When I talk to organizations about implementing the material ledger, I’m often asked two sets of questions. The first concerns the way you use the material ledger to calculate a periodic unit price based on all the invoices and goods movements in the period. What if the price of the raw materials varies radically from period to period? Can the cost of manufacturing strawberry yogurt really be the same in January as it is in June? Shouldn’t it be possible to calculate an annual or quarterly unit price instead of just a price per period?

The second concerns pricing approaches in general. Is it always appropriate to take the prices from the invoices and roll them through the production levels to the ending inventory? On a wider scale, if you report inventory values according to multiple accounting principles, can you apply different approaches of inventory valuation to the same set of base data?

Since R/3 Release 4.7 (R/3 Enterprise), the alternative valuation run has provided answers to both of these questions. I’ll show you how to use the alternative valuation run to calculate a price based on data in more than one period and how to use it to apply alternative valuation approaches. Let’s first learn a bit more fundamental information concerning an alternative valuation run.

Alternative Valuation Run Basic Information

The name “alternative valuation run” is actually something of a misnomer. This additional costing run can allow you to perform alternative valuations or include alternative time frames, but it is not an alternative to the classic costing run (transaction CKMLCP). You still need to perform a costing run at the end of every period to build up the quantity structure and to provide an initial valuation of this structure. Building up the quantity structure refers to creating the structure that displays which raw materials were purchased from which suppliers, used in which manufacturing processes, and finally sold in the course of the period.

Without this first costing run, the alternative valuation run would have no point of reference for calculating the delta postings. You use the quantity structure that was recorded based on the goods movements, but either cumulate it over a longer time frame or apply a different valuation approach (or approaches) to it.

You should also be aware that if you are using SAP ERP Central Component (ECC) 5.0 or 6.0, the alternative valuation run is automatically part of your menu structure. If you are using R/3 Enterprise, then you first have to activate the extension EA-FIN to gain access to the functions. To do this, select the top entry in the IMG, Activation Switch for SAP R/3 Enterprise Extension Set, and choose the application EA-FIN (Financials Extension) as shown in Figure 1.

Figure 1

Activate Financials extensions for SAP R/3 Enterprise

Alternative Valuation Run Menu

Let’s move now to the menu for the alternative valuation run. To create an alternative valuation run, follow menu path Accounting > Controlling > Product Cost Controlling > Actual Costing/Material Ledger > Actual Costing > Edit Alternative Valuation Run and click on the Create button. If you are working in a test system, it is a good idea to check that someone performed a normal costing run for the periods you want to use before proceeding. Otherwise, the alternative valuation run does not find the beginning inventory, ending inventory, quantity structure, single-level price differences, or activity prices — it needs a starting point.

The next thing to be aware of is that you can create a chain of alternative valuation runs by entering the previous valuation run and double-clicking on the Create following run button. You don’t necessarily need to do this in testing, but in a productive environment, it ensures that the ending inventory recorded by the first run is written to the following run as the beginning inventory. If you do not enter a previous run, then the system uses the beginning inventory of the first period you include in the valuation run as its starting point.

First enter a name and description for the costing run together with the initial period and the current period (Figure 2). An example for the initial period is January if you are trying to cumulate values for the fiscal year. I’m using September as the current period in my example.

Figure 2

Alternative valuation run — period data

Double-click on the Plant Assignment tab and enter the plants that you want to include in the calculations (Figure 3). If you’re trying to smooth out price variances by taking a longer time frame, then you should include the same plants here that you used in the original costing run. If your aim is to apply different valuation approaches, then the company codes are probably your guide. Consider the legal obligations for inventory valuation in each of the company codes to determine whether or not you need to run an alternative valuation in all plants. In my example, I’m using one plant only to keep things simple.

Figure 3

Alternative valuation run — plant assignment

Double-click on the Settings tab to enter the system settings for your alternative valuation run (Figure 4). You should only make entries in this tab after you have completed the entries under Period Data and Plant Assignment, because the checks that the system performs are dependent on the periods and plants entered in these screens.

Figure 4

Alternative valuation run — settings

It may help to think of this screen as having three parts. The upper part of the screen determines what ultimately happens to the results of the costing run. Thus, if you set the Posting Run flag, you also have to determine which inventory accounts the system updates by making the appropriate entries in the Acc. Modification field. I’ll return to posting entries in more detail when I get to the Post Closing step. For reasons of consistency, the system only allows you to update one inventory account per period and plant, and issues an error if you try to update the same account twice with alternative valuation runs.

If you are working with multiple accounting approaches, then you should also specify which accounting approach you are following in this valuation run by making an entry in the Accounting Principle field. The accounting principles are defined in the IMG using Financial Accounting > Financial Accounting Global Settings > Company Code > Accounting Principles and Additional Ledgers > Define Accounting Principles, as shown in Figure 5. You then link this accounting principle with the appropriate ledger by following the same path in the IMG and choosing Assign Accounting Principle to Ledger.

