Valuation of inventory in SAP as per business requirements

# SAP Costing # SAP Inventory Valuations # SAP FICO # SAP CO

Facts of the case:

In standard SAP normally, we keep the SFG/FG 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 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:

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:

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	1067.40	Balance before settlement
Variance settlement (Standard)		1,000
Closing stock after settlement			206.74	10	2067.40	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.

RM variance account Dr. (Separate Cost Centre)

Activity Variance account Dr. (Separate Cost Centre)

COGM account Cr. (Production / Process Order)

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

Valuation of inventory in SAP as per business requirements

Solution in SAP System for the above requirements:

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