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SAP ERP Financials - Controlling

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Material Ledger Overview

Version 1

created by Manish Sharma on Sep 17, 2014 6:29 AM, last modified by Manish Sharma on Sep 17, 2014 6:50 AM
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Introduction:
Material ledger (ML) is functionality in SAP, which helps to calculate Actual Cost for materials and also provide the
facility of multiple parallel valuations in multiple currencies. ML has two major functionalities, irst to calculate
actual cost of materials, semi/ inished goods, and second provide an opportunity to calculate actual cost on
multiple valuation such as Legal, Group, & Pro it center valuation. In this document we will see fundamental
concept of material ledger, how the actual cost is calculated for different business scenarios.
Actual Costing in SAP
Actual Costing has a purpose of calculating actual cost for goods manufactured in-house and materials procured
from outside. Calculation of actual cost for inished goods, raw materials is very dif icult as we dont know many of
actual costs when business transactions are performed. Business transactions are performed throughout the months
and at that time we dont know the actual cost of our production activities, expenses for full months, total activities
performed in month, overhead cost etc., so its become dif icult to calculate actual cost for inished goods, raw
material purchased from outside. The situation becomes more dif icult when we talk about a Multinational
organization having manufacturing plants in different countries and transfer of goods is happening between groups.
Material ledger works on a concept on irst recording the material movement in Standard Cost and then
accumulating the Variance to calculate the Actual cost.

Incoming Links
Re: Material Ledger Integration with COPA
In Material ledger the benefit of standard cost is retained as all the materials movements are initially recorded at
Standard Cost and variances are collected to come to actual cost. Actual cost is calculated at the end as part of Period
End Closing, and the actual cost is termed as Periodic Unit Price (PUP).

Periodic Unit Price (PUP)

Periodic Unit Price refers to the average actual cost of materials in material ledger.
For material procured from outside, PUP represent Standard Cost plus Capitalized Purchasing variances (like,
purchase price variance, exchange rate variance etc.)
For in-house produced material, PUP represents Standard Cost plus manufacturing variances (like quantity
variances from raw material & activity, purchase price variance, multi-level variances coming from raw materials
etc.)
For calculating the PUP, only opening stock and receipt is consider, but not the consumption.
Consumption is revalued at closing cost. First the consumption is booked at standard cost and then its revalued
during ML period end closing, with the difference of New PUP and Standard Cost.
PUP is updated in Accounting View 1 of material master data.

Re: Variance analysis with actual costing

Re: Price difference add up to stock account
Re: Material Ledger Activation - No parallel
currencies

Pre requisite for Material ledger

a. Material price determination should be 3 (i.e. Single/Multilevel price determination)
b. All procurement cost should be linked to purchase order
c. All manufacturing cost, overhead expenses should be part of activity cost (i.e. product cost value flow)
Different Scenarios:
Scenario 1: External Procurement of Raw Materials
Step 1: Purchase requisition: No journal entries, as its a pre-commitment.
Step 2: Purchase order: No journal entries, its a commitment for Budget
Step 3: Goods receipt: when we receipt the raw material, at that time we are not aware of our actual cost of material
then the initial recognition happened at Standard cost.
Stock of Raw material A/c .. Debit (Std. Cost * Actual Qty.)
To, GR/IR A/c (Credit) (Std. Cost * Actual Qty.)
The value posted at GR is equals to (Std. Cost of raw material multiplied by Actual Quantity receipt)
Material ledger: at the time of good receipt, in material ledger there is an entry happened for receipt under purchase,
where entry happened for stock quantity & value is recognized as standard price.
Step 4: Invoice Receipt:
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Step 4: Invoice Receipt:

