Professional Documents
Culture Documents
for
Actual Costing
July 3, 2003
CONTENTS
AUDIENCE & AIM OF THE DOCUMENT............................................................................................. 2
AUDIENCE .................................................................................................................................................. 2
AIM ............................................................................................................................................................ 2
SECTION 1: MATERIAL LEDGER/ACTUAL COSTING OVERVIEW ............................................ 3
A. FUNCTIONS OF MATERIAL LEDGER........................................................................................................ 3
Multiple Currencies .............................................................................................................................. 3
Actual Costing....................................................................................................................................... 3
B. CONCEPT BEHIND ACTUAL COSTING ..................................................................................................... 4
Standard Price ...................................................................................................................................... 4
Moving Average Price .......................................................................................................................... 5
Actual Costing....................................................................................................................................... 7
SECTION 2 : DETAILED ACTUAL COSTING SCENARIOS............................................................ 10
A. MATERIAL LEDGER DATA ................................................................................................................... 10
B. SCENARIOS........................................................................................................................................... 12
Scenario 1: Actual Costing for a Raw Material with a Purchase Price Variance (PPV)................... 12
Scenario 2: Actual Costing for a Finished Material........................................................................... 21
Scenario 3: Actual Costing for a Raw material with Exchange Rate Difference................................ 26
APPENDICES ............................................................................................................................................. 31
APPENDIX 1: FLOW OF VARIANCES FOR SCENARIOS 1, 2 AND 3 ............................................................... 31
APPENDIX II: TERMINOLOGY .................................................................................................................... 34
APPENDIX III: STANDARD MATERIAL LEDGER REPORTS ......................................................................... 37
APPENDIX IV: ISSUES WE FACED IN ACTUAL COSTING/MATERIAL LEDGER ............................................. 39
APPENDIX V: ORIGINAL PROPOSED OUTLINE ........................................................................................... 40
Aim
Multiple Currencies
Material inventory values are normally carried by the R/3 system in the company code currency.
The material ledger component enables the R/3 System to carry inventory values in two
additional currencies other than the company code currency. Therefore, all goods movements in
the material ledger can be performed in up to 3 currencies. In our system, the material ledger
carries inventory in 2 currencies company code and group currency (USD). Currency amounts
are translated at exchange rates valid at the time of posting. Thus material transactions may
occur with different exchange rates at different points of time.
Actual Costing
Actual costing calculates an actual price at the end of every period (periodic unit price) for each
material. All goods movements within a period are valuated preliminarily at the standard price. At
the same time, all price differences and exchange rate differences for the material are maintained
in the material ledger.
At the end of the period, an actual price is calculated for each material based on the actual value
of the material transactions over the period. The actual price that is calculated is called the
periodic unit price and can be used to revaluate the inventory for the period to be closed. In
addition, this can be used as the standard price for the next period.
Standard Price
When using the standard price, all goods movements of a material are valuated with the same
price over at least one period. Therefore, the standard price ensures consistent cost management
of the production process and makes variances within production transparent. A periodic price
(standard price) is especially useful when working with cost management by period.
The standard price can also be used as a benchmark by which you can measure different
methods of production, or compare the contribution margins of a material in different market
segments in Profitability Analysis.
However, because the standard price is held constant for an entire period, it does not reflect the
actual costs incurred during the period. This can lead to inexact valuation prices for materials
whose procurement prices change a great deal over a period, or whose method of production
changes within a period.
Below is an example of a standard price scenario of a goods receipt followed by invoice receipt.
Some typical accounts that are posted to are shown.
Actual Costing
Let us look at the example above and determine what the postings would be if actual costing is
used. The GL postings during the period for goods receipt and invoice receipt would be
exactly the same as the Standard Price scenario. The Material Ledger however would
continue to record the price difference and exchange rate difference for every transaction.
At the end of the period, the actual costing run is done. It involves the following steps:
In steps 4 through 6, the system calculates periodic unit prices for the settled period
and updates them (for information) in the material ledger.
7. Allowing Closing Entries
8. Performing Closing Entries
In step 8, the closing entries of the actual costing run are performed for the
closed period that posts to the FI ledger. The following entries are performed.
