Integrating Material Master Records, and Product Cost Planning

Some areas of the material master is system general data and some are plant specific.

In costing, the material master is used in the calculation of material costs and is updated with prices.

The accounting, costing, and material requirements planning (MRP) views are relevant to costing.

The characteristics of each view are as follows:

• Accounting views:

  The accounting view contains parameters relevant to material valuation, material price control, and account determination.

• Costing views:

  The costing view contains control parameters for material costing and characteristics required for Cost Object Controlling. Costing lot size can only be greater than the pricing unit. The valuation class triggers the automatic account assignments when transactions occur.

• MRP views:

  The MRP view contains parameters that define the material status in Production Planning, scrap factors, special procurement, co-product and bulk material (high volume / low value items) indicators and specifies the production version.

The material type determines whether a costing view is allowed for a material. The material type specifies certain default values that are set in the material master.

• Lot size:

  You can use the lot size that you enter in the material master as the default value for generating the material cost estimate. The lot size can be overwritten in individual processing. It cannot be overwritten in mass processing.

• Valuation class:

  The valuation class controls account determination. You determine the consumption account that also is used as the primary cost element in the itemization.

• Origin group as subgroup of a cost element:

  If you enter an origin group for a material, the combination of origin group and cost element is updated in the controlling (CO) system. You can define the overhead for specific material groups, such as input material groups and the cost components for specific raw material groups.

  Note

  Origin groups are used for raw material. Overhead groups are used for manufactured items.

• Overhead group:

  The overhead group is the key that groups materials manufactured for the same type of overhead application, based on the product.

• Planned prices 1, 2, and 3:

  Planned prices 1, 2 and 3 can be used for reporting and to valuate materials in cost estimates. You can either enter the planned prices manually or determine them using a material cost estimate. If they are determined by a cost estimate, the prices are updated on the material master using the Price Update function.

• Tax-based and commercial prices:

  You enter tax-based and commercial prices either manually or using the Price Update function from material cost estimates. An inventory cost estimate can use these prices for valuation and then update the costing results in the tax-based and commercial prices fields of the material master of the produced material.

• Price control:

  The price control indicator specifies the price you use to evaluate the inventory of a material. The available options are standard price and moving average price.

The following applies to valuations at the standard price:

• All stock postings take place at standard prices.

• Variances are posted to the price difference accounts.

• Variances are updated.

• Price changes can be observed and monitored.

If a material has a standard price control, the value of the material is calculated with the standard price. For subsequent goods movements or invoice receipts where the price varies from the standard price, the differences are posted to a price difference account.

The Posting Example - Standard Price figure illustrates a goods receipt posting with a price (2.40) that is not the same as the standard price (2.00). This leads to price variances that are carried on a price difference account (+/– 0.40). The subsequent invoice receipt with a varying price (2.20) is also not posted to material stock. Instead, the variances are written to the price difference account (–20.00).

The features of standard price control are as follows:

• All stock postings are carried out at a standard price.

• Prices remain constant for at least one period.

• Price fluctuations do not credit or debit the cost objects (for example, orders) due to consistent controlling with the standard price as a benchmark.

• Calculation of the standard price with the cost component splits.

• Recommended for all material types.

• Price differences cannot then be adjusted to the ending inventories or the consumed products (such as production withdrawals and sales).

If the material valuation takes place at a standard price, all the goods movements are valuated with the same price. The standard price control enables consistent controlling of the production process.

Variances within production are transparent. The use of a periodic price is especially recommended for periodic controlling.

The standard price can also be used as a benchmark. You can measure various methods of production or compare the contribution margins of a material in various market segments for Profitability Analysis (CO-PA).

One disadvantage of standard price control is that the variances or the price differences cannot be allocated to the subsequent production levels. Real-time cost controlling for the finished product cannot be guaranteed.

The example in the figure shows how the material stock value and the material price can appear the same as the actual price of a material with a valuation at the moving average price (V).

In the scenario of invoice receipt after goods receipt, the GR/IR account is charged with the goods receipt amount of 300.00 as an offsetting entry to the inventory posting during goods receipt. The GR/IR clearing account is settled at the purchase price when the invoice receipt is updated and the vendor account is updated at the invoice price of 400.00.

When both receipts are posted, the moving average price (V) in the material master is adjusted (from EUR 2.00 to 2.50 to 3.00).

If a goods issue takes place, it is valuated with the current moving average price (EUR 3.00).

Therefore, the moving average price (V) is more useful if you want material stock values and material prices to reflect up-to-date data.

The posting logic of a moving average material appears to be a very accurate method of inventory valuation, but it depends on the sequence of postings. If the inventory is issued prior to invoice receipt or order settlement, the stock is issued at the incorrect value and the system does not support revaluation of the earlier inventory transactions.

The advantages of moving average price are as follows:

• The stock value is adjusted each time a goods receipt takes place.

• Real-time price fluctuations are posted to the stock.

• Prices differences only occur in exceptional circumstances.

The disadvantages of moving average price are as follows:

• Price fluctuations cannot be adjusted to the finished products of the higher level (standard price).

• Only recommended for raw materials or materials procured externally (real-time price for goods receipts should be known).

• Incorrect entries have severe consequences (compounded errors).

• Danger of incorrect valuations when invoice receipt is delayed.

These disadvantages illustrate how the decision to use the moving average price (V), to have material stock values and material prices reflect up-to-date data, can be a mistake.

For this reason, we recommend using the moving average price (V) only for material valuation of raw materials and trading goods.

Materials produced in-house, such as semi-finished and finished products, can involve considerable risk. At period-end closing, many variances from order settlements, such as follow-up costs, are posted to a relatively small stock. This can lead to either price variances or incorrect valuations.

Another disadvantage of the moving average price (V) is that incorrect entries may be made, for example, typing errors made when a posting is being carried out that go unnoticed can lead to an unrealistic stock value. Subsequent goods issues are then valuated with these incorrect prices (compound errors).

If a company permits the use of negative stock quantities, this may lead to incorrect valuations.

In a multilevel production structure, variances can appear for various objects at various levels of the production process.

With external procurement, variances appear as a result of the change in market and vendor prices. In particular, inflation scenarios can cause significant variances.

Internal production variances can arise in the area of cost responsibility, such as cost centers, or in the area of production, such as production orders.

Standard cost accounting variances are posted as price differences to CO-PA because these variances cannot be posted to the material stock. They can be divided into various variance categories, such as price variances and quantity variances in CO-PA, but they cannot be assigned to their corresponding products.

In FI, these variance categories correspond to the balance of a price difference account. This balance cannot be proportionally allocated to the ending inventory, such as assets, consumption, or period expense, from an external accounting point of view.

Standard cost accounting is beneficial because it enables you to perform consistent and efficient controlling of production procedures by comparing the current actual prices with their respective standard prices.

With standard cost accounting, variances are posted at their level of occurrence and are not visible on the consuming material. Variances for a purchased material cannot be posted to the higher level of production. When the profitability of a finished product is evaluated, the variances of lower-level products are excluded.