Last Updated on November 21, 2022 by Pradeep
Material Ledger in SAP S4 HANA – Introduction
Material Ledger in SAP S4 HANA is used for inventory valuation in multiple currencies and actual costing.
In SAP, the word material denotes goods or services that we use for different transactions. These include purchasing, sales, production, warehouse and inventory management etc. Each Material represents a unique data object that is stored in SAP tables and contains several attributes. Such as plant, storage location, profit center, sales organization, standard cost etc.
Also, the master data of material contains hundreds of fields that serve different purposes. In addition, we can classify material according to what we use it.
Classification of Material Ledger in SAP S/4HANA
a) Raw Materials – Basic materials that we use in the production process
b) Semi-finished goods – Partly produced materials that we use in the production of other goods
c) Trading goods – Materials that the company purchase for resale
d) Finished goods – Goods that the manufacturing process completed.
The Material Master is a record of all the information necessary for maintaining a material and is organized into views. These views correspond to the areas in which we use the material.
Basic Data view of Material Master
Types of Ledgers in SAP
The word ledger refers to a record of business transactions that relate to a financial category and form part of a company’s financial statement. The common types of ledgers in SAP are:
- Accounts Payable (AP) ledger ( for vendor transactions)
- Accounts Receivables ( AR) ledger ( for customer transactions)
- Fixed Assets ledger etc which ultimately integrates a general ledger ( GL) for all financial transactions.
It typically refers to AP, AR and fixed assets as sub-ledgers of the GL. These sub-ledgers are the categories that the Material Ledger fits into. For example, AP is a sub-ledger of G/L that provides a more detailed analysis of vendor transactions. Similarly, AR provides a more detailed analysis of customer transactions.
Thus, in the same way, Material Ledger provides a more detailed analysis of inventory transactions.
Also Read: An overview of SAP Receivables Management in S/4HANA
Functionalities of Material Ledger
The Material ledger consists of two main functionalities:
- Actual Costing
- Parallel Valuation
A common misconception about Material Ledger among SAP customers is that it refers solely to actual costing. This is because actual costing tends to get the most attention, even though Material Ledger serves as a sub-ledger for inventory transactions.
It is important to understand that it is much more than that. Because the method of inventory valuation may differ from company to company depending on various factors. Such as the country or industry the company is in or the management requirements for how should report the inventory.
Material Ledger in SAP is a Sub-ledger for Inventory Valuation
Material Ledger serves as a sub-ledger for inventory valuation. Traditionally SAP has categorized Accounting into:
- Financial Accounting ( FI) and
- Controlling ( CO) modules
These are part of SAP ERP.
The FI module deals with external financial reporting, such as the balance sheet and income statement. These types of reports are usually for legal and regulatory purposes and they generally follow a standard format and rules governed by the General Accepted Accounting Principles (GAAP) of the country.
Whereas the SAP CO module deals with internal management reporting such as:-
These reports are usually tailored to internal management requirements for planning, controlling and decision making.
Impact of Material Ledger on CO and FI
Even though the Material Ledger falls within the CO menu, it has as much impact on the FI module as it does on the CO module. This is because it also put impacts the inventory transactions that we post to General Ledger (G/L).
The material ledger’s reach even spans across the accounting modules as its serves as an interface with the logistics modules such as Material Management, Production Planning and Sales Distribution.
Read Related: SAP Controlling Interview Questions
Types of industries applying Material Ledger in SAP S4 HANA
Generally, companies avoid implementing the Material Ledger because they feel that it requires too much discipline. Additionally, it increases the tasks at the month-end and may become too complicated to implement and understand.
Initially, only the organizations in specific industries use to implement the Material Ledger. Such as – chemicals, oil & Gas, metals etc.
You may want to read: Concept of Cost Object Controlling in SAP
Advantages of Material Ledger in SAP S4 HANA
- Ability to evaluate inventory based on the actual cost
- Easy identification of intercompany profit in inventory
- The flexibility of viewing material costs in multiple currencies
- Transparency of all material activities carried out within a period
- Ability to set up and identify transfer pricing between profit centers
How Material Ledger in SAP S4 HANA is different from Material Ledger in ECC?