In closed period,
DR ML Accrual Account
CR Price difference Account
20.00
20.00
In current period,
DR Adjustment of Standard
CR ML Accrual Account
20.00
20.00
* Price determination calculates the periodic unit price for a material. The standard price, the price variances
accumulated in the period as well as input material differences are all taken into account. A level is identified by a material
and its associated procurement process. Single-level material price determination is used for raw materials and takes into
account the differences that arise directly when a material is procured. Multiple levels are the result of one material being
used in another material. These multiple levels are reflected in the actual BOM that is created in the costing run in the
step Determine Sequence.
Thus steps 8 and 10 are the only steps in the actual costing that result in financial
postings.
The above is a very simplistic example with no consumption being considered, but it
provides the essence as to why actual costing has some commonality with costing based
on standard as well as costing based on moving average prices.
In Actual Costing, preliminary valuation of goods movements using the standard price
makes consistent and reliable cost management of the production process possible
against a standard. Revaluating inventories at the end of the period with the periodic unit
price is optional. Therefore, the functions of actual costing can not only be used to run
actual costing itself, they can also be used for informational purposes in conjunction with
other cost accounting systems. By calculating actual prices for materials, actual costing
can aid in making decisions such as whether to manufacture in-house or outsource.
Because, in actual costing data, is updated at the level of the plant and material, it is
possible to compare different sources of supply.
Purchase Price
Variances (PPV)
Raw Materials
(Receipts / Invoices)
Exchange Rate
Variances
SAP Material
Ledger
Records Actual Values throughout
the period
Inventory Revaluation
Production
Variances
Transfer
Variances
Finished/ Semi
Finished Materials
(Process Orders)
Adjustments posted to
inventory and consumption
to reflect actual value
In the next section we are going to discuss in detail how Material Ledger helps in accomplishing
Actual Costing. We will use examples to show the data that is maintained in the material ledger
and the GL postings that are triggered by the Material Ledger. We will also point to some
standard reports that can be of help in tracing transactional flow and analysis.
Using the transaction Material price analysis (CKM3), it is possible to see values of material
transactions for a particular material in a specific plant in each of the data categories above in
every period. It also shows the price and exchange rate difference for each transaction. Below is
a screenshot of the material analysis screen:
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The PrelimVal (Preliminary Value) column represents the value of the transaction
quantity based on the current standard price of the material.
Preliminary Value = Quantity * Standard Price
The Price diff (Price Difference) column represents the difference in value of the
transaction quantity due to a difference in the actual unit price of the material. The
difference may be with respect to the standard price or price on another document.
Examples:
Price difference at goods receipt = price at goods receipt*goods receipt quantity
standard price * goods receipt quantity
Price difference at invoice receipt = price at invoice receipt*invoice quantity price at
goods receipt * goods receipt quantity
The ExRt diff. (Exchange Rate Difference) represents the difference in the value of the
transaction due to change in exchange rate at different points of time.
The Price represents the Actual Price that the Material Ledger calculates at period end
taking into consideration the price and exchange rate differences. The values for price
in the scenarios described in the next section are shown as per 100 KG.
With this brief introduction of the data categories and information maintained in the
material ledger, let us take a few materials and analyze how their transactions have been
recorded in the Material Ledger. Specifically, the aim of this detailed analysis would be
two fold:
1. Show how Material Ledger calculates Actual Cost
2. Point out the Financial Postings (GL postings) that are associated
with these transactions. Some of these are due to material
movements and associated value flow. Others are triggered by the
Material Ledger during the last step of the actual costing run.
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B. Scenarios
Scenario 1: Actual Costing for a Raw Material with a Purchase Price
Variance (PPV)
Scenario details:
We are going to use material number 1041 [Polyether Polyol (Voranol 220-110N)] in
Plant US47 and analyze the material ledger transactions for this material from period 3
to period 5. Material 1041 is a raw material. In plant US47 this material has goods
receipt and invoice receipt with PPV. It also has consumption to production order.
