Ensure Accurate Inventory Valuation by Using Actual Costing Functionality

  • by Muralidharan Sethuraman, Director Enterprise ERP IT Finance, Johnson Controls
  • September 23, 2009
Break through a common misconception about how the actual cost is updated as the standard price in the material ledger and actual costing. Understand the process of how you can use the functionality to compute the actual cost of the material and carry out accurate inventory valuation at the end of the period. By following the sequence of the material ledger closing process, you’ll see why the update of the actual cost of the material as a standard price happens with a lag.
Key Concept

SAP actual costing/material ledger functionality fulfills two basic objectives of product cost controlling: the ability to carry material prices in multiple currencies and valuations, and carrying out actual costing. In the absence of the material ledger, inventory values are maintained in local currency in SAP systems. The material ledger enables the system to carry inventory values in two additional currencies or valuations by updating all goods movements for a material in up to three currencies or valuations. Actual costing expands on the material ledger functionality by determining actual costs for externally procured materials and materials produced in house. Actual costing calculates an actual cost (i.e., periodic unit price) for each material and valuates inventories of raw materials, semi-finished products, and finished products.

Many SAP users are confused by the term “actual costing” in the material ledger. They expect that the periodic unit price computed by the material ledger for the last period is immediately updated as the standard price of material for the following period. This is not the case — there is always a one-month delay in the update of the periodic unit price as the standard price.

I’ll explain why the delay occurs and what prerequisites enforce this delay, followed by recommendations on how to carry out a material ledger closing process in the correct sequence. You’ll see how the actual cost is calculated by the material ledger to revalue the inventory and how to update the standard price of a material. Based on the sequence of the material ledger closing process, the update of the actual cost of the material as a standard price happens with a lag. Knowing why this lag occurs helps in defining the correct period-end close process. It also helps cost accountants define the strategy of material valuation with the material ledger and actual costing.

See the sidebar “Valuating at Actual Cost” for more information about how companies use the method. For information about terminology such as periodic unit price, price determination, and process categories, see the sidebar “Key Terms in the Material Ledger.”

Muralidharan Sethuraman

Muralidharan Sethuraman is director enterprise ERP IT finance at Johnson Controls. He has more than 16 years of industry experience leading and managing multiple SAP implementation and business transformation programs across geographies. Muralidharan is currently leading the SAP S/4HANA program at Johnson Controls. He specializes in SAP Financials and has done design lead, solution architect roles in global SAP implementation programs. Muralidharan is a subject matter expert in the areas of product cost analysis and management, inventory and working capital management, management reporting and profitability analysis, financial analytics and reporting, and business planning. He has published multiple articles in Financials Expert in these areas.

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