Price control

How the materials will be valuated is depends on the price control indicator in material master record. There are two types of price control indicator.
1. Standard price 2. Moving average price

Standard Price:
• When we select the standard price control indicator (S) in the material master record, any posting made to stock account is done at this price. While posting to stock account this price is taken as a standard. That’s why it is termed as standard price. Standard price of a material remains constant for atleast one period.
• Any variance is posted to price difference account.
• Variances are updated in moving average price for statistical purposes.

Advantage of Standard Price:
As this price is constant for atleast one period, it ensures the consistent cost management of production process and makes variances within production transparent.

Disadvantage of Standard Price:
As this price is constant for atleast one period, it does not reflect the actual cost incurred during the period. If the procurement price of the material changes greatly in that period, it can lead to an improper valuation price.

Moving average price:
When we select the Moving average price control indicator (V) in the material master record, any posting made to stock account is done at their actual price (as per purchase order, goods receipt, settlement etc.). With this price control indicator, a new material price is calculated after every goods movement, invoice, and /or order settlement. This material price is an average value calculated from the total inventory value and the total quantity of the material in stock. This is why it is termed as moving average price.

Advantage of Moving average price:
The material price is updated any price variance in in-house production as well as external procurement.

Disadvantage of Moving average price:
1. The main disadvantage of using the moving average price is that the price used to valuate a material consumption is almost completely dependent on the time at which the goods issue is posted in the system. Suppose we have done a goods issue and after that an invoice. But in this case the invoice value will be not reflected in the value of material issued .So the material is not valuated with its actual cost.
2. The moving average price can lead to an unrealistic price.
3. The moving average price is not period dependent. This can lead to a incorrect material valuation price .For example goods movement posting that are done in previous period is not valuated at the price form previous period indeed it is valuated at current price.

When to use Standard price and when to use Moving average price:
Some times it is very confusing when to use Standard price and when to use Moving average price.

The key for selecting the price control for a particular material is the fluctuation of the price of that material .If the prices fluctuates frequently then assign it to moving average price and if not then assign it to Standard price. SAP does not restrict you to choose the price control for a material but strongly recommends using Standard Price for Semi-finished and Finished materials( for more details refer to SAP Note 81682) . It is also recommended to use moving average price for those materials which are procured externally and standard price for those materials which are produced in-house.


Example 1:
Posting at Standard Price:

1. Initial situation :
• Material is valuated at standard price.
• Standard price = 10 INR
• Total stock value 10*10 INR= 100 INR
• Moving average price = 10 INR
2. GR done for PO
• GR quantity =10 EA
• GR price per unit = 12 INR
• Initially the total stock value was 100. Now GR has been done for 10 materials at price 12 INR.
The new total stock value= (100+ 10*10 )INR=200 INR
• Standard price =10 INR(remains constant )
• Moving average price = (100+10*12)/(10+10)=11 INR
• As the good receipt is done at price 12 INR, GR/IR account will be credited by 10*12 INR = 120 INR.
• Difference of (120-100) INR =20 INR would be posted to price difference account.

3. IR done for PO
• IR quantity =10 EA
• IR price per unit = 11 INR.
• As the price control of the material is Standard, the total stock value remains same.
• Standard price =10 INR(remains constant)
• Moving average price =(100+10*11)/(10+10) INR= 10.5 INR
• At the time of goods receipt GR/IR account was credited by 120 INR. Now for balance at the time of Invoice GR/IR account will be debited by 120 INR , vendor account will be credited by 110 INR and the difference (120-110) INR = 10 INR will be credited to price difference account.
Example 2:
Posting at Moving Average Price:
1. Initial situation :
• Material is valuated at Moving average Price.
• Total stock value 10*10 INR= 100 INR
• Moving average price = 10 INR

2. GR done for PO
• GR quantity =10 EA
• GR price per unit = 12 INR
Initially the total stock value was 100. Now GR has been done for 10 materials at price 12 INR. The new total stock value= (100+ 10*12 )INR=220 INR
• Standard price =10 INR(remains constant )
• Moving average price = (100+10*12)/(10+10)=11 INR
• As the good receipt is done at price 12 INR, GR/IR account will be credited by 10*12 INR = 120 INR.
• There will be no posting at price difference account as stock account and GR/IR clearing account is respectively debited and credited by the same amount.

3. IR done for PO
• IR quantity =10 EA
• IR price per unit = 11 INR.
• As the price control of the material is Moving average price and the IR price is less than GR price, stock account id credited by IR quantity * (GR price – IR price) = 10*(12-10) INR = 10 INR.
• Standard price =10 INR(remains constant)
• Moving average price =(100+10*11)/(10+10) INR= 10.5 INR
• At the time of goods receipt GR/IR account was credited by 120 INR. Now for balance at the time of Invoice GR/IR account will be debited by 120 INR , vendor account will be credited by 110 INR and remaining (120-110) INR = 10 INR will be credited to stock account.


Moving average price and price difference account:
Whenever there is a price variance during goods posting or invoice posting, in case of standard price, a price difference account is being hit to nullify it.
When the price control is moving average price there are also some cases when price difference account is hit. To understand under what circumstances price difference account is being hit inspite of moving average price as price control indicator go through the below mentioned example.


Example 3:
Initial Situation:
Moving average price: 10 INR
Total stock quantity: 10 EA
Total stock value: 100 INR

Now an invoice for 40 material with price variance of 5 INR ( ie the invoice price per unit = 10 INR- 5 INR =5INR ) have to be posted . So the stock account should be credited ny 5*40 INR = 200 INR . But the total stock value is 100 INR.

In this case the system credit the stock account by 10*5 INR =50 INR, and post the remaining 30*5 INR = 150 INR to price difference account.

Negative moving average price
Sometimes we can not post an invoice due to error like “Moving average price for material is negative: Mat XXX plant yyy.” , message no. M8783.
To understand why this kind of situation happens, go through the following example.

Example 4:
Initial situation:
Moving average price: 10 INR
Total stock quantity: 10 EA
Total stock value: 100 INR

Now you create an invoice for same material with quantity 6 EA and price 30 INR .So the price variance is (30 -10) INR = 20 INR. In this situation at the time of invoice posting the stock account should be credited by 6*20 INR = 120 INR.

But total stock value is only 100. So the system can not deduct 120 INR from 100 INR because that will lead to a negative stock value, which in turn lead to a negative moving average price. For this reason the system throws Error message no. M8783 and prevents the posting.

Now here one question may arise that why system is not posting the rest amount to PRD account.
The answer is very simple. If the system allows us to post the invoice by posting the difference to PRD account then 100 INR will be credited from stock account and 20 INR will be credited to PRD account. But then total stock = 10 EA, and total stock value =0. This leads to a zero moving average price which again may lead to an error during inventory postings.

Physical Inventory

What is physical inventory?
The process of counting physical inventory, posting corresponding document and posting the difference is called Physical Inventory.

Why we do physical inventory?
1. To know the correct stock in hand. Due to some inconvenience (like some materials have been stolen or broken) it may happen that the stock reflecting in sap system differs from the actual stock in storage location. Physical inventory is then carried out to synchronize the stock in hand with the stock reflecting in SAP system.
2. In many countries there is a law that Company have to do physical inventory to check the current stock in hand and that stock or assets is taken into consideration in Company’s financial statement.

At which level Physical inventory is carried out?
1. Material
2. Plant/storage location
3. Batch
4. Special Stock