1911776 - Using the moving average cost for material valuation

When you use the moving average cost, you may notice the following undesired symptoms:

• The material unit cost is not adjusted.
• The material unit cost does not develop as expected (material unit cost is too high or is approaching zero).
• Material withdrawals or inventory changes for production or for delivery to the customer are not posted using the expected valuation price.

How the moving average cost works

Moving average cost for a purchased part

For a procured material, the inventory cost is updated at the time of goods receipt using the purchase order value. It is also updated through GR/IR clearing, which involves the purchase-order-related processes of goods receipt and invoice receipt.

For the GR/IR run, however, only the proportional variation still covered by the inventory quantity is calculated for the inventory. This is intended to guarantee that the inventory cost is correct. The remainder of the variances are included in the price differences. (See the attachment for details of GR/IR clearing and the associated posting logic.)

Example for a purchased part

2  The goods receipt updates the inventory cost with the value required at this point in time (mixed price).

3 The goods issue is posted with the value applicable at this point in time.

4 The invoice does not have any direct effect on the price.

5 The GR/IR run transfers the proportional variance value to the inventory. The remainder is included in the price differences. In this case, the total variance amounts to EUR 3 on 3 pieces. There is still one piece in inventory. This means that one third of the variance can be attributed to the inventory. Two thirds of the variance is posted to the price differences.

An unfavorable sequence of goods receipts and invoices can result in an unrealistic inventory cost for a purchased part with a moving average cost.

The GR/IR clearings each identify a difference of EUR 1 from the reconciliation of the invoice and goods receipt. The base quantity for the variances is 1 piece in each case.
The variances are therefore covered by the current inventory of 1 piece in each case. GR/IR clearing must proceed on the assumption that the entire variance amounts can be attributed to the inventory.

A similar, undesirable result can occur if partial deliveries and partial invoices exist for a purchase order.

Moving average cost for a product produced in-house

If a product is produced in-house, the inventory cost is updated only by the WIP run.

For WIP clearing, again only the proportional variation still covered by the inventory quantity can be calculated for the inventory. This can have two undesirable results:

The material unit cost is not adjusted
During make-to-order production in particular, the inventory quantity may be 0 at the time of WIP clearing. In this case, all production variances at the time of WIP clearing are included in the price variances and the inventory cost is not updated. The withdrawals to production and to the customer were valuated using the old cost, and these withdrawals are not revaluated.

 The material unit cost does not develop as expected (material unit cost is too high or is approaching zero)
 If multiple production orders exist for one product at the same time or if multiple production orders are billed for one product at the same time, this may have the effect described above for a purchased part.
Each individual order clears its production variances based on the covered quantity in the inventory.

The moving average cost is a tool for valuating the inventory cost automatically based on current valuation approaches. It is intended to minimize price difference postings.

In some countries, the use of a moving average cost to valuate materials is a legal requirement arising from accounting principles.

You must, however, ensure compliance with the following two points when using the moving average cost:

1. The moving average cost must be processed correctly in the SAP Business ByDesign system.
2. Depending on your processes and business requirements, you must specify whether the moving average cost can be activated for each material.

If you cannot ensure the above, we strongly recommend that you use the fixed standard cost for material valuation.

Checklist for deciding whether to activate the moving average cost

Moving average cost for manufactured products

The moving average cost is updated only by WIP clearing.

To enable a moving average cost to be created, you must ensure that the inventory is still located in the warehouse at the time of WIP clearing.
Partial deliveries and partial withdrawals are never revaluated.

The following process is required:

1. Final delivery of the order
2. Closing step for surcharges, if relevant
3. WIP clearing
4. Withdrawal to the next production stage or delivery to the customer

Since it is rarely possible to guarantee this order of process steps, the standard cost is usually used in production.

Moving average cost for purchased parts

To ensure that any changes to the invoice have a prompt effect on the moving average cost, you should start the GR/IR run on a daily basis.
(You can schedule a job in advance that runs every night.)

For purchased parts, you can use the following decision tree to determine whether the moving average cost is able to provide the desired results:

1. Do delivery costs need to be taken into account and activated in the SAP Business ByDesign system?
• Yes: You should use the standard cost.
  Using the moving average cost would result in strong fluctuations between the goods receipt (purchase order price) and the invoice with the delivery costs.
• No: Continue with question 2.
2. Do good purchase order values exist? Are the variations between the purchase order value and invoice value small?
   (You must also take into account any applicable currency differences.)
• Yes: You can use the moving average cost.
  The material unit cost is updated with the desired cost when the goods receipt is posted for the purchase order.
  The invoice that is posted later and GR/IR clearing do not have any effect.
• No: Then you must examine additional criteria.
  If you cannot ensure that inventory will still be in the warehouse when the invoice is received or at the time of the GR/IR run, the inventory cost is not updated and the withdrawals are performed using the old value. In this case, the moving average cost is not updated and you do not achieve the desired result. To use the moving average cost successfully, it must be possible to post the goods receipt and invoice receipt simultaneously and perform the GR/IR run shortly afterwards.
  However, you must also refer to question 3 below to determine whether the moving average cost can result in extreme values.
3. Could multiple purchase orders be open for one purchased part at the same time? Or are you likely to have partial deliveries and partial invoices for a purchase order?
• No: You can use the moving average cost.
• Yes: This can have an undesirable effect on the material unit cost. If you do use the moving average cost, you must check it on a regular basis.

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