Some of the characteristics associated with this scenario are:
Goods receipt and invoice receipt are in different periods (Period 3 and Period 4)
Most of the goods received had been consumed before the invoice receipt
The standard has been kept unchanged from period 3 to period 4. It has been
updated with a value different from the periodic unit price of the previous
period at the beginning of period 5
Period 3
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979.81
138.01
841.80
3. Cumulative Inventory:
Quantity = Beginning inventory + All receipts during the period
= (100.244 + 625.957) KG
= 726.201 KG
Price
= (Prelim Value + Price difference + Exchange Rate difference) for
beginning inventory and all receipts/ Quantity
= (156.91 + 979.81 138.01 + 0)*100/ 726.201
= USD 137.53 USD
4. Consumption: There is a goods issue of 517.095 KG to production order
1016953. The Preliminary Value is calculated as (517.095*156.53) = 809.41
USD
FI Posting
FI Doc #: 4900070099 (Goods Issue for order 1016953)
There is a transfer of 809.41 USD from the Raw Material to the Consumption
account.
DR 4031020 (Material Consumption)
CR 1156020 (Raw Materials)
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809.41
809.41
5. Ending Inventory: After the end of the period, the actual costing run is
performed. Steps in this run are price determination and posting closing entries.
Price determination: Through price determination, the system calculates the
periodic unit price. It apportions the cumulative price difference of the period to
consumption and ending inventory in the ratio of quantities consumed during the
period and the ending inventory. SAP allows price differences from component
materials to be taken into account while calculating the price for a finished
material or semi-finished material. This is accomplished through multilevel price
determination. For raw materials, the price difference is entirely generated during
procurement and there is no price difference from further lower levels to take
into account. This is allocated through single level price determination
The Unit Price calculated for the ending inventory includes the portion of the
price difference that is allocated to the ending inventory through price
determination. This is called the Periodic Unit Price. It is stored in the Material
Master in the Per Unit Price field in the Accounting 1 view. If desired, this price
can be used to revaluate the beginning inventory for the next period by going
through the inventory revaluation step in actual costing. Otherwise, the inventory
value can be kept unchanged, or revaluated with a completely different price.
The calculation below demonstrates how the system calculated the periodic unit
price in the price determination step.
Quantity = Cumulative Inventory Consumption
= 726.201 517.095
= 209.106 KG
Preliminary Value = Prelim value of (Cumulative Inventory Consumption)
= 1136.72 809.41
= 327.31 USD
Price Difference = (-138.01) * (209.106/517.095)
= (-138.01) *.404386
= -39.74 USD
[The remaining price difference (98.27 USD) is allocated to consumption.]
Periodic Unit Price = (327.31 39.74)*100/209.106
= 137.52 USD
Posting closing entries: In this step (the last step in the costing run), FI postings
take place.
(1) The price differences allocated to the ending inventory are accrued in the
closing period.
(2) In the current period, the inventory is revalued using the new standard price.
This is done by marking and releasing the new standard price.
(3) In the current period, the accrual is reversed and price difference adjusted
based on inventory revaluation.
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FI Postings:
FI Doc # s: 4700010233 & 4700010234
In Period 3:
FI Doc # : 4700010233
DR 4021320 ML Price Difference (Single level)
CR 2110150 ML Accrual Adj
39.74
39.74
In Period 4:
FI Doc # : 4700010234
DR 2110150 ML Accrual Adj
CR 4021320 ML Price Difference (Single level)
In Summary, for Period 3:
Standard price
156.53 USD
Periodic unit price
137.52 USD
Current stock
209.10 KG
Current stock value
327.31 USD
Inv. value using periodic unit price 287.57 USD
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39.74
39.74
Period 4
The only activity in this period is the receipt of the invoice for PO 4500010840.
The Goods Receipt was posted in Period 3.
1. Beginning Inventory: As mentioned before, no update of standard
price/revaluation of inventory was done. Preliminary Value and Price Difference
are the same as the Ending Inventory of the last period.
2. Receipts: The only receipt in this period is a vendor invoice. This has a
different price than the PO/Goods receipt. Hence the price difference is booked to
the PPV account.
