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When manufactured goods are issuedfrom stock to sales, the posting to the cost of sales account is usually based on an estimate of the cost of goods sold(COGS). This estimate — commonlyknown as the standard cost — is calculatedby looking at the bill of material (BOM)and routing for the product and creating acost estimate for each semi-finished andfinished product to calculate the cost ofthe material shipped to the customer.

While this valuation at standard costs isperfectly acceptable in the United Statesand Europe, Latin America and Asialegally require companies to value COGSwith a price that reflects the actual costsfor the product. For more information onthis subject, refer to Sharon Tang’s article“Statutory Requirements Compliance: AreYou Ready for China?” in the January2005 issue of SAP Financials Expert.

I’ll show you how to use new functionsavailable with the material ledger (CO-PC-ACT) in R/3 Release 4.7 toadjust the cost of sales accounts to reflectthe actual costs for the period. Also, if you are working in a make-to-order environ-ment, I’ll show you how to use the samefunctions to update the sales order orproject with the actual costs. (See thesidebar, “What Are Actual Costs?” onpage 11.)

First, let’s look at how the standard costsfor the manufactured product are set. The

Product Cost Planning (CO-PC-PCP) func-tions are used to create a multi-level costestimate to determine the costs for eachmaterial at the start of the year or period.This explodes the BOM and calculates thecosts of the raw materials and each semi-finished and finished product in turn toarrive at a standard cost for the productsold to the customer. Usually, a costing runis used to calculate and update the stan-dard costs for all materials centrally.

In principle, the standard costs represent atrue and fair view of the material costs. Inpractice, however, variances can occur atany stage of the manufacturing process,resulting in price differences on the asso-ciated purchase orders and productionorders. In a standard costing environment,these variances are posted to a price dif-ference account. Clearly, if these variancesare significant, the standard costs do notreflect the true costs of manufacturing theproduct sold.

It is the task of the material ledger tounravel the postings to price differences.Variances are collected with respect to therelevant material in an additional set oftables, instead of being subsumed in asingle account. At the end of the period, asecond costing run calculates the vari-ances for each procurement alternativeand material and then applies these differ-ences either to the goods in stock or to thegoods consumed in the next manufactur-ing level, thus rolling the actual costs

through the production structure in a waythat mirrors the process in Product CostPlanning.

The result is inventory values for eachproduct that include all the variances. Ifyou are new to this area, you might find ituseful to refer to Kurt Goldsmith’s article,“Hard-to-Get Inventory Analyses BecomeEasy Via the Material Ledger 4.6,” pub-lished the July/August 2002 issue ofFI/CO Expert.

Prior to Release 4.7, the value flow cap-tured by the material ledger stopped as thefinal goods were delivered to inventoryand ignored the goods issue to the salesorder or project that completes the processfrom a logistics point of view. In make-to-stock production, the goods issue resultedin an FI posting only, whereas in make-to-order production, the posting was addition-ally reflected on the cost collector for thesales order or project. I’ll show you how

Include Actual Costs in COGS with Material Ledger in Release 4.7

by Janet Salmon, SAP AG

SAP uses the term “aaccttuuaall ccoossttss” invarious ways. For the materialledger, the actual costs are calcu-lated at period close, taking intoaccount all material movements andinvoices associated with the rawmaterials and the actual cost of theconfirmations to the productionorders. R/3 determines these actualcosts using a multi-level costingprocess that takes account of allgoods movements within a plant.This article refers only to the mate-rial ledger definition of actual costs.

Key ConceptDoes your cost of goods sold (COGS) figure match your actual costs? Learn how to use newfunctionality in the material ledger to complete the value flow through R/3 and assign price dif-ferences to the cost of sales accounts to ensure that the COGS reflects the actual costs.

>>

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the “revaluation of consumption” functionsin the Material Ledger extend the valueflow to include the goods issue to the salesorder in Release 4.7, allowing you toupdate the cost of sales account and, ifnecessary, the sales order or project.

ExampleLet’s say that you need to produce and sella demo CD in Mexico. Figure 1 showsthe material master (transaction MM03)for the demo CD together with its valua-tion parameters on the Accounting 1 tab.Experts recognize this subscreen as theMBEW tables. You are manufacturingdemo CDs to stock, instead of to order,which means that the fields VC:Sale Ord.Stk and Project Stock VC are blank. In amake-to-order environment, either salesorder stock or project stock would also beactive. Full details on valuated sales orderstock are beyond the scope of this article.If you want to know more, refer to theFI/CO Expert article on valuated salesorder stock by John Jordan, “Make-to-Order WIP and Cost of Sales: You HaveThree (Not Two) Options,” in the October2003 issue.

Two fields in this screen are specific tothe material ledger — the flag showingthat the material ledger is active (ML act.check box) and the price determinationmethod (Single-/Multilevel in this case).I’ll return to these later when I talk aboutconfiguration. Just as you can access thestandard cost estimate used to set the stan-dard costs from the material master, youcan use the Mat. Price Analysis button toaccess details of how the actual materialcosts were determined from the materialmaster. This takes you to the screenshown in Figure 2. You set up myexample as follows:

Use a production order to manufacture 50demo CDs and deliver them to stock. Youcan see this posting under Receipts>Pro-duction>Production Version 1 — thegoods receipt is document 1000000182 inthe material ledger.

