Introduction to SAP Material Ledger

Category: SAP FICO Posted:Jun 30, 2020 By: Alvera Anto

Introduction-to-SAP-Material-Ledger

Material Ledger is SAP’s solution to perform actual costing. It is intended to include the benefits (without acquiring the negative aspects) of both traditional techniques of inventory valuation – Standard Costing and Moving Average Costing. Before you can understand the functionality of Material Ledger, it is always good to start with several features of these two conventional techniques.

Standard costing is a reliable method of acquiring steady prices for your materials which can be benchmarked against any price variations. Therefore, You can perform variance analysis to better understand whether you are creating effectively or whether your raw material prices are reasonable. However, a weakness of the Standard Costing Process is that the variations that relate to unsold inventory remain in the cost of sales (price variance) account, and are not posted back to inventory. After that what happens to the production variances that are being in the P&L?”. The answer to this at the time was to take the fraction of the production variances which associates with the inventory not sold in the period and post it back to the inventory accounts. This was a top-level journal that did not specify the activity for every individual material (as this would have been too cumbersome a task). The downside to this if you looked at a profitability report for each material, the difference might alter the actual price of sale for the period if you did not sell everything that you produced.

Moving Average Costing is a great approach to maintain your material costs up to date, particularly in cases where the prices keep rising and fall. Each time you perform on goods or invoice receipt, the moving average price is updated based on the overall inventory value (taking the current purchased price into account) and dividing it by the overall inventory quantity. One of the weaknesses of the moving average costing is that the new price is only posted back to inventory if there is enough inventory quantity to cover the difference. This could be the situation if you consume a material between the time that you get it and when you invoice it, and the invoice cost is different from the goods receipt price. If the invoice is for a quantity that is greater than the amount of the material left in inventory, the difference between the invoice and goods receipt will not completely be allocated back into inventory. Rather, just the section that relates to the existing inventory quantity will be allocated back to Inventory, and the remainder will be posted to the price variation account. This implies that if you looked at the Moving Average price for that material, it will not represent the true current price.

Material Ledger’s two primary goals are:

(1) Inventory Valuation in up to three currencies and valuation methods

(2) Performing Actual Costing for Materials

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The genuine appeal of the material ledger is number (2). This is due to the fact that it takes the variances that occur from Inventory Transactions and post them back to the end inventories in order to value them at an actual cost. It does this while keeping the standard cost of the material as a standard. You additionally have the choice to revalue the current standard cost with the periodic unit price (which is the actual cost determined by material ledger). The two types of price determination that occur with the material ledger. 

(1) Single-level price determination: This takes the variances that occur for an individual material and roll them back into its ending inventory.

(2) Multilevel price determination: This takes the variances that occur for a lower-level product (e.g. raw material) and roll them (in the proportion of consumed quantity) into a higher-level product (e.g. finished product).

You can pick to roll the variances that relate to sold inventory, in the cost of sales account in order to value COS at actual costs. This includes using Material Ledger’s “Revaluation of Consumption” functionality. With Material Ledger, you can consequently accomplish actual costs for ending inventory of single and multilevel products and cost of sales, and also still measure your procurement procedures according to standard costs.

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Bottomline

Material Ledger is SAP’s solution to perform actual costing. It is intended to include the benefits (without acquiring the negative aspects) of both traditional techniques of inventory valuation – Standard Costing and Moving Average Costing. 

Moving Average Costing is a great approach to maintain your material costs up to date, particularly in cases where the prices keep rising and fall. Each time you perform on goods or invoice receipt, the moving average price is updated based on the overall inventory value and dividing it by the overall inventory quantity.

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