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Moving Average Price Vs 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 master level, thus different materials can use different methods within a plant.  Although SAP does not restrict this choice, moving average is typically used only on purchased materials.

The decision to use moving average for certain materials should reflect the approach used to analyze contribution margins, and variances in manufacturing and purchasing.  Use of moving average on purchased materials may be appropriate where the item is an easily obtained commodity, with small fluctuations in cost.  In such situations, the impact on margins is minimized, reducing the need for formal variance analysis.

From a practical point of view, some of the key differences and considerations in how this would be reflected in the system are identified below.

1.    SAP has officially recommended not using moving average for semi-finished and finished materials.  The key point behind this recommendation is that the moving average may become distored due to the timing of cost postings and settlements, and the number of orders in progress for the same material.    See OSS note #81682 for more detail.

2.    There is no variance calculation for materials carried at moving average.  Although this saves time during month-end, by definition this eliminates any analysis of price variances on raw materials and consequently, on buyer performance.

3.    If (sub) assemblies are also carried at moving average, it is extremely difficult to identify the source of fluctuating valuation since many materials in the BOM may contribute to it.  Again, there is no variance calculation for analyzing manufacturing operations.  Additionally, cost fluctuations will seriously impact margin analysis for items sold or transferred.

4.    In situations of rapid inventory turnover, use of moving average on (sub)assemblies may result in variance postings due to inadequate stock coverage to absorb settlement adjustments.  Attempting to settle more often / automatically may not be feasible if not all costs have been posted.

5.    Moving average can be set to zero and will not generate any warnings during transactions (i.e. no FI postings).  Standard cost also allows a zero standard cost (as of 3.0d), but generates at least a warning.

6.    Cost fluctuations at lower levels in the BOM will have a delayed impact on parent items, either in terms of variance postings and/or adjustment of parent moving averages.  For example, a lower level material which is adjusted through its own settlement, may be used at various points in the life cycle of higher-level orders; any cost under/overruns of the component would be reflected later on the higher level orders.

7.    The moving average for a material may be changed directly via t/c MR21, unlike the more formalized cost roll-up procedure used in standard costing.  Access to this transaction should be restricted.

8.    Changing a material from standard cost to moving average will overwrite the existing moving average with the then-current standard; a report extract should be generated before any update for analysis and audit.

9.    Any changes to config on the price control for a material type impacts newly created materials only – they are default settings and do not affect already created materials.

10.    In environments where some materials are carried at moving average and others at standard, there is a subtle error possible.  Even for materials being carried at moving average, 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 a statistical / memo entry only.  However, the ‘as-delivered’ settings for valuation variant 001 (used for both cost roll-ups and goods receipt), are:

a.    Planned price
b.    Standard cost
c.    Moving average cost

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

This Post Has One Comment

  1. Arvind

    It’s a good post

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