SAP Material Ledger – Detailed Guide on Concept & Functions

Last Updated on November 21, 2022 by Pradeep

(Article updated:- 3rd June 2021)

What’s covered in this Article?

• Inventory Valuation Methods and their uses
  • Advantages/Disadvantages of Moving Average Price
  • Advantages/Disadvantages of Standard Price
  • How to choose the best valuation method
• The objective of SAP Material Ledger
• Functions of SAP ML
• Multiple Valuation Views in SAP ML
• SAP Material Ledger Process
  • Actual Cost Calculation
  • Material Price Determination & Price Control methods
• Importance of Material Ledger for SAP Consultant

Inventory Valuation Methods

I already mentioned above, that the Material Ledger helps in inventory valuation. Subsequently, regarding how your system will evaluate material inventory and all material movements, The Price Control field in the Material Master Data Accounting 1 view indicates the same.

Using the SAP ECC, we have two alternatives to evaluate the inventory.

• Standard Price (SP)
• Moving Average Price (MAP)

Use of Standard Price

Standard Price means that you have a constant price at which material is evaluated over some time.

Importantly, if you set the material Price Control as Standard (S), the ECC system evaluates the movement of all the goods in your ECC system at a constant price. Though, for a certain period.

The standard price can be the result of a product cost-estimate process.

Suppose while using the standard price, a purchase order (PO) or invoice receipt has a different price than the standard. In this case, the system will post the price variance between the receipt and the standard price to the price variance account. It would not take it into account in the inventory valuation.

Use of Moving Average Price

If you select this, then you get a price that the system recalculates automatically after each goods receipt or invoice entry.

Heads-Up: SAP CO Interview Questions

Best inventory valuation method in SAP Material Ledger

You may now be wondering which is the best valuation method for inventory when using an SAP ECC. Well, the answer is not that easy to figure out.

For this, we first understand the advantages of both of these methods individually.

Advantages of the Moving Average Price

Variances updated immediately– We understand some variances occur for materials procured externally or produced in-house. With MAP, the system updates those variances immediately in the material price and material inventory value.

This is because the material price reflects the average procurement cost of the material. Noteworthy, in principle, we can value the material issued at the actual cost.

Though, in special cases, the system allocates the variances to the FI price variance account, rather than to the inventory.

Disadvantages of the Moving Average Price

There could be many disadvantages too.

Price dependent on time– One: By using price control “V” for the MAP, the price is almost dependent on the time when we enter the issued goods in the system. Please note, this is the price that you use to value a material consumption.

May have in-consistent Cost Management– Another disadvantage of price control V is that it does not guarantee consistent cost management of a production process. This is because comparing results from different areas is not meaningful without a benchmark.

Also Learn: Calculation of Production Order and Variance using ML

Things to keep in mind:-

Any mistake in data entry can cause immediate and unwanted changes in the material price.

Also keep in mind that for in-house production, we make the postings to the price variance accounts. Understand this with a scenario.

The Scenario:-

Suppose, you have a manufacturing order for “V” price-controlled material. For this, you have no inventory while you settle the order. Further, you produce and sell a finished good in the same period and thus, the final inventory quantity is zero.

Now, assume the manufacturing order had variance. If you settle it when the inventory is zero, the price variance account receives the variance instead of the inventory or cost of goods sold account.

Do you get the point?

The price control “V” has several advantages though. However, you can never assume that material with “V” price control always represents the correct actual cost. 

Advantages of Standard Price

Consistent Price– With Standard price control, the system evaluates the good’s movements with a constant price during a period. Further, any receipt that has a different value from the standard price will result in a posting to a price variance account.

In the production process, quantity variance is the main interest.

Consistent Cost Management – When we set the price as “Standard”, it ensures consistent cost management of the production process. It further makes quantity variances within production transparent and comparable.

Benchmark Price – Another advantage is that we can use the standard price as a benchmark by which we can measure different lines of production.

