Facts of the case:
In standard SAP normally, we keep the SFG/FG (Semi-Finished Goods/Finished Goods) in standard price, the impact of that is as under;
- The day when we run the standard costing run all the inventory gets updated with the new standard cost and system post a revaluation gain / loss entry in Financial books.
- All old inventory of SFG/FG also gets revalued with this new standard cost, even though that inventory was very old in nature.
In this way an abnormal gain/loss gets booked in our books which may not be the actual in nature.
Valuating the very old inventory with new and latest cost also would not be the right approach, as we should value the inventory with cost or NRV (Net Realizable Value) whichever is less. For old inventory of SFG/FG always the NRV would be lower than the cost.
Hence the standard practice of maintaining the SFG/FG with standard price sometimes is a matter of debate and many finance experts not agree with the concept of maintaining the SFG/FG with the standard price for valuation and stock keeping.
Business Requirements
Business requirements regarding inventory valuation often focus on distinguishing between old stock and current production to ensure accurate financial reporting:
- Valuation team would expect that the old inventory should not be revalued with the new standard cost.
- At the same time the current months production should be valued with the new standard cost.
- Every time system should calculate a new weighted average price for movement of stock for sales/consumptions etc.
The new weighted average price would be worked out as under: rest same
| Details | Op. MAP | New Std. cost | New MAP | Stock Qty | Amount | Remark |
|---|---|---|---|---|---|---|
| Opening stock | 100 | 100 | 10,000 | Stock value in books | ||
| Standard cost run | 120 | 100 | No impact in FI Books | |||
| Production | 120 | 50 | 6,000 | Entry in FI Books | ||
| New MAP by System | 106.66 |
Stock value: 16,000
Stock qty: 150
MAP: 16000/150=106.66
|
||||
| Stock in system | 106.66 | 150 | 16,000 | With new MAP | ||
| Consumption/Sales | 106.66 | 30 | 3,200 | With new MAP | ||
| Closing stock | 106.66 | 120 | 12,800 | With new MAP |
In this above example the opening stock of 100 quantity remain at 100/- only, however the current months production is being valued with the new standard cost and as a result the closing stock gets adjusted accordingly.
Solution in SAP System for the above requirements:
- All the SFG/FG we should maintain in “Moving Average Price” with price control “V” in material masters.
- Standard cost of SFG/FG should be executed at the start of every month. With T. Code CK40N
- Production of SFG/FG should be booked with latest standard cost.
- Consumption of SFG for FG production would be booked with the moving average price.
- Delivery of FG for sales purpose also would be posted with moving average price.
- Settlement of SFG/FG production / process order would be done through a custom program and not through the standard order settlement program. The reason for this is as under:
With standard settlement program the total variance would be posted in the inventory account (if stock quantity is >= 0), as a result the moving average price would be disturbed and incorrect. To continue with the above example:
| Details | Op. MAP | Variance | New MAP | Stock Qty | Amount | Remark |
|---|---|---|---|---|---|---|
| Closing stock | 106.66 | 120 | 12,800.00 | With new MAP | ||
| Sales of goods | 106.66 | 110 | 11,732.60 | PGI | ||
| Closing stock | 106.66 | 10 | 1,067.40 | Balance before settlement | ||
| Variance settlement (Standard) | 1,000 | |||||
| Closing stock after settlement | 206.74 | 10 | 2,067.40 | Revised MAP after settlement |
- The revised MAP has been changed from 106.66 to 206.74, this will lead to incorrect valuation of stock valuation if we go with standard settlement of process/production orders.
- Here we have a full proof and tested custom program for settlement of production / process order, with this program we will post these variances in a separate GL account. The entries would be as under:
- With the above accounting entries, the existing stock valuation and MAP will remain same and the valuation would not be disturbed.
For professional requirements on the above subject please connect with us on mail id; sarat.agrawal@infocost.net
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