Material master showing settlement controlFigure 1

Result of revaluation of consumptionFigure 2

Next, run an order settlement for the variance of 574.70 Mexican pesos thatoccurred during manufacturing. You can see this posting under Receipts>Production>Production Version 1 — the order settlement is document1000000183 in the material ledger.

Issue 40 demo CDs to a sales order. Youcan see this posting under Consumption>Consumption>Account 893015 — thegoods issue is document 1000000184 inthe material ledger. Ten demo CDs remain

in stock (ending inventory).

When you carry out the costing run, theprice differences from production (574.70Mexican pesos) are assigned as follows:

• 459.76 Mexican pesos to the cost ofsales account 893015. You can see thisposting under Consumption>Consumption>Account 893015 — the revaluation of consumption is document 4000000398 in the materialledger.

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• 114.94 Mexican pesos to the endinginventory. You can see this postingunder Ending Inventory –— the price differences are in document4000000399 in the material ledger.

Now I will walk you through the customiz-ing steps in the material ledger and thechanges to the costing run required torevaluate consumption postings. (If you arenew to the material ledger or need a reviewof what happens prior to revaluation ofconsumption, see the sidebar on the nextpage, “Steps in the Costing Run for theMaterial Ledger.”)

Material Ledger GeneralSettingsIf you are setting up the material ledgerfor the first time, start in the accountingview of the material master (Figure 1). On the Accounting 1 tab of the materialmaster, you can see that the material priceis stored in three currencies, Mexicanpesos, Euros, and US dollars, and that theprice control remains S (standard costs) in all currencies to ensure that the prelimi-nary valuation uses standard costs. TheML act. check box indicates that thematerial ledger is active, so price differ-ences will be collected for the material.

As shown in the Price determinationfield in Figure 1, the settlement controlhas been set to 3 for multi-level settle-ment. This means that the R/3 system usesa costing run to assign these differences toeach level of production (and ultimately tosales) at the end of the period. To generatethese fields in the material master, youneed to activate the material ledger for theplant by following the IMG menu path

Controlling>Product Cost Controlling>Actual Costing/Material Ledger>Acti-vate Valuation Areas.

For multi-level actual costing, check thatthe automatic update of the quantity struc-ture is activated by following the IMGmenu path Controlling>Product Cost Controlling>Actual Costing/MaterialLedger>Actual Costing>Activate ActualCosting. This ensures that all goodsmovements that affect inventory valuationare tracked to construct a multi-levelquantity structure for each product.

You might be familiar with the term “quan-tity structure,” referring to the BOM androuting used as the basis for standardcosting. To arrive at the standard costs,individual BOM and routing items can bedeactivated at numerous places. Becauseactual costing uses the goods movements inthe Materials Management (MM) module,you don’t need to revisit the BOMs androutings to get to your actual costs.

Material MovementsTo revalue goods issued to sales ordersand projects with the actual costs, youneed to determine which movement types are used in the MM module to issue materials to sales orders/projects or reverse such postings and activate therevaluation of consumption for thesegoods movements. Note that if you acti-vate revaluation of consumption, youshould also create an account for anygoods issues that are not to be updated tocost objects, using the posting key COC(cost of other consumption) in MM toensure that an account assignment existsfor all variances to consumption.

To define movement groups for the rele-vant postings, follow the IMG menu pathControlling>Product Cost Controlling>Actual Costing/Material Ledger>Material Update>Define MovementType Groups of Material Ledger.

In this example, movement type group CF updates the COGS account and movement type group CC updates both the COGS account and the salesorder/project. The group names are mine.At a live installation, you will probablywork with one or the other, entering either 1 — Revaluation of G/L Account or 2 — Revaluation of G/L Account andCO Account Assignment in the Revalua-tion of Consumption field for the move-ment type group (Figure 3).

If you choose 1, then only the FI account for the cost of sales is updated.This makes sense in a make-to-stockenvironment, when the sales order orproject is not a cost collector and salescontrolling takes place primarily in Prof-itability Analysis (CO-PA).

If you choose 2, then both the FI accountand the sales order/project are updated.This works in a make-to-order environ-ment. Option 2 also is a good choice forgoods issues to cost centers. However, youshould be careful if goods are issued toproduction cost centers. Generally, costcenter closing and order settlement shouldbe complete before you run the costing runin the material ledger. If you were to sub-sequently revalue the production costcenters, then a cyclical structure would becreated that cannot be resolved by thematerial ledger. The revaluation to the costcenter can only be posted to ProfitabilityAnalysis (CO-PA) as a variance.