Disadvantages of Standard Price

Doesn’t reflect Actual cost – The main disadvantage is, the standard price remains constant for an entire period. It does not reflect the actual costs incurred during that period. Consequently, it can lead to incorrect valuation prices.

While externally procured materials it affects over a long period. For in-house production materials that have changed within a period, it affects too.

Incorrect Pricing at multilevel production – This issue increases in multilevel production where each production level is consuming the lower levels at an incorrect price.

Variance Accounting Issue -Another disadvantage is that the variances from the standard price are collected in a price variance account in FI. It also does not correct the inventory account.

Likewise, we cannot assign the variances collected in the price variance account to each material.

So Now, Which Should We Use?

The conclusion is that both price controls V and S have advantages and disadvantages.

While MAP could theoretically be closer to an actual cost. It can also lead to incorrect valuation. Thus, can create variances as the standard price normally does.

In both cases, we cannot assign the variances to each material, its inventory values and the cost of goods sold.

Suggestion

Organizations should use Standard Prices for in-house produced materials and Moving Average Prices for procured materials that fluctuate in their raw material prices.

In any case, (Moving or Standard), may fail in an organization with big fluctuations in raw material prices or varying production structures.

Related Post: What is New in SAP Controlling in S/4HANA

SAP Material Ledger – Objective

As mentioned earlier in this post too, Material Ledger in SAP is an auxiliary ledger that has three main objectives.

1. Carry material prices in multiple currencies
2. Carry material prices in multiple valuations
3. Collect all material movements and variances (goods receipts, invoice receipts, goods issue etc. ) and use this data to calculate a periodic actual cost.

Without the Material Ledger, we can evaluate the inventory system with one currency only. I.e. Company Code Currency.

However, with the SAP material ledger, the system can carry inventory values in two additional currencies or valuations.

Uses and Functions of Material Ledger in SAP

There are many uses or functionalities of SAP Material Ledger which help in inventory valuation and price management. Some of them are here below.

1. Carry Multiple Currencies

One of the main tasks of the Material Ledger is to carry inventories in multiple currencies. With the Material Ledger, all goods movements in the system can be performed in up to three currencies.

Amount translated into parallel currencies based on exchange rates at the time of posting. One of the first decisions you have to make when working on a Material Ledger project is which currencies you want to carry inventory values.

This is very important because once you have a productive Material Ledger system; you are no longer able to change its currencies. 

2. SAP Material Ledger Offers Standard Product Cost

You can save the standard cost estimate results in two currencies (Controlling area and company code currencies). Therefore, if you are using the Material Ledger and it is configured with the same two currencies as the company code and controlling area. In that case, the results of the cost estimate are not translated into the Material Ledger but rather are transferred directly.

Do Read: A Comprehensive Guide on SAP Controlling for Beginners

3. Default Manufacturing Order Settlement

If you are using the Material Ledger, the manufacturing order as with the cost estimate is managed by default in two currencies (Controlling area currency and object currency).

Note:
If you find the Material Ledger configured with the same two currency types as in the company code and controlling area, then the values in the manufacturing order correspond to currencies that are managed in the Material Ledger.
These are not translated but rather transferred directly.

4. Translates Invoice Receipt to Current Exchange Rates

When you post the invoice, the system translates the amount into the currencies managed in the Material Ledger in SAP at the current exchange rate.

An integrated value flow between functionalities in all currencies is achieved only if the functionalities use the same currency types.

Making and release of the standard price and order settlement are examples where the Material Ledger receives values from Controlling without the need for any translation if the currency types are the same.

For invoice receipts, the invoice price which by the nature of the application given in only one currency that is invoice currency, is translated at the time of translation into the company code currency and the parallel Material Ledger currencies and then stored in the Material Ledger.

You may be interested in:- SAP Controlling Interview Questions

Multiple Valuations Views in Material Ledger in SAP

The Parallel Valuation Function is also called the transfer price. If you want to use it, then the values in each currency can also represent a separate valuation view.

Examples of these views are:

1. Legal Valuation View
2. Group Valuation View
3. profit Center valuation View

1. Legal View

This mandatory view represents the sales value/price of goods or services transferred between legally independent member companies in the corporate group.