Though the concept is the same, still there are some differences in Material Ledger in SAP S4 HANA from what it is in the ECC model. To understand this, read on how is the material ledger in ECC and its functionalities.
Material Ledger in SAP ECC
SAP ERP is divided into two main modules – FI & CO. These modules separate financial accounting and management accounting tasks. This separation was useful to keep external reporting, which usually has legal and regulatory significance from internal reporting which is more for management decision-making.
Related: SAP ECC Material Ledger – Detailed Overview
Pros and Cons of FI CO separation
The benefit of this approach is that the external reports, such as financial statements and cash flow statements are not influenced by the more subjective and allocation-based model of internal reports.
The problem with this approach was that the tables for external financial reporting were separate from those for internal reporting.
Therefore, in certain cases, reconciliation issues often existed between the two modules. In the classic G/L, a reconciliation program (T.Code KALC) we normally use to bridge the gap between the two modules.
Related: SAP Finance in ECC Vs. S4 HANA
Role of Material Ledger here
Material Ledger is one of the components that has undergone incremental improvements over the years. In SAP ERP ECC system, it served the overall purpose of providing better data for specific inventory valuation scenarios such as actual costing and parallel valuation.
Inventory Valuation
Inventory valuation is the process of establishing a cost for the materials that a company own and uses.
Standard Costing
It is an effective method of recording stable prices for your materials that you can benchmark against any price fluctuations. Standard costs are typically set every year but you can do it more frequently.
The thumb rule is that you should not change your standard cost multiple times during the month. This is because it makes it a little more difficult to control your inventory costs. With a stable cost, you can therefore perform variance analysis to better understand whether you are producing efficiently or whether your raw material prices are reasonable.
However, the variances that relate to unsold inventory remain in the profit & loss account (price variance), so you cannot post them back to inventory.
Moving Average Costing
Moving average costing is a good method of keeping your material costs up to date, particularly in the case where the price keeps fluctuating.
Each time you perform a goods receipt or invoice receipt, the system updates the moving average price by taking the total inventory value and dividing it by the total inventory quantity. Thus, you can post any variance that occurs for material, directly to the inventory account if there is enough quantity in inventory to cover the variance.
We use Moving average price normally with raw materials, packing materials, Trading goods etc. Also, it is indicated with a V in the price control field in Accounting 1 view.
Parallel Currencies
The parallel currencies functionality allows inventory values to be recorded in up to three currencies as below:-
- Derive the currencies from FI
- You can use the currencies that are set up as additional local currencies in the CO module.
As shown there are two currencies (company code currency and Group currency) that the Material Ledger can adopt if you select the CO Currency Type.
3. Derive the currencies manually.
Parallel Valuation
The parallel valuation functionality allows the recording of inventory values in up to three valuation approaches:-
- Legal Valuation – This is the default valuation approach. A company code that you use in SAP records all transactions in legal view to be compatible with the rules of the country the company reside.
- Group Valuation – This approach is used where an organization is made up of multiple entities that transact with each other and also want a group view of inventory costs that eliminates any intercompany profit.
- Profit Center Valuation – This approach is used where a company contains sub-entities that are represented by profit centers and want to record any profit that occurred from transactions between these sub-entities.
Price Determination of Material Master
Price determination is also an option in the material master’s Accounting 1 view, which is only relevant when the Material Ledger is active. It determines whether the material is subjected to Material Ledger’s actual costing or not. There are two types of price determination:-
- Transaction-based (2) – With this setting, the Material Ledger is active, but actual costing is not. This option is available for materials with standard price and moving average price
- Single/Multilevel (3) – With this setting, the Material Ledger and actual costing are active. This option is available for materials with a standard price only.
Material Price Analysis
After the actual costing cockpit has been run, you can get a detailed analysis of the data that contributes to the computation of the actual cost.
