One of the most tangible changes in the evolution towards S/4HANA was the obligatory activation of the so-called Material Ledger. Part of the SAP Controlling (CO) module, the Material Ledger is a line item wise record of all material movements. Its main attraction is the permitted management of material prices in various currencies, using different valuations. Moreover, the Material Ledger is instrumental in the (optional) introduction of actual product costing. In what follows, the components and advantages of the Material Ledger will be explored. Subsequently, we will shed light on actual costing: what it is, how it is effectuated, and what kind of impact it could have on your pricing procedures.
The Material Ledger’s Components
SAP’s Material Ledger is a line item wise record of all events related to a company’s materials, such as goods receipts, invoice receipts and production order settlements. It is part of S/4HANA’s Universal Journal. Its main goal is to offer businesses more transparency in the efficiency of their material movements. In that spirit, the Material Ledger also comes with a complementary set of analytical and reporting functionalities on both the GUI and Fiori.
While the Material Ledger’s activation is compulsory in S/4HANA, its set-up still allows for plenty of customization towards a company’s specific requirements. First of all, each event in the Ledger can be logged in up to three different currencies: a standard local or company code currency, a global or controlling area currency and a hard currency. The latter mostly appeals to companies suffering high inflation rates, as they will be given more insight into the inflation’s effects on their stock. The global currency is mainly beneficial for consolidating purposes. All conversions to the desired currencies are realised at historical exchange rates; i.e. the exchange rates that were applicable at the time of the postings.
Secondly, each transaction relevant to the Material Ledger can be recorded in conformance with up to three different ‘valuations’. The first mandatory valuation is the ‘legal’ or ‘company’ view. Here, each company code is treated as a separate legal entity. Intercompany pricing agreements (‘transfer prices’) and legal tax requirements are therefore taken into account when purchasing materials from affiliated companies. The ‘group’ or ‘management’ view, on the contrary, regards the entire organisation as a single group entity. Any intercompany profits are eliminated, thereby providing a consolidated corporate financial report. Lastly, the ‘profit centre’ view addresses an organisation’s profit centres as independent entities. Any management prices agreed between divisions are considered.
The combination of a currency and valuation constitutes a ‘valuation approach’. Required valuation approaches should be identified before the Material Ledger is set to productive. Once activated, these settings can no longer be set or changed. It is recommended to only set up those valuation approaches that will be used in the future, to avoid excessive system processing time and maintenance.
Figure 1: There exist several combinations of currencies and valuations, so-called ‘valuation approaches’. These can be assigned to a Material Ledger Type, which in turn is assigned to a valuation area (see Figure 2).
Materials themselves are valued according to the price control set in their master record. Traditionally, you can choose between standard pricing (S) and moving average pricing (V). When applying standard pricing, the first step entails a cost estimation. The resulting estimate is subsequently used to attach a constant price to the material in all related transactions of at least one period. Any differences between the estimated price and the real price of the goods movement are posted to a price difference (P&L) account. Consequently, the inventory’s value could stray from reality when a material’s price changes starkly throughout time. This effect will only be amplified for products whose bill of materials consists of multiple levels, as each production level (raw materials, work-in-progress, finished goods) consumes increasingly more materials whose price differences are not factored in.
The second price control technique, moving average pricing, is more cautious of real-time price fluctuations. A material is assigned the average inventory value; i.e. the total inventory value divided by the number of items in stock. These prices are recalculated after every goods receipt, invoice receipt, and/or order settlement. Even though this might induce more expeditious price adaptations, it also leaves (production) cost management without a stable benchmark and causes small mistakes in data entry to have major effects. Moreover, material prices become heavily dependent on the time at which the consumption of goods issue is recorded in the system: when the invoice receipt follows the consumption, the procurement cost will not be reflected in the value of the issued material.
By relying on the Material Ledger, companies can choose to activate a third price control technique, which combines the advantages of both traditional techniques while avoiding their disadvantages. Dubbed ‘actual costing’, the technique applies a constant standard price throughout at least one period. Any differences between the constant price and the real price of the goods movement are noted in the Material Ledger on a per material basis. At period end, these recordings are used to derive the `periodic unit prices (PUP)´ of the materials. The calculated PUP can be taken into account when re-evaluating the inventories and consumptions (‘closing postings’) or when determining the planned material prices of future periods (optional update of the material master records). In other words, actual costing offers a stable cost management benchmark while facilitating real-time awareness of material prices.
Depending on your system configurations, variances between the constant periodic price and the real price of the goods movement can be tracked at ‘single level’ or ‘multi-level’. Single level differences occur for an individual material within a direct procurement or settlement process. Multi-level differences start as variances for lower-level products (e.g. raw materials), which are compiled for higher-level products (e.g. semi-finished and finished products) based on the BOM and consumed quantities. By rolling variances across different manufacturing levels, we can obtain insight into the efficiency of different production processes.
As mentioned before, the activation of the actual costing feature is optional to the Material Ledger. Additionally, when actual costing is activated, its calculations could equally only be used for informative purposes without impacting the inventory value and reliance on traditional pricing control methods. In that case, the actual costing calculations do not give rise to any postings or re-evaluations.
If you have any questions about Material Ledger or Actual Costing, do not hesitate to request more information or leave a comment in the comments section below.