Whats Material ledger and why is it mandatory in S/4 HANA
Material Ledger/ Actual Costing is one of the complex tool provided by SAP to manage its inflows and outflows of core manufacturing related materials in multiple currency and valuations. In this blog, I have tried to explain this functionality in detail with example (mainly Actual Costing).
The case for material ledger is based on the below point .
From the time of Luca Pacioli, the father of accounting, till today, inventory valuation has been a point of debate. In countries with stable inflation rate it is considered fine to have inventory valuated at standard cost. In such countries material inventory values are normally carried by the SAP system in one currency with raw materials valuated at moving average price and semi-finished and finished goods valuated at standard price. In countries where currency is not stable and inflation rates are high it is pertinent to have inventory valuated at actual costs. In such countries it might also be required to record inventory valuation in more than one currency, usually a local currency and another more stable reporting currency like the USD to indicate the inflationary impact on the inventory values. SAP supports this requirement of showing inventory valuation in multiple currencies at actual cost using the functionality of material ledger and actual costing. This whitepaper provides an overview of material ledger, actual costing, its setup in SAP and some known issues based on real life project experiences.
"Latest trends in material management aim for improved and more flexible valuation methods in multiple currencies and parallel accounting standards while simultaneously reducing required system resources and improving scalability of the business processes. Since the data model of the Material Ledger module supports these business requirements, it was chosen as the basis for material inventory valuation in the new SAP S/4HANA solution."
What is material ledger ?
Material Ledger in SAP essentially is a line item wise record showing changes in stock and prices with each material movement in up to three currencies. Material records pertaining to opening stock, goods receipt, invoice receipt, debits, credits etc get logged in the ledger along with the price and exchange rate differences throughout the month. The currency translations for the three currencies happen at historical exchange rates available at the time of posting. This ledger with a complete record of each single transaction of the material forms the basis to calculate actual cost for the material at period end. The actual price thus calculated in SAP is called the periodic unit price (PUP) and can be used to reevaluate inventory. This actual price can then also be treated as standard cost for the next month. Before going further lets understand actual costing
Actual Costing
Actual Costing is functionality provided by SAP to calculate actual prices i-e; PUP (periodic unit price) of inventories/ valuated material including Raw Material (ROH), Semi- Finished Good (HALB) and Finished Good (FERT). It includes all the actual prices for material in particular period.
Actual Costing Run (CKMLCP) is the month end activity, which is used to valuated the inventory in balance sheet at actual price (PUP- Periodic Unit Price) by calculating and posting Production variance during the month on the Material which was previously maintained at Standard Price (calculated from CK11N) in balance sheet.
Standard costing and actual costing can run completely separate from each other without any conflicts. The only decision to be made is, what price you use for material valuation. You can mark and release your cost estimations from CK40N as standard price to be used during the period. After the period is over and you run your CKMLCP you can decide in the closing entries if you want to revalue the inventory (of last month) by the periodic unit price.
Note: The transaction CKM3/CKM3N was refactored and now provides a simplified and improved view of materials in plants with active Actual Costing in S/4 HANA. It replaces the former CKM3 view Price Determination Structure. The former CKM3 Price History view is still available via transaction CKM3PH for all materials (independent of price determination control and active Actual Costing). All other views formerly offered by CKM3/CKM3N are no longer available.
One of the Advantages of the Material Ledger is , it combines the advantages of both types of price controls
- S ( Standard price)
- V (Moving Average price)
In this post you will learn how Material Ledger combines the advantages of both MVA and Std price and why is is mandatory in S/4 HANA.
Let us first see the advantages and disadvantages of Price control V and S
Let us see what are the price controls recommended for different types of materials with Material Ledger active and with out Material Ledger active . Let us have a look into the table
Price Control and Price determination
When Material ledger is not active MAP is recommended for RM and Std price is recommended for Finished Goods and Semi-FGs (as shown in the 4th column)
When Material ledger is active Std price and Price determination 3 (ie Single/Multilevel Price determination ) is recommended for FGs , SFGs and RMs (as shown in the 2nd column)
It is interesting to see that when Material ledger is active it is recommended to set Std price even for RMs.