Figure 5

Accounting principles screen

If you set the Revaluate Consumption flag, then the system writes the results of the valuation run to the cost of goods sold. For more information about this function, refer to my article, “Include Actual Costs in COGS with Material Ledger in Release 4.7.” It is also possible to make the results available for use in the standard cost estimate (transaction CK11N) by selecting the flag Relevant for Costing. You might do this if you wanted to treat the prices calculated by the alternative valuation run as standard costs for the initial valuation in the following period.

Finally, you can update the activity price differences to CO-OM-CCA by selecting the Credit Cost Center flag. The settings for CO-OM-CCA in the alternative valuation run work in combination with the entries for the quantity structure in the IMG. To check these, follow menu path Controlling > Product Cost Controlling > Actual Costing/Material Ledger > Actual Costing > Activate Actual Costing (Figure 6).

Figure 6

Activate actual costing in IMG

In my example, for the plant in Mexico City (plant 6000), the flag 2 (Activity update relevant to price determination) has been set in the ActAct (actual activity) column but there is no entry in the CreditCCtr (credit cost center) column. To credit the cost centers using the alternative valuation run, you would have to enter a 1 (credit cost centers using alternative valuation run) in this column. This means that the costing run subsequently posts any difference between the planned activity rate and the actual activity rate.

Note that if these flags are active, you should ensure that you are not using the function Revaluation at Actual Prices in Cost Object Controlling by removing transaction CON2 from your period closing activities, because this transaction would also charge the difference between the two activity rates to your production orders, leading to potential inconsistencies.

Looking back at Figure 4, the middle part of the screen (from Provisional Price downward) determines which prices the system uses for the valuation of the materials and activities. The first field, Provisional Price, determines whether the initial material price is the price from the first period included in the alternative valuation run or the last period.

The next field, Price (actually Activity Price), determines which price the system uses for the activities during the alternative valuation run. Initially all activity postings are valued with a standard price at the time of confirmation. You can choose to continue to work with this price by choosing Plan price for the period and entering the original plan version in the Price for cumulat. legal field. Alternatively, you can use the alternative valuation run to have the system select a new price for the activities by choosing Plan price for the period or Actual price for the period and entering a different version here. The system then calculates the delta with respect to the initial standard price during the Determine Actual Prices step and updates it to the versions you enter in the Price for cumulat. legal and Price for PC valuation fields. The second price field only appears if you activated parallel valuation in customizing.

The lower part of the screen in Figure 4 determines which prices the system uses to value the raw materials. Your entry in the Valuation Alternative field determines which values from the balance sheet valuation the system applies to the quantity structure. The options include the balance sheet prices; first-in first-out (FIFO) valuation; last-in first-out (LIFO) valuation for materials or for pools, or lowest value determination by market prices; devaluation by range of coverage; devaluation by rate of market; and loss-free valuation. It would be beyond the scope of this article to explain the impact of all of these options. What you should know is that these are set up in the IMG by following menu path Materials Management > Valuation and Account Assignment > Balance Sheet Valuation Procedures > Set Up Valuation Alternatives. You find details of the individual balance sheet valuation procedures in the same folder of the IMG. In my example, I’m working with the valuation alternatives shown in Figure 7.

Figure 7

Valuation alternatives in Materials Management (MM)

You can find details of how to work with these different approaches in the SAP Library and by following menu path Logistics > Materials Management > Valuation > Balance Sheet Valuation > Determination of Lowest Value/LIFO Valuation/FIFO Valuation. Before you run the alternative valuation run, you have to ensure that the system performed the appropriate balance sheet valuation and the data updated as physical inventory prices. Alternatively, you can use an external price by entering a price in table CKMLPR_EB and having the alternative valuation run use this as a basis for pricing. This option makes sense if you are calculating FIFO values in an external system rather than in the Materials Management (MM) module. After you have completed these settings, you are ready to perform costing. Once you have run the first step of costing, these settings will be fixed.

Working with the Alternative Valuation Run

Now that you have maintained all the basic data for the alternative valuation run, save the costing run and select the Processing folder to initiate each of the steps in the costing run. You can see the steps involved in Figure 8. As you proceed, the system updates how many materials it has processed and how many are still open for each step.

Figure 8

Alternative valuation run — processing steps

As each step is completed, you are able to analyze its impact using the folder Costing Results to display reports showing each material process and a status will be set for the material, displayed in Figure 9.

Figure 9

Result of cumulation

The statuses in Table 1 are set for each material as the relevant steps are carried out.

Costing Steps

The first step in the alternative valuation run, Selection, is the same as for the normal costing run, so I won’t go into details here. The first step that is specific to the alternative valuation run is Cumulate Data. You use this to cumulate data that provides year-to-date values for your materials or a quarterly valuation as an alternative to the strictly period- based periodic unit price. In other words, Cumulate Data reads the quantity structures for each procurement alternative from the normal costing run and aggregates them to create a cumulative quantity structure.