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FI Postings
FI Doc #: 5100020105 (Invoice receipt for PO 4500010840/10)
DR 4021120 (Variance PPV(Auto))
DR 2110120 (GR/IR Reconciliation)
CR Vendor
138.00
841.80
979.80
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39.75
39.75
98.26
98.26
FI doc #: 4700012426
DR 4021320 ML Price Difference (Single level)
CR 2110150 ML ML Accrual Adj
CR 4021020 Revaluation of Standards
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138.01
98.26
39.75
Period 5
In this period, the standard price is updated to 137.52 USD. This is different from
the periodic unit price of period 4 (203.72 USD). As a result the entire price
difference was not transferred to the beginning inventory in period 5.
1. Beginning Inventory: As mentioned before, the inventory is revaluated at the
beginning of the period with standard price of 137.52 USD. The change in
material price resulted in a Preliminary Value becoming 287.56 USD. Result
is a posting of 39.75 (-) USD to Revaluation Account. The price difference
was adjusted to 138.01 (98.26 -(- 39.75)) USD.
2. No Receipts. Cumulative inventory same as beginning inventory.
3. No consumption during the period.
4. Ending Inventory: Same as cumulative inventory.
In Summary, for Period 5:
Standard price
137.52 USD
Periodic unit price
203.52 USD
Current stock
209.10 KG
Current stock value
287.56 USD
Inv. value using periodic unit price 425.57 USD
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1. Beginning Inventory:
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There has been a change in material standard price from 264.65 USD in
period 4 to 264.28 USD in period 5. This has resulted in the inventory
revaluation of 9.85 USD (Change in standard price * Quantity).
Revaluation Value = (264.28 264.65)*2662.585/100 USD
= (-) 9.85 USD
The beginning inventory shows a price difference (304.01 USD). The
system calculates the price for the opening inventory as 252.86
USD/100KG taking the price difference of 304.01 USD into the
calculation.
The FI postings associated with the revaluation and the reversal of the price
difference accrued in the last period are done after the end of the last period as
part of the actual costing run and the release of the planned standard price of
the material.
2. Receipts: There are 3 line items under Receipts. All of them relate to a stock
transfer from another plant in the same company code. ML document
1000297516 represents value of stock transfer and ML document 50000811134
represents value of price difference transferred.
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ML document 1000297516 (2nd and 3rd line under receipt) represents the value
of stock transfer from plant US35 based on the standard prices of the material
in the receiving and sending plants. Standard price in plant US35 for material
4546 is 248.50 USD and in plant US26 is 264.28 USD. As the standard price
is different in the two plants, values [(-) 258.82 USD and (-) 64.70 USD]
show up under price difference in the material ledger for these lines
(Difference in standard price * quantity of transfer).
Let us see how these values are calculated for line 2 under receipts.
Value of Material 4645 transferred from plant US35 = 248.50* 1640.189 USD
= 4334.69 USD
Difference in standard price for material 4645 between plants US35 and US26
= (248.50 264.28) USD
= (-) 15.78 USD
Quantity of material transfer in line 2 = 1640.189 KG
Price Difference = 1640.189* (-)15.78 /100 KG
= 258.82 USD
FI posting
FI Doc #: 4900068952
DR 1152020 Finished Material
CR 1152020 Finished Material
CR 4021261 Var - Transfer
4075.87
4334.69
258.82
None of the consumption transactions have any price difference. The reason is
that these transactions took place with the current standard price.
Below is the FI posting generated from one of the consumption transactions (ML
document 1000277078). Similar FI documents are generated from each
transaction under consumption in this scenario.
FI posting
FI Doc #: 4900065321
DR 4011020 (COGS @ Standard)
CR 1152020 Finished Material
1083.67
1083.67
5. Ending Inventory: As part of the actual costing run, the price difference is
apportioned between consumption and ending inventory in the ratio of the
quantities by the single/multilevel price determination. As a result of this, out of () 270.06 USD variance, (-) 106.62 USD goes to consumption and (-) 163.44 USD
goes to finished goods inventory. This (-)163.44 USD is accrued and postings
done to the P&L to adjust the variances booked during the period. Two entries are
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made to the next period as part of the actual costing closing entries one to
revaluate inventory and the other to reverse the accruals and adjust price
difference posting.