More interestingly system do not use Std Price for all periods even though we set std price in the material master.
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Answer to why ML is mandatory in S/4 HANA .
Note 2396864 - Material Ledger Obligatory for Material Valuation in S/4HANA systems, provides a high level explanation of the need for the activation of the Material Ledger functionality and links to additional notes that provide the detail you are searching.
Note 2267834 - S4TWL - Material Ledger Obligatory for Material Valuation provides a more detailed explanation:
"Latest trends in material management aim for improved and more flexible valuation methods in multiple currencies and parallel accounting standards while simultaneously reducing required system resources and improving scalability of the business processes. Since the data model of the Material Ledger module supports these business requirements, it was chosen as the basis for material inventory valuation in the new SAP S/4HANA solution."
-------------------------------------------------------------------------------------------------------------Material Ledger has two objectives:
1.) Actual Costing
2.) Parallel Currencies/ Valuation
The latter objective positions the ML as a sub-ledger for inventory valuation, and this is the mandatory part of the ML for SAP S/4HANA.
If an Organization records inventory on its balance sheet, then it will need a sub-ledger for inventory postings, which provide more granular detail about inventory transactions than G/L postings (as is done with AP, AR and Fixed Assets, which are also sub-ledgers of the SAP General Ledger.)
The inventory “sub-ledger” already existed in the SAP ERP system in the form of the inventory valuation tables xBEW(H), such as tables, EBEW, EBEWH, MBEW, MBEWH, OBEW, OBEWH, QBEW and QBEWH.
SAP enhanced these tables in SAP S/4HANA just as it did with the Universal Journal.
They leveraged the existing functionality of the ML to create a cohesive sub-ledger for inventory valuation in the SAP S/4HANA.
The actual Costing functionality is still optional (and this is what causes the most confusion). Therefore, companies that do not need to report their inventory and cost of sales at actual cost do not need to activate this functionality.
SAP S/4HANA offers a few new currency options, but more importantly, it offers new ways of evaluation Material Ledger data. Currency settings available in the Universal Journal is integrated with the ML.
Multiple currencies, or parallel currencies, is a functionality that allows companies to record transactions in more than one currency for every transaction posted to FI. This parallel currency functionality has been extended to the ML for any inventory transactions, which can be viewed in Material Ledger reports.
In SAP ERP System, you can have one company code currency (Local Currency 1) and up to two parallel currencies (Local Currency 2 and Local Currency 3) in the FI module. We have the option of adopting the currencies used in the FI module, the CO module, or both, or of assigning currency types individually. The currencies are translated based on the historical rates in the Material Master.
In SAP S/4HANA, a key improvement that SAP has made with parallel currencies is to allow up to eight freely definable currencies in the Universal Journal table, in addition to fixed (local and global) currencies as follows:
Local : The company code currency
Global: The Controlling area currency
Freely defined: Up to eight currency types
“Freely defined” means that you can name the currencies any way that makes sense for your business and not rely on SAP’s predefined currency type names.
Also, if creating these currencies for parallel ledger, you don’t need to base these currencies on the currency of the leading ledger( as is the case with an SAP ERP system)
Exchange rates should be maintained for these extra currencies and system will perform the real time currency translations of the postings in FI module (and related sub-modules) into these additional currencies.
Alternatively, we could specify that the translation is performed at the end of the period with the foreign currency valuation program. As a result, a company can present it’s financial and management reports to different stakeholders in different currencies, as needed.
In the ledger settings for a company code, you can configure additional currencies along with the local and global currency types by using transaction FINSC_LEDGER.
Even though eight additional currencies are allowed in the Universal Journal, only three currencies are allowed in the ML. Therefore, when defining the currencies in ML(which is based on the currencies of the leading ledger), you’ll need to specify which additional currencies in the Universal Journal should be mapped to the ML. Also, all the valuation areas(plants) that belong to a company code should have the same currency type settings in the Material Ledger.
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