GR/IR A/c . Dr. (Std. Cost * Actual Qty.)
Exchange rate difference A/c Dr. (Exchange rate variance)
Purchase Price Variance A/c Dr. (Balancing figure)
To Vendor A/c (Invoice Value)
Material ledger: at the time of invoice receipt the purchase price variance is recognized in material ledger under zero
quantity receipt, which increases the actual price of cumulative inventory. In some of cases we can also see
exchange rate variances at time of invoice receipt. Exchange rate variance generally arises when the transaction
currency is different than legal currency and average actual exchange rate is different than budgeted exchange rate.
Scenario 2: In-house production of Finished goods
Step 1: Goods Issue to Production/ Process Order
Raw Material Consumption A/c Dr. (Std. Cost * Actual Qty)
To, Stock of Raw material A/c .. Cr (Std. Cost * Actual Qty)
In Controlling, Order should be debited with raw material consumption with a value equals to (Std. Cost * Actual
Qty).
In Material Ledger, consumption entries will happen for raw material with Consumption of Raw material quantity as
Actual quantity issue to order and value of consumption as (Std. Cost * Actual Qty).
Step 2: Activity Confirmation for completion of production activity
When production/ process order activities are con irm, then order is debited/charged with the cost of activity (Plan
Activity rate * Actual Activity), and the production cost is credited. This entry is passed in Controlling, but no
entries happened in FI.
Step 3: Goods receipt, finished goods receipt as part of order completion.
Stock of Finished Goods A/c Dr. (Std Cost * Actual Qty) BSX
To, Finished Goods manufacture A/c (Std Cost * Actual Qty) GBB
In Controlling, order is credited with cost of finished goods manufactured i.e. (Std Cost of FG * Actual Qty produced).
In Material Ledger, there will be entry in the receipt for inished goods. Inventory/volume in KG will increased by
quantity receipt during goods receipt and value will increased by (Standard cost of FG * Actual Quantity receipt)
Step 4: Variance Calculation & Settlement
Once we do the variance calculation then variance represents the difference between Total cost charged to
process/production order and Cost of Finished good receipt. These variances basically represent quantity variance
of raw material and activity. i.e. (Actual Quantity less Plan Quantity)* Standard rate.
Variance calculated at this step gets posted in Material ledger to adjust the actual cost of finished goods produced.
Scenario 3: Sales of Finished goods (FG)
Step 1: Sales order; no accounting entries are created in FI. No impact in material ledger.
Step 2: Goods Issue to Customer; when goods issued to customer, in inancial accounting the entries are recorded for
actual quantity sold @ Standard cost of finished goods.
Cost of Goods Sold A/c .. Dr. (Std. cost of FG * Actual Quantity)
To, Finished goods Inventory A/c (Std. cost of FG * Actual Quantity)
In Material ledger: goods issue to customer is recorded in material ledger as consumption of raw material. The
Actual quantity is recognized at standard cost.
Step 3: Billing document released
Customer A/c ..DR
To, Sales Revenue A/c
Step 4: Payment receipt,
Bank A/c DR
To, Customer A/c
Step 5: Period end closing: when we do period end closing activity in ML, the consumption is revaluated with the
different between actual cost (periodic unit price) and standard cost of inished goods. The price difference &
exchange rate difference are proportionately adjusted between consumption & closing inventory.
Illustration:
To illustrate the scenario in more details, assume that we are manufacturing inished goods FGA, which is made of
raw material RM1 & RM2, and two activity X & Y are performed to convert raw material in inished goods. In below
table represent Plan standard cost of finished goods.
Table 1

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Assume that we have created a production order to manufacture 10 kg of inished goods FGA. The details of value
which will be posted at different task like Goods issue, Activity con irmation & goods receipt are given below. I
have assumed actual quantity as different then plan quantity so that we can check variances.
Table 2

Here we can see the total variance of 140 USD, basically represent quantity variance.
Table 3
Assumed, actual rate different than plan rate. Here we can see the calculation of lower level variance.

PUP Calculation for finished goods FGA

PUP is calculated on the ratio of total cumulative cost with total cumulative quantity. The formula is given below.

In the below table the calculation of average actual cost is shown

Assuming the opening stock is zero in table 4.

Goods receipt from order is actual quantity @ standard cost. Details can be verified from Table 2.
Variance from order of 140 USD is basically the difference between total debit cost & total credit cost to
production order, which is quantity variance. (Table 2)
Lower level variance of 95 USD is price variance (Table 3)
PUP is {(630+235)/10} = 86.50 USD/Kg
Goods issue to sales order is initial recorded at Std. cost
Revaluation of consumption {(PUP Std Cost)*Actual Qty} i.e. {(86.5 63.0)*5} = 117.5 USD
Closing inventory is also revaluated with PUP.
Table 4

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Conclusion:
With the help of this document I have tried to focus on basic functioning of material ledger with concept. It will help
to understand how the variances are moved from raw material, activity to inished goods & to closing inventory and
consumption.

