to be recorded and returned to the vendor, such as gas cylinders, but that cannot be shown on the balance sheet, as they are not owned by the company. Another example is DIEN (service material), which represents non-stock items such as labor. You can see this configuration via transaction OMS2.

How Does an Individual MM Transaction Update the Stock Balances?

Every time an MM document is posted for a valuated material with a valuated transaction, a corresponding FI document is posted that adjusts the value of the appropriate FI-GL stock account. The value of the posting is the standard cost of the material times the quantity. Several MM tables also are updated for stock quantity and stock value. See Figure 1 for an MM document using MM movement type 501 (initial load of stock.). Figure 2 shows the corresponding FI document.

Figure 1

MM document for initial load of stock using 501 MM movement type

Figure 2

Accounting document for an MM document

In a simple chart of accounts design, a single G/L account is used to store all stock balances. However, multiple accounts are often required to break out stock balances in FI-GL (e.g., raw materials, consignment stock, WIP, and finished goods).

In R/3, the plant and the material valuation class determine which stock G/L account is posted for an MM transaction. The determination of the stock account is performed in R/3 by reading table T030 (Table 1). You can configure the table using transaction OMWB.

The G/L account is selected from table T030. The key fields of table T030 are read using the logic shown in Figure 3 to determine the stock account.

Figure 3

How key fields of T030 are read for a stock transaction

The major tables related to MM stock quantities and values are shown in Table 2. It is not an exhaustive list. If you use processes such as sales order stock, R/3 uses additional tables to store MM quantities and values.

Figure 4 on the next page is a flow chart showing the MM stock quantity and value update process. This puts together all of the steps shown above.

Figure 4

Stock quantity and value update process flow

How Do You Determine the Total Stock Balance?

In the previous section, I discussed how an individual MM transaction updates the FI-GL stock balances. At the initial go-live of an R/3 project, the stock balances conversion is run with thousands of 501 and 521 (commonly used to load opening stock balances) MM movement types to load all of the initial stock, resulting in the initial stock balance being posted. Once the R/3 system is productive, the stock balances move up or down based on the many daily MM transactions.

You can determine the value of stock for a given company code in four ways:

• Multiply the stock quantities in the MM quantity tables, MARC, MARD, etc., by the standard price in the MM value tables
  
  
• Multiply the stock quantities in the MM value tables, MBEW, etc., by the standard price in the MM value tables
  
  
• Add the stock value from the MM value tables; note that MM value tables contain valuated stock quantity, standard price, and the total value of the stock
  
  
• Add the balances of the FI-GL stock accounts

In theory, all four of the methods should return the same answer, subject to rounding differences. The key question is: If the values are different, which one of the four methods gives the true value of stock?

Why Do Differences Occur Between MM and FI Stock Balances?

Before correcting any differences in the stock balances, you should identify the root causes and correct them to prevent additional differences occurring after you correct the stock balances.

In my experience, these are the most common causes of stock value differences:

• Update terminations have resulted in documents posting incorrectly. If you have only a small stock value difference, this is the likely cause.
  
  
• Bad configuration or bad process design has resulted in differences, e.g., custom movement type configured without a valuation string. (The valuation string is defined for a movement type in transaction OMJJ. It is used to select the G/L account for an MM movement type. If the valuation string is missing in configuration, no FI-GL update can occur.)
  
  
• Custom programs that update the MM quantity or value tables. In R/3 you should always avoid writing custom programs that directly update standard tables.

Over a period of years, a small number of errors can build up and result in significant differences between the stated G/L value of stock and actual stock balances.

Which Value Is Correct?

When there are differences between the MM quantity and value tables, it is safest to assume that the MM quantity tables are correct. These are the values that MM people work with and the values that are used for cycle counting and physical inventory counting. If any differences were detected, the quantity tables would have been adjusted during the cycle count or physical inventory count. If you have a large volume of differences, this is a safe approach to take. Any incorrect values will be adjusted at the next cycle or physical inventory count.

Transaction MB51 (material movements by material) is another source of stock values that is sometimes used to determine the correct stock balance for a material based on the transaction history for the material. I do not recommend using the MB51 value for adjusting the stock, as the balances may be incorrect if archiving has occurred, if MM balances were not rolled forward correctly, or if documents are missing because of update terminations or similar errors. MM quantity tables are the best basis for the adjustment. The key is to get the MM quantity and value tables in alignment.

How Do I Validate the Total Stock Balance in FI-GL?

Differences in stock values can arise in two places, first between the MM quantity tables and the MM value tables and second between the MM value tables and the G/L balances (Figure 5). To ensure the accuracy of FI-GL balance, you must check and correct both points of error.

Figure 5

Comparison of stock values

Transaction MB5K/report RM07KO01 compares your MM quantity balances to MM value balances. Transaction MB5L/report RM07MBST compares your G/L balance to the totals in table MBEW. Also see SAP OSS to download the newer RM07MMFI report: sap note 198596 (fast MM-FI balance comparison). It replaces RM07MBST.

When running stock value comparison reports, be aware they have long runtimes and any MM movements that occur during the run may produce incorrect results. It's best to run the reports as a batch job during a quiet time like Sunday morning.

What Can I Do to Correct Stock Balances?

If you have FI-MM reconciliation problems, you probably need to call in SAP OSS to correct the issues for you. See the following SAP notes, which apply to R/3 4.0 and above:

• 520010: FAQ: inconsistencies in inventory management
  
  
• 34440: procedure for correcting the material master
  
  
• 32236: incorrect stock quantity/stock value in material master
  
  
• 204393: error in material accounting view (table MBEW)
  
  
• 76926: checklist for material inconsistencies (value, quantity)

SAP OSS will undertake the stock balance corrections for you. It requires you to load correction programs into your system as identified in the notes. Because of the somewhat complex nature of these corrections, R/3 works directly in your production system. Immediately after an adjustment is made to the tables, you should select all the materials that were adjusted for cycle counting. R/3 will provide you with a list of adjusted materials.

How the Correction Was Made

Let's go back to the client company I originally mentioned, which had to tell its auditors how its G/L stock balances were composed. After reading the article so far, you know that simply multiplying all stock balances by their standard cost does not give the correct stock value, as you will include non-valuated materials in your calculation. Also, many people miss key tables that contain stock values by focusing on MARC and MARD quantity balances only.

In the case of the cycle count adjustments that were non-valuated, the client:

• Posted the reverse movement types
  
  
• Corrected the movement type configuration to be valuated
  
  
• Reposted all of the movements so that the stock balances were correct and the FI-GL postings were made

This corrected about 80 percent of the stock value differences between MM and FI-GL. Even after the cleanup of cycle count errors, other small errors were found and SAP was called in to get a 100 percent match between the MM and FI-GL stock balances.