You can perform various forms of cumulation. One is year-to- date cumulation, in which you create an alternative run at the end of each period of the fiscal year, the first for January only, the second for January and February, the third for January, February and March, and so on. You can also create sequential cumulations, in which you cumulate either a whole fiscal year or each quarter (i.e., periods 1-3, 4-6, 7-9, and 10-12).

In both cases, the cumulation’s result smooths out the effect of seasonal changes, fluctuating inventory, and work in process by setting a wider time frame. If you need to manipulate the cumulated data in any way, you can use the Business Add-In (BAdI) CKMLAVR_SIM to add your own logic here.

The steps Determine Sequence and Single-Price Determination follow the same logic as in the normal costing run, so you should already know them. The next step that is specific to the alternative valuation run is Determine Actual Prices. This allows you to calculate actual activity prices based on the same time frame as the material prices. In other words, the normal costing run uses the activity prices calculated using transaction KSPI in CO-OM-CCA and written to version 0 as its basis, but the alternative valuation run can calculate alternative activity prices and store them in CO versions other than version 0 (the versions you entered in the Settings tab). To do this for actual prices, the material ledger calls transaction KSII (calculate actual activity prices) in CO-OM-CCA with the version you entered under Settings (Figure 4).

Note that for consistency reasons, you should check the settings in this version by following IMG menu path Controlling > General Controlling > Organization > Maintain Versions and checking that you can only update this version in the material ledger. To do this, select the version and check that the Exclusive Use field is set to Material Ledger: Actual Version Cumulated in Parallel. The activity price can either be simulative in nature or you can use it to clear any variances on the cost center during the Post Closing step. I’ll discuss this in more detail later in the article.

The next step, Multilevel Price Determination, also follows the same logic as for the normal costing run. The steps Determine Delta Postings and Post Closing only appear if you set the Posting Run flag in the Settings tab. To determine the delta postings, the alternative valuation run compares the material prices the system calculated with the current material valuation. The account assignment for these postings was made using account modification BSX. The system posts any differences between the two valuations to a delta stock account selected using account modification BSD and the offset to an account selected using account assignment UMD. To ensure that you store the operative or period- based valuation separately from the alternative valuation, the system does not allow you to enter the same account under account modifications BSX and BSD.

To make this step clearer, let’s look at an example. In December, the normal costing run has calculated that 100 units of a particular material have a value of 1 euro each, so the stock value of the inventory for the period closed is 100 euros (account modification BSX). The alternative valuation run calculated that the same 100 units have a value of 1.20 euros each, so the alternative value of the inventory is 120 euros. The difference of 20 euros is posted as +20 to account modification BSD and -20 to account modification UMD.

Note that you can see the result of the delta postings before you post by choosing the Results section of the alternative valuation run and choosing the Delta Postings view (Figure 10). It is particularly important to check this report before generating the postings to FI to avoid unpleasant surprises.

Figure 10

View delta postings

Finally, if you set the Credit Cost Center flag in the Settings tab, the Post Closing step can also update CO-OM-CCA. Here you need to decide whether you want to base the crediting of the cost centers on the normal costing run (periodic valuation) or the alternative valuation run. It makes sense to use the results of the alternative valuation run if the system would not clear the cost centers in some periods due to the highly seasonal nature of the production activities, leaving a high over/under absorption on the cost center. If you choose to credit the cost centers, then the system makes the posting using the account modifications PRV (lower-level price differences) against GBB (offsetting entry for inventory posting)/AUF (goods receipts for production orders with account assignment) and triggers the posting during the post closing step.

After you complete the alternative valuation run, you have several options for using the results. It is possible to perform a revaluation to Profitability Analysis (CO-PA) using transaction KE27 by setting up the valuation strategy to pull the results of the alternative valuation run. You can take the results of up to three alternative valuation runs into CO-PA. You can find more details of how to maintain this strategy in my article “Calculate Contribution Margins in CO-PA That Include All Production Variances.” 

It is also possible to display the results of the alternative valuation run by material in transaction CKM3 (material price analysis), transaction CKMLQS (valuated multilevel quantity structure), and transaction CKMVFM (value flow monitor) and to extract the data to SAP NetWeaver Business Intelligence (SAP NetWeaver BI). You can also use transaction CKMPERD to compare the periodic valuation and alternative valuations per procurement alternative.

Janet Salmon

Janet Salmon joined SAP in 1992. After six months of training on R/2, she began work as a translator, becoming a technical writer for the Product Costing area in 1993. As English speakers with a grasp of German costing methodologies were rare in the early 1990s, she began to hold classes and became a product manager for the Product Costing area in 1996, helping numerous international organizations set up Product Costing. More recently, she has worked on CO content for SAP NetWeaver Business Warehouse, Financial Analytics, and role-based portals. She is currently chief product owner for management accounting. She lives in Speyer, Germany, with her husband and two children.

You may contact the author at janet.dorothy.salmon@sap.com.

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