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44 Comments
Mukthar Ali Ahamed N Sep 17, 2014 9:03 AM

Hi Manish,
Nice document...Great explanation..
Regards,
Mukthar
Like (0)
Mansoor Khan Sep 17, 2014 11:47 AM

Dear Manish,
Excellent.....explanation...
1 Question- All Price diff will allocation proportionate based upon the availability of closing stockElse
it will settle to COGS- ????? (is correct)
Regd,
Khan.
Like (0)
Manish Sharma Sep 17, 2014 1:15 PM (in response to Mansoor Khan)

Dear Mansoor,
Price diff will be in proportion to Closing stock & Consumption (COGS). Just like a simple
ratio between Closing Stock & Qty sold. Hope I answered your question.
Best regards,
Manish
Like (1)
Mansoor Khan Sep 18, 2014 6:42 AM (in response to Manish Sharma)

Dear Manish,
Thanks a lot...
Regd,
Khan.
Like (0)

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Sridhar Bolisetti Sep 18, 2014 4:16 AM

Hi Manish,
Superb document that I came across in recent times on Controlling and especially on Material
Ledger concept. Very well explained with related journal entries for easy understanding of FI core
fellows like me.
It would be great if you could share related SAP config steps as well covering CO, important MM, SD
and PP activities. For example, if a new company code is required to be created in existing live
environment with Material Ledger functionality what aspects need to be considered from design
point of view, etc. Thanks
Warm Regards,
Sridhar
Like (0)
Shraddha Panchamiya Sep 19, 2014 1:04 PM

Hi Manish,
Material Ledger very well explained with simple and point to point explanation.
It understood easily by reading only once.
Thanks,
Shraddha
Like (0)
Manish Sharma Sep 19, 2014 1:42 PM (in response to Shraddha Panchamiya)

Thank you Sridhar and Shraddha

Like (0)
Pavan Kumar Arvapally Sep 20, 2014 6:38 AM

Dear Manish.....
Good document on Material Ledger explained well in brief.
Pavan Kumar Arvapally
Like (0)
Manish Sharma Sep 20, 2014 9:58 AM (in response to Pavan Kumar Arvapally)

Thanks Pavan ...

Regards,
Manish
Like (0)
Rajneesh Saxena Sep 20, 2014 10:16 AM

Hi Manish
I would say '''''Simply superrrrrrrrrrrrrrrrb'''. This area is little scary to me at least. I have seen few other
documents also on this but were either very technical (i would say complicated) or only giving the
config steps. But here I got a fare enough picture of the concept.
Regards
Rajneesh Saxena
Like (0)
Manish Sharma Sep 20, 2014 10:23 AM (in response to Rajneesh Saxena)

Thank you Rajneesh Sir.

Like (0)
nikitha2009 saju Sep 24, 2014 2:02 PM

If we have the price indicator of material as 'V' (for FERT types also), still the 'Actual Costing' point
with respect to Material Ledger is valid ?
Like (0)
Manish Sharma Sep 25, 2014 6:43 AM (in response to nikitha2009 saju)

Yes, it can be done, them need to use price determination as 2 (transactional based
PUP)... Entire functionality will not be same as I mentioned in my doc (not be able to track
Price diff, Exch rate diff variance separately in reporting)... Check all Pron & Cons of this.
Like (0)
Narasimhulu Konnipati Oct 6, 2014 11:48 AM

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Hi Manish,
I really appreciate the way you are presenting the scenario and explaining the concept(seen
previously posted documents as well).
Complex area....nice explanation. Thanks for sharing...
Keep up the good work.
Thanks,
NSK
Like (0)
Karthikeyan Ganesan Oct 9, 2014 12:12 PM

Hi Manish,
This is Fantastic to say the least. You have hit the bull's eye. This area is certainly a grey area for
many CO consultants including me . Eventhogh I Myself is ICWA, had some basic doubts in this
area which got cleared after going through this document Very simple and nice explanation.
I would expect sequel to this document next.
Keep sharing...Hats off to you buddy!!!
Thanks
Karthikeyan
Like (0)
Manish Sharma Oct 9, 2014 1:18 PM (in response to Karthikeyan Ganesan)

Hello Karthikeyan,
Thank you for valuable comment. I will try to create more.
Best regards,
Manish
Like (0)
Samson Kim Oct 15, 2014 6:44 AM

