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Moving Average Price v/s Standard Price

SAP offers two methods of inventory valuation and product costing: standard cost and

(weighted) moving average. The method to be used is identified on the material masterlevel, thus different materials can use different methods within a plant. Although SAPdoes not restrict this choice, moving average is typically used only on purchasedmaterials.

The decision to use moving average for certain materials should reflect the approachused to analye contribution margins, and variances in manufacturing and purchasing.!se of moving average on purchased materials may be appropriate where the item isan easily obtained commodity, with small fluctuations in cost. "n such situations, theimpact on margins is minimied, reducing the need for formal variance analysis.

#rom a practical point of view, some of the $ey differences and considerations in howthis would be reflected in the system are identified below.

%. SAP has officially recommended not using moving average for semi&finished andfinished materials. The $ey point behind this recommendation is that the movingaverage may become distorted due to the timing of cost postings and settlements, andthe number of orders in progress for the same material. See 'SS note %*+ formore detail.

+. There is no variance calculation for materials carried at moving average. Althoughthis saves time during month&end, by definition this eliminates any analysis of price

variances on raw materials and conseuently, on buyer performance.

-. "f (sub) assemblies are also carried at moving average, it is etremely difficult toidentify the source of fluctuating valuation since many materials in the /'0 maycontribute to it. Again, there is no variance calculation for analying manufacturingoperations. Additionally, cost fluctuations will seriously impact margin analysis for itemssold or transferred.

1. "n situations of rapid inventory turnover, use of moving average on (sub)assemblies may result in variance postings due to inadeuate stoc$ coverage to absorbsettlement ad2ustments. Attempting to settle more often 3 automatically may not be

feasible if not all costs have been posted.

4. 0oving average can be set to ero and will not generate any warnings duringtransactions (i.e. no #" postings). Standard cost also allows a ero standard cost, butgenerates at least a warning.

*. 5ost fluctuations at lower levels in the /'0 will have a delayed impact on parentitems, either in terms of variance postings and3or ad2ustment of parent moving

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averages. #or eample, a lower level material which is ad2usted through its ownsettlement, may be used at various points in the life cycle of higher&level orders6 anycost under3overruns of the component would be reflected later on the higher levelorders.

7. The moving average for a material may be changed directly via t3c 08+%, unli$e themore formalied cost roll&up procedure used in standard costing. Access to thistransaction should be restricted.

. 5hanging a material from standard cost to moving average will overwrite theeisting moving average with the then&current standard6 a report etract should begenerated before any update for analysis and audit.

9. Any changes to configuration on the price control for a material type impacts newlycreated materials only they are default settings and do not affect already createdmaterials.

%;. "n environments where some materials are carried at moving average and othersat standard, there is a subtle error possible. <ven for materials being carried at movingaverage, the cost roll&up will update the standard price field with the calculated value.Since the material itself will be transacted at moving average, this would appear to be astatistical 3 memo entry only. =owever, the >as&delivered? settings for valuation variant;;% (used for both cost roll&ups and goods receipt), are:

a. Planned priceb. Standard costc. 0oving average cost

This means that in a cost roll&up, if the lower level item is being carried at movingaverage, has a costing view, and has been included in a cost roll&up, it will also have astandard price recorded. According to the standard valuation variant, this would meanthe higher level material would see and use the standard cost before the movingaverage. This could result in a built&in variance.