These values are reflected in the individual financial statements of these companies.

2. Group View

In this view, we can value the goods and services using the corporate cost value. For these prices, we eliminate the internal profits from the legal view prices.

3. Profit Center view

This is another optional view. Here we can use the negotiated prices to transfer goods and services between profit centres.

Additionally, we use them to determine their internal profitability.

Also Read: Profit Center Accounting -Interview Question

SAP Material Ledger Process Flow

The process of SAP material Ledger includes various calculations like Actual costing, price determination, price control, and valuation of material inventories. Let us understand the important ones here.

Actual Costing calculation

Actual costing is a function of the Material Ledger. It determines a periodic actual cost for each material. Material that businesses procure externally or produce in-house.

Additionally, we can use the Material Ledger actual costing to value all material inventories cost of goods account, WIP (Work in Process) and internal consumption.

The actual costing calculation reads all variance that has been previously collected in the database. It may include purchasing price variances or production variances. Likewise, it may include plan/actual activity type rate variance to calculate the actual price.

Then the actual cost calculated by the Material Ledger can evaluate inventory and roll up variances to higher production levels.

We can also use the actual price to reevaluate WIP, internal consumptions or cost of goods sold.

Learn: SAP S4 HANA Finance with Material Ledger

Material Price Determination in SAP Material Ledger

Price determination control refers to a field in material master data that specifies how the material price determination is set.

We get this field available only if the Material Ledger is active. Similarly, we also get this if it determines whether a material is set to be part of the actual costing calculation or not.

There are two options for Field price determination control:

1. Transaction-Based
2. Single or Multi-level

In SAP Screen you see it as “PRICE DETERM”.

Now, if we select Transaction-Based for a material, the system will not include the material in the actual costing calculation. Using Price Determination 2 for a material means that you have two possibilities to set up the price control.

• Price Control V
• Price Control S

Understand each of them.

Price Control V

Noteworthy, With Price Control V (MAP) and price determination Transaction-Based, we can calculate the MAP and use it to evaluate the inventory.

Price Control S

Likewise, With Price Control S, we evaluate the material with the standard price and calculate a MAP for information purposes.

If you select Price Determination 3 (single/Multilevel) for a material, the material will be part of the actual costing calculation. In this case, price control has to be S (Standard).

The standard price remains unchanged during the period and PUP is calculated at the end of the period.

Also Read: Bills of Material in SAP S/4HANA

Why learning SAP Material Ledger is Important for SAP Consultants?

Material ledger has two objectives.

• One- Parallel currency and valuation.
• Two- Actual Costing.

So you can certainly conclude that by learning SAP material Ledger, you being an SAP FICO consultant, can do the inventory valuation and other related work efficiently.

However, Material Ledger has a second objective also.

I.e. Positioning the Material Ledger as a Sub-ledger for inventory valuation. And now this is a mandatory part of the Material Ledger for S/4HANA.

Since in every S/4HANA implementation Material Ledger has been mandatory, obviously it becomes mandatory to learn for SAP S/4HANA Finance consultants also. To work on S/4HANA implementation.

Even in SAP Controlling interviews now, you have a high chance to get questions on this subject from interviewers.

In this article, you understood, the basic concept of Material ledger in SAP, its use, functions and process. You also get the valuation views in SAP Material Ledger. But there is much more than this to learn which you can only do by practising it practically.

Learn Material Ledger configuration in:- SAP S/4HANA Finance Training by Pradeep Hota.

Also. it is a key subject in SAP Product Costing which is an important subject of SAP S/4HANA Finance.

With the presence of cloud technology, now we have Material Ledger in SAP S4 HANA also. The basic functionality is the same, though more advanced.

Companies strive to get consultants who are good at Product Costing (and of course Material Ledger too). So, if you learn it really, it would enhance your chances to get ahead of the crowd.

Also Read: Difference between SAP FICO and S4 HANA Finance

Watch Video: SAP Product Costing | Standard Costing