Hi Manish,
I am looking for the method that raw material cost account revaluation with actual cost.
Namely, Raw material with 'S' is posting GI with standad price, collecting its price differences and
distribute to consumtion part and ending inventory by ML recon.account.
But, I want to recognize the raw material cost account as actual cost.
The consumtion revaluation in movement type 261(raw materal cost post to order) is suitable?
Like (0)
Mallikarjunr r Oct 15, 2014 12:14 PM

Excellent Manish specially for people like me who are trying to learn more in to this module.
Regards,
Mallikarjun
Like (0)
Ram R Nov 3, 2014 6:21 PM

Excellent document with good examples to understand the concept easily.. appreciate your efforts.
Thanks
Ramu
Like (0)
B.Ranjith Reddy Nov 3, 2014 6:48 PM

Excellent Document.
Regards,
Ranjith
Like (0)
prakash badram Nov 4, 2014 8:31 AM

Hi Manish,
This is a great document. If you can also add ML closing entries, I think it would logically close the
topic.
Thq
Like (0)
Thierry Van der Veken Dec 11, 2014 2:27 PM

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I have a question about the closing of ML.

If there are 2 plants in the same company code, and I buy a raw material in plant A. If the purchase
price is different from the standard cost price in plant A, the PUP calculated in plant A at month end
will reflect that difference. And my stock revaluation in FI will also reflect that difference.
But if, in the same month of purchase, I transfer all the quantities of that raw material to plant B
(which has the same standard cost price as plant A), then the ML closing in plant A for that material
will not create a revaluation, (because the material is not there anymore), and in plant B also no
revaluation will take place (bexcause the stock transfer is at standard price.
So depending on the fact that you make a stock transfer or not, there will be a stock revaluation or
not.
This doesn't seem right to me.
Is there a transaction in ML to transfer the purchase price differences from plant A to plant B ?
Like (0)
Manish Sharma Dec 14, 2014 8:37 AM (in response to Thierry Van der Veken)

It's not correct.

The PPV will automatically get transfer from plant A to plant B. Create this scenario in
system, you will be able to see the transfer of PPV. Then only the actual cost will be
calculated in plant B via ML.
Like (0)
Din Yaln Jan 14, 2015 1:24 PM

Manish your example is absolutely clear and understandable...Thanx for your efforts.
Like (0)
Kamal Kumar SAP Consultant/Trainer Jan 14, 2015 3:38 PM

Hi all
I have gone through all .....First I congrats for this attempt to explain the basic concept..I would like
to add another few basic areas if added will be great to this doc..
1. The effect of price difference between PO and Invoice
2. Diff between single level and multilevel differences and how it effect in act cost calculation
3. Concept of Non-distributed and Non-allocated of differences
Then this doc will be very useful for every one
Like (0)
ROHIT SHIVANKAR Feb 3, 2015 6:10 AM

Very Helpful Document , Thank you

Like (0)
Patricia Brainard Feb 5, 2015 4:58 PM

Hi Manish (and everyone),

Thank you for an excellent document. I am struggling with a problem with one material's PUP, and I
think the answer might be useful for other people who deal with the material ledger.
For this material, the standard cost is $10,600/20,000 lbs. Opening inventory was 54 lbs. The
warehouse guys transferred the 54 lbs to another material, and then an adjustment came through
from Warehouse Management to clear a decimal quantity (this sometimes happens when they split
a pallet into two shipments). This increased inventory by .005 lbs.
(There was also consumption for deliveries.)
So the cumulative inventory from receipts ended up looking like this (numbers are rounded):
Prelim val = $ 0.00
Price diff = $15.00
Qty in lbs = .005
Price = $6,000,000
This happened almost a year ago, and even now, that material has a standard price of $1,100 /
2,000 lbs and PUP of $660,000. I can't figure out any way to get it back to normal.
Any advice would be appreciated, although I'm fairly sure there is nothing that can be done.
Thanks.
Patricia
Like (0)
Karteek k Apr 22, 2015 8:49 AM

Hi Manish,
Very nice document. Thanks for knowledge sharing :-)
Like (0)
Bijay Deo May 16, 2015 6:26 AM

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Hi Manish,
Does "Revaluation of Consumption" function in CLMLCP also revaluate consumption that happened
via movement type 261 to production orders/ process orders?
Thanks,
Bijay
Like (0)
Giri Gopalaswamy May 18, 2015 6:57 PM (in response to Bijay Deo)