As shown above, the Price Determination Structure view of the material price analysis shows the Quantity, Preliminary Valuation and price. Several tables store the periodic results of Material Ledger’s actual costing data. These tables store the header or line item data for the material ledger price, quantity, actual cost and cost component split.
During the Material Ledger conversion, material valuation tables and purchase order history tables are replicated into material Ledger tables by Transaction CKMSTART (Material Ledger Production Startup).
Challenges with the Material Ledger in SAP ECC
- Potential reconciliation issues with FI currencies
- No clear separation of valuation views in all financial reports
- Duplication of inventory valuation data
- Several execution steps in the costing run
Material Ledger in SAP S4 HANA
With the above details, you get a detailed idea of how is a material ledger in SAP ECC how functions. Now I provide here, how it functions in S/4HANA Finance. Thus, it will help you get the difference between the two.
Material Ledger in SAP S4 HANA is mandatory.
One of the changes that SAP made with S/4 HANA 1511 was to make the Material Ledger mandatory. This decision led to a lot of confusion in the SAP industry. This is because people normally perceive the Material Ledger as a tool that companies only within specialized industries or specific countries use.
In addition, the material Ledger had gained the reputation over the past few years of being complicated to set up and understand. This led to some doubt about the decision to make it mandatory for all customers that have inventory valuation requirements.
Inventory Valuation Sub-ledger
As I mentioned earlier, the Material Ledger has two objectives – actual costing and parallel currencies/ valuation.
There is now the third objective of Material Ledger which is its role as an inventory valuation sub-ledger. If your organization records inventory in its balance sheet, you will need to have a sub-ledger for inventory posting which provides more granular details of inventory transactions than those existing in the G/L (like AP, AR and Fixed assets which are also sub-ledgers.
Other important factors
- The Material Ledger is a mature and widely used solution
- More than 10,000 companies are using the Material Ledger on all continents
- Some countries (for example Brazil and Turkey) and Industries (for example oil and gas, chemicals and food) also use the Material ledger to satisfy specific legal or business requirements.
- Both large and small-to-medium-sized businesses worldwide use Material Ledger
- There is currently no other competing application that provides similar functionality.
- There is a growing use of the Material Ledger among SAP Customers.
The Valuation methods in inventory management in SAP S/4 HANA are therefore a combination of the traditional inventory valuation methods with the Material Ledger functionality.
Price Determination for Valuation Methods
| Valuation Method | Price Determination |
|---|---|
| Standard Costing | • 2 (Transaction based) • 3 (Single/multilevel) |
| Moving average price | • 2 (Transaction based) |
| Balance sheet Valuation | • 2 (Transaction based) • 3 (Single/multilevel) |
| Actual Costing | • 3 (Single/multilevel) |
Material Ledger Valuation Tables
These are the tables that store the quantities and values of several types of inventory. Such as unrestricted inventory, sales order inventory and project inventory.
The data from the SAP ERP Table MBEW, OBEW QBEW and so on, as well as their corresponding history tables (designated by an H at the end of the table name), are now part of the Universal journal ( ACDOCA).
This data also exists in the material ledger document table MLDOC and MLDOCCS (via an extract of table ACDOCA) called ACDOCA_M_EXTRACT). Further, the old inventory valuation tables still exist in SAP S/4 HANA, but they store master data values only.
Also read: Important Tables in SAP Finance
Summary
In this blog, we learned a definition of the Material Ledger by breaking out the two words “Material and “Ledger”. We learned how the Material Ledger serves as a sub-ledger for the inventory value that is shown on the balance sheet. We also saw where the Material Ledger fits into the traditional SAP FI components and how it is connected to other modules.
Material Ledger is a very important subject in SAP CO and thus, in SAP S4 HANA Finance. Since CO is already merged into S/4HANA Finance, not a separate segment. This is critical for implementation, though it depends upon a company’s requirement if they want it in SAP ECC. However, for S/4HANA Finance, Material Ledger is mandatory.
So you consider it a must-have skill for your career in SAP S/4HANA Finance and becoming a fully equipped and successful SAP consultant.