FI Documents
Period 5
FI doc #: 4700012519
Cr 2110150 ML Accrual Adj
Dr 4021320 ML Price Diff (single)
Cr 4021330 ML Price Diff (multi)
163.44
529.31
365.87
Period 6
FI doc #: 4800001299
Dr 4021020 Revaluation of Standards
Cr 1152020 Finished Materials
FI doc #: 4700012520
Dr 2110150 ML Accrual Adj
Cr 4021320 ML Price Diff (single)
Dr 4021330 ML Price Diff (multi)
Cr 4021020 Revaluation of Standards
172.56
172.56
163.44
356.75
365.87
172.56
The (-) 106.62 USD price difference [in the consumption line in the screenshot
above] that is apportioned to consumption stays in the variance account in the
P&L. We run another program to re-classify the price difference belonging to
consumption other than sales (mainly scrap) into an inventory adjustment
account. The functional area COS Material Variance (MATV) is assigned to all
the variance accounts. Thus, through functional area reporting, these remaining
variances show up as an adjustment to cost of sales.
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1. Beginning Inventory:
There is -.01 GBP exchange rate difference showing up in the beginning
inventory. This seems to be due to rounding differences.
Inventory is not revalued with a new standard price at the beginning of the period.
Hence, the price difference (USD -1838.42) brought forward from the last period
is not transferred to inventory.
2. Receipts: There are a number of goods receipts (GR) and invoice receipts (IR)
during this period for a number of purchase orders (PO). Let us analyze the GR
and IR for PO number 4500014164.
10530.00
9047.68
1482.32
CR Exxon Mobil
DR 2110120 GR/IR Reconciliation
DR 4021120 Variance PPV
DR 6011260 FX Unrealized loss
DR Input tax
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3. Cumulative Inventory: Includes beginning inventory and all receipts during the
period.
4. Consumption: The consumption for this material is to production orders as an
ingredient for several other materials. Let us take the consumption of 904 KG of
2646 for manufacturing material 4877. The FI entry is as follows:
FI Document
FI Doc#: 4900003823
GBP
406.80
406.80
The consumption for the period includes price difference and exchange rate
difference. These were allocated during the actual costing run at the end of the period
(the price determination step) based on quantities consumed vs inventoried at the end
of the period. FI entries associated with that are discussed in step 5.
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5. Ending Inventory: The value of the ending inventory is the cumulative inventory
less consumption during the period.
The price difference and exchange rate difference are calculated during the
single level price determination as part of the actual costing run. The price
determination step apportions the total price and exchange rate difference
(588.59- GBP and 1369.11 GBP) between consumption and ending inventory
in the ratio of the quantities consumed vs. inventoried. Within consumption,
the values are further allocated to the individual materials using material 2646
as an ingredient in the manufacturing process.
During the post closing entries step in the actual costing run, the price and
exchange rate difference postings are made to the P&L to transfer a portion in
inventory and these are accrued in the ML Accrual adjustment account.
During the same step, the accrual is reversed in the next period and postings
are made to the price difference and exchange rate difference accounts based
on material revaluation (change in the material standard price, which in this
case changed from 45.00 GBP in period 4 to 41.89 GBP in period 5).
FI Document
Period 4
FI Doc #: 4700001640
Dr 2110150 ML Accrual Adj
Dr 4021320 ML Price Diff (single)
Cr 6011250 FX Unrealized gain
115.44
86.98
202.42
Period 5
FI Doc #: 4700001641
Dr 4021320 ML Price Diff (single)
Dr 6011250 FX Unrealized gain
Cr 2110150 ML Accrual Adj
Cr 4021020 Revaluation of Standards
1098.60
202.42
115.44
1185.58
Revaluation Entry
FI Doc #: 4800000056
Dr 4021020 Revaluation of Standards
Cr 1156020 Raw Materials
1185.58
1185.58
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Appendices
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32
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Costing Sequence
Costing Sequence is the sequence in which materials are costed during the actual costing
run.