Hello Bijay
Consumption as such doesn't have any impact on ML price calculation unless we assign
movement type group in the customising.
To answer your specific question - Yes 261 movements types are revaluated as part of
Multilevel price determination while running CKMLCP during period end
Regards
Giri
Like (0)
Jyothi Pammina May 20, 2015 4:07 PM

Thanks Manish,
Well articulated with scenarios. Really its helped me to understand the basic concept of ML.
Thanks a lot once again for sharing a wonderful document and expecting more & more such
documents from you.
Regards,
Jyothi
Like (0)
hameed uddin mohammed Sep 3, 2015 9:26 PM

Hi Manish,
Just want to thank you for this excellent document.
regards, hameed
Like (0)
Priti Dugwekar Nov 30, 2015 2:38 PM

Hi Manish,
Thanks. V nice document.
1Q from my side I have a scenario where 4 of the 8 plants in a company code have ML active with price determination
indicator as 2 (transaction based).
Now when I am doing a MIR7 (doc currency - INR / co code currency - USD) having different profit
centers (New GL Active and document splitting enabled with profit center) , I am getting an ABAP
dump Message
: GLT0/000
Program
: SAPLGLT0
Termination point : BALANCE_SUBTRACT
We have raised a OSS for this one where SAP replied I verified that the transaction indeed a main invoice with document type RE and document currency INR and
material ledger documents with document type ML and document currency USD, and that option "Further
subdivide document for each logical transaction" hasnt been activated in the configuration of document splitting
rule Z000000012/0300/0001 for business transaction variant 0300/001 assigned to document type RE.
Conclusion: Note 1884540 indeed applied to your issue.
Please either activate option "Further subdivide document for each logical transaction" in the configuration of
document splitting rule Z000000012/0300/0001
or
(if you use the same rule for other document types used by transactions for which you cannot use this option)
assign another business transaction variant (e.g. a copy of 0300/0001) with a document splitting rule configured
similarly as Z000000012/0300/0001, but with active option "Further subdivide document for each logical
transaction", to document type RE.
Furthermore we recommend assigning the same business transaction variant to document type ML as assigned
to document type RE (currently this is business transaction variant 0300/0001).

Can you pls help me understand in a more lucid manner - how is this issue related with document
split config?
Also, we have faced this issue for the first time and ML is active since quite a few years.
Thanks and regards,
Priti
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Trinath Gujari Feb 3, 2016 6:31 AM

Very nice document ! thanks for sharing this document

Trinath
Like (0)
chand basha Feb 3, 2016 7:06 AM

Its Very Nice Document ! Thanks for sharing

Like (0)
Chirag Panchal Feb 3, 2016 7:07 AM

Nice explanation with example.

Best Regards,
Chirag Panchal
Like (0)
nikki saju Mar 1, 2016 12:07 PM

HELLO Manish
for ML functionality, do we need to have the price indicator 'S' for all materials including Raw
Materials ? What will happen if I have 'V' (Moving Average) for Raw Materials ?
Like (0)
mahesh kumar Mar 4, 2016 12:31 PM

Hi Manish,
As said by many consultants,Material Ledger is a grey area,but after go through the above
document,i can say a lot of conceptual doubts are clear.
Looking forward for more documents....
Thanks & Regards
Mahesh
Like (0)
shuangxi wu Mar 4, 2016 3:37 PM

Its Very Nice Document ! Thanks for sharing

Like (0)
Gabriel Felipe Coleti Mar 16, 2016 7:55 PM

Really good explanation.

Like (0)
Branislav Chudy Mar 21, 2016 3:09 AM

Very clear and simple explanation of a pretty complicated concept in SAP. Thank you very much.
Like (0)
john peter Mar 24, 2016 7:40 AM

Hi Manish..
I have read most of your documents in SCN forum and its really helpful for people like me who are
relatively new to this area. I wanted to thank you for all your efforts in sharing knowledge across the
community and appreciate your service ..
One kind request you to is that It would be very helpful if you could share a document on material
ledger configuration for one finished material (with CCA,PA, PP) so that we can have a good insight
as I could not find any good material that helps me understand the total steps required to complete
the ML configuration.
Once again thank you very much ...
Like (0)
Manuel Robalinho Apr 12, 2016 4:38 PM

Excelent contribution!
Thank You
Like (0)
Manuel Robalinho Jun 9, 2016 7:51 PM

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Very Good.
Thanks
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