Then you need to assign the movement typegroups to the movement types by followingthe IMG menu path Controlling>ProductCost Controlling>Actual Costing/Mater-ial Ledger>Material Update>AssignMovement Type Groups of MaterialLedger. I use movement type 251 to issueMovement type groupsFigure 3

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>> Steps in the Costing Run for the Material Ledger

If you are new to the material ledger functions, you mightfind it helpful to understand what happens in the stages of the costing run prior to revaluation of consumption :

• Selection specifies which plants, company codes, or con-trolling areas are included in the multi-level costing run.Because of the multi-level nature of the costing, it is notpossible to exclude particular materials from a costing run,as it is in standard costing.

• Determine sequence checks the material inputs and out-puts of each production process and determines the numberof levels in the quantity structure. This step is needed tobuild the quantity structure for actual costing dynamicallyeach period, especially for cyclical production structuresand co-products.

• Single-level settlement calculates the periodic unit price for each material, taking account of price differ-ences, revaluation differences, and exchange rate differ-ences. It also determines the difference to be rolledthrough the quantity structure during the multi-level settlement.

• Multi-level settlement takes the difference calculated dur-ing the single-level settlement and passes it on to eachmaterial and procurement alternative in the quantity struc-ture in turn. Note that this step handles goods movementsarising from external procurement, subcontracting, andstock transfers as well as in-house production. After themulti-level settlement, you see a new material price andthe cumulated price differences from the subordinate mate-rials (multi-level price difference) for each material.

• Revaluation of consumption determines which goodshave been issued to sales and applies the price differencesfor these goods to the cost of sales account attached to thematerial movement. If you activate the CO assignment, italso assigns the price differences to the sales order. Thisstep results in a new period status being set: Revaluationof Consumption Completed (Figure 2).

• Post closing switches the price control in the material mas-ter from S (standard price) to V (periodic unit price) for theperiod closed, writes the price calculated to the materialmaster as a new V price, and adjusts the balance sheet forthe period closed when you create closing entries.

>>>> What Are Actual Costs?

SAP uses the term “actual costs” in different ways. Manyreports in the CO and PP modules show “actual costs” as dis-tinct from “planned” or “target” costs. In that case, actualcosts refer to a posting such as a goods issue or a confirma-tion that has resulted in “actual costs” on a cost center or pro-duction order. Typically, these costs are based on an actualquantity, such as the amount of material issued to a costcenter or the amount of work performed for a productionorder. The costs are based on a standard price for the materialissued or the standard rate for the work performed.

The goods receipt to stock when the production order is com-plete also results with an actual costs credit to the order –normally the actual quantity multiplied by the standard price.As far as the material ledger is concerned, these costs are notactual costs at all, but simply a preliminary valuation of thegoods movement or confirmation with a standard pricebecause the actual costs are not known at the time of posting.

In the days before the material ledger, sites that wanted touse actual costs for inventory valuation would value finishedand semi-finished goods with the moving average price.Unlike the standard price that was updated when the costestimate was released, the moving average price was updatedwith every goods movement, invoice receipt, and order set-tlement.

This was particularly dangerous in the case of order settle-ment, because order settlement would only assign variancesto the materials if they were still in stock. If some of thegoods had been issued between the time of the goods receiptand order settlement at period close, then part of the movingaverage price would finish up in price differences, leavingthe auditors with a headache and management with a materialprice that did not take account of all variances. The newfunctionality of the material ledger adjusts the cost of salesaccounts to reflect the actual costs for the period.

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goods to sales and 252 to reverse such post-ings, as shown in Figure 4. Depending onyour configuration in the MM module, youmay need to create multiple entries here ifyou are using special stock types, such asconsignment (the K shown here) or salesorder stock (special stock type E) in a make-to-order environment.

Change the Parameters in the Costing RunTo calculate actual costs at the end of the period, you need to create a costing run using the IMG menu pathAccounting>Controlling>Product CostControlling>Actual Costing/MaterialLedger>Actual Costing>Edit CostingRun. Before you perform the costing run,you need to change the parameters in thevariant for the closing entries report. Goto the Post Closing step, right-click on the execute icon, and select ChangeParameters (Figure 5).

Change the variant for the closing entriesreport by checking the flag for RevaluateConsumption (Figure 6). If you chose 2 for revaluation of consumption in Figure 3, also choose the flag for Set CO Account Assignment to ensure thatyour sales order or project is updated too.

Now you know how to roll price differ-ences through all levels of production tothe cost of sales. In a subsequent article, I will show you how to create a cost component split in actual costing to viewthe factors affecting the price differencesand how to include the actual costs inProfitability Analysis (CO-PA).

Change parameters in the costing runFigure 5

Choose movement types for revaluationFigure 4

Parameters for revaluation of consumptionFigure 6

Janet Salmon joined SAP AG in 1992. After six months of training on R/2, she began work as a translator, becoming a technicalwriter for the Product Costing area in 1993. As English speakers with a grasp of German costing methodologies were rare in theearly 1990s, she began to hold classes and became a product manager for the Product Costing area in 1996. She has since helpednumerous international organizations set up Product Costing. More recently, she has worked on CO content for the BusinessInformation Warehouse and Financial Analytics, and is currently responsible for User Productivity in ERP Financials. She livesin Speyer, Germany, with her husband and two children. You may reach her via email at janet.dorothy.salmon@sap.com.