The step determine costing sequence is performed before the single level price
determination. In this step the system calculates the sequence that the costing run will
follow.
The system shows a list of the manufacturing levels (for example, level 1 contains raw
materials, level 2 contains semi-finished goods, and so on) with a hierarchical list of the
materials that were processed by the system. This sequence results in the difference being
rolled up from raw materials through semi-finished products to finished products during
multilevel price determination.
Exchange Rate Difference
Exchange rate difference arises when the transaction is being carried out in a currency
different than the company code currency. The exchange rate difference represents the
change in the value of a material due to fluctuation in exchange rate at different points of
time. For example, when there is a fluctuation of exchange rate between the time the PO
is generated and the invoice is received, exchange rate difference results.
In Material Ledger, the exchange rate difference is shown in the Material Price Analysis
view of the Material Ledger (CKM3).
Material Ledger Settlement
The Material Ledger Settlement is synonymous with Actual Costing. This includes the
procedure in material valuation using the material ledger in which the system:
34
Posts differences that arise through transactions to material stock accounts where
this is possible and, for multi-level material settlement, assigns them to
consumption
35
Price difference represents the difference in value of a transaction due to difference in the
actual unit price of the material in the transaction from the standard price. This is shown
in the Material Price Analysis view of the Material Ledger (CKM3).
Examples:
Price difference at goods receipt = price at goods receipt*goods receipt quantity
standard price * goods receipt quantity
Price difference at invoice receipt = price at invoice receipts*invoice quantity price at
goods receipt * goods receipt quantity
Depending on how the differences arise, they are booked to different accounts. The
different accounts are Purchase Price Variance (PPV) Account, Process Variance
Account and Transfer Variance Account.
Single Level Price Determination
Single-level material price determination is used for calculating the periodic unit price for
a material in actual costing/material ledger. This is a step in the actual costing run.
During the period, the transactions take place at standard cost and the price differences
are maintained in the material ledger. The single level price difference takes the standard
price and the cumulative single-level differences of the period while calculating the
periodic unit price. A level is identified by a material and its associated procurement
process. Procurement processes are used to determine procurement costs and to present
those costs. Single-level and multilevel procurement processes are differentiated
according to different types of procurement and consumption of materials. Purchase
Order, for example, is single-level procurement.
Single-level material price determination needs to be performed for all materials for each
posting period, regardless of whether any material movements have occurred for the
relevant materials. Single-level price determination is a prerequisite for multilevel price
determination.
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Below are some reports identified by the actual costing team for inclusion in this
document. A brief description of the suggested use for these reports is also provided from
SAP standard documentation.
Object Lists
1. Prices and Inventory Values (Transaction Code: S_P99_41000062 )
This report provides an overview of the prices and inventory values of
materials in a period. In the basic setting, the inventories are grouped
according to material type and subtotals of inventory values are displayed.
This report is also useful in the analysis of materials with regard to prices (for
example, comparison of the standard price and the periodic unit price) or
inventory values (for example, analysis of the price and exchange rate
differences of the ending inventory).
Detailed Reports
2. Material Prices and Inventory Values Over Several Periods (Transaction
Code: S_ALR_87013181)
This report displays material ledger data of multiple periods. The report can
be used to analyze the change in a materials price and inventory over a given
period of time.
3. Material Price Analysis (Transaction Code: CKM3)
Material price analysis shows the valuated transactions and the results of
material price determination with price and exchange-rate differences for a
given material in a plant in a period within a price determination structure.
Data is displayed according to process categories and procurement
alternatives.
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Appendix:
I. Terminology [Help to define critical terms associated with Actual Costing]
II. Identify standard Material Ledger reports in R3
III. Some issues faced by us with respect to Material Ledger analysis & the
solution approaches [Most issues related to understanding of Material Ledger
would be addressed by the previous sections. Some specific issues would be
discussed here e.g., reconciliation issues related to timing (different periods),
currency translation, user error in upstream transactions. This is going to be a
living section with updates based on user experiences] **
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