SAP offers two basic ways of recognizing the value of materials and stock: moving average price (MAP) and standard price. In some cases, neither option provides enough information to correctly manage stock. In these cases SAP also offers the option of periodic unit price or valuation based on user-defined criteria (split valuation), using valuation types. I’ll describe the basic characteristics of these options in R/3 and SAP ERP Central Component (ECC) to help you choose the best method to valuate your stock.

MAP Method

The type of price control is determined on the Accounting 1 View of the material master (Figure 1).You typically use the MAP for purchased (raw) materials, in which finished products in a production environment are most often valued at standard price. The moving average price always recognizes the (total) actual value of the materials in stock. The system calculates the price as a weighted average of all purchases. This means that a receipt of 1,000 pieces has a bigger impact on the price than a receipt of 10 pieces.

Figure 1

Maintain price control on the Accounting 1 View of the material master

It is important to know that the system recalculates the price only for transactions that relate to incoming goods. An issue of goods (i.e., when a sale is done) has no influence on the price. Only the goods receipt from the purchase order (or production order) and the related invoice (or settlement of production order) trigger the system to recalculate the price in the material master (Figure 2).

Figure 2

Example of the recalculation of the moving average price

The example in Figure 2 shows how the system calculates the MAP in the material master based on the quantities already in stock and the quantities received.

The system first updates the MAP for goods receipts at the purchase order price. Then, when the accounts payable department verifies the invoice, the system also notes any differences from the invoice to the quantity in stock. If, as in the example, the stockholdings at the moment of the invoice receipt are less than the invoiced quantity, SAP only updates the MAP for the portion of the stock that is still available. The system posts the rest to a price difference account.

Standard Price Method

You use the standard price for materials that do not have high fluctuations in price or for materials that are produced in-house. In the latter case, the system calculates the cost price of the materials based on the bill of material (BOM) and routing, making it comparable across different production facilities. It also allows you to calculate variances of the actual production costs versus the standard.

Figure 3 shows the cost price calculation for a produced material in SAP Product Costing. After calculating this price using transaction CK11N, you must mark the price and release it using transaction CK24. Marking the price fixes the price and updates the material master Future price field (Figure 4). This “fixing” of the price protects the system from overwriting the calculation, while at the same time it allows the system to carry out the calculation process in a timely fashion before the new price needs to be current. At release, the system updates the standard price field (Current) as well as the stock value for this material (if any).

Figure 3

Result of a costing run showing two raw materials and an activity as the basis for the finished good price or value

Figure 4

The three price types (Future, Current, and Previous) of a costing run

By updating the standard price with the calculated cost price you enable the system to assign the total variance on a production order to different categories, thereby allowing for more in-depth analysis about why the actual costs do not agree with the standard. The data in Figure 5 shows the actual inputs and output for a production order. The system issued two materials against the production order and assembled them into the finished product B via activity Z.

Figure 5

Example of a production order

Based on the output, the system calculates the target cost, which is the value of the expected inputs according to the standard cost based on the BOM and routing. The system calculates variances between the actual costs and the target costs (Figure 6). It then recalculates the desired inputs based on the actual output and not on the planned output. This provides a better understanding of bottlenecks in the process as they are measured against actual production.

Figure 6

Variance calculation actuals versus target

If you click on the Variances button in Figure 6, you can view additional information about the variances (Figure 7). In this example, the system recognizes both price and quantity differences. From a management point of view this alerts you that something is not going right in the production process. It can also let you know if variances in the production process are due to purchase price changes since you set the standard cost.

Figure 7

Different types of variances

Split Valuation Method

In some cases you may want to assign the value to the stock based on different attributes, such as the origin of the product. For example, you may value stock that you produce in-house differently than product you procure externally. This method provides more accurate information for the actual value of particular stock. It requires that you have the Materials Management (MM) and Financials (FI) modules implemented. Let’s look at an example using split valuation to determine tax benefits when a product is manufactured in two different countries.

A company performs research and development in country B. However, a separate legal entity of the same company produces the product in country A. To allow for maximum tax benefits, the company wants the profit for the products reported in country B because the profits can offset the costs for R&D in that country.

To do this, the company has its country A division sell the products to country B at production cost price, making the country B division the owner of the stock. The country B division does quality control and marks up the sales price to include coverage for R&D and profit. It then sells the goods to, among others, the country A division.

The problem here, when using single valuation, is for the country A division to distinguish the two types of stock for the same material, first because R/3 does not allow for more than one price per material per plant and second because it would be hard to identify the stock produced versus stock purchased.

The production cost for product Z is as follows, taken from master data for country A. The master recipe calls for 100 kg of product Z. The following costs do not include any of the costs associated with the R&D to develop the product:

• 100 raw materials at $4 each: $400
  
  
• 10 hours at $60 an hour: $600
  
  
• Standard price: $1,000

Country A’s division produces product Z and receipts it into stock using the valuation area PROD (produced):

• Quantity: 100 kg
  
  
• Value: $1,000
  
  
• Valuation type: PROD

Country A’s division then sells the product Z to country B’s division at that price. Country A issues the product and country B receipts it. For my example, country A now sells 50 kg to country B leaving it with 50 kg of produced stock. Intra-company sales of 50 kg from country A to country B leads to an issue of stock to company A as follows:

• Quantity: 50 kg
  
  
• Value: $500
  
  
• Valuation type: PROD

The receipt into stock country B amounts to the following:

• Quantity: 50 kg
  
  
• Value: $500
  
  
• Valuation type: N/A

The country B division does quality control and finds the product is acceptable. It then sells the product back to country A for a price that is marked up to cover R&D and a profit. Country B determines the sales value of product Z at $30 per kg for the intra-company sales of 50 kg from country A to country B. The issue of stock to country B is:

• Quantity: 50 kg
  
  
• Value: $500
  
  
• Valuation type: N/A

The receipt into stock for country A using the valuation area PURC (procured) is:

• Quantity: 50 kg
  
  
• Value: $1,500
  
  
• Valuation type: PURC

With this setup, the profit for the product falls in country B. Country A receives the semi-finished product again, but against the higher value and different valuation type. It can either sell it or use it at the higher value in a finished product.

As country A only sold 50 of the produced 100 kg, it now has 50 kg of produced and 50 kg of procured stock at different prices. If the company had used single valuation, the only information available would have been:

• Quantity: 100 kg
  
  
• Value: $20
  
  
• Stock value: $2,000

However, because the company used split valuation, the actual value of the batches is also available. The stock value in country A on valuation type level is:

• Quantity: 100 kg
• Value: $2,000
  • 50 kg @ $10 (PROD)
  • 50 kg @ $30 (PURC)

Periodic Unit Price

You can only use the periodic unit price when the material ledger is active. The periodic unit price helps you analyze trends in price development and you can use the basis for actual costing. During the month, the Product Costing module tracks all variances to the standard. At month end, you can update the stock value to reflect the actual costs for the month via transaction CKMH (Figure 8). Also, the periodic unit price allows you to track the development of the price per movement and in multiple currencies.

Figure 8

The system tracks the price information to the level of the purchase order

Purchasing Costs

Apart from offering several options for the valuation of your stock, you can also include purchasing costs (i.e., delivery costs and custom duties) from the price. Also, for rebates and cash discounts, you can configure the system to either include or exclude these amounts from the stock value. Of course, this is only applicable for materials values at moving average price. When you use the standard price, the system treats these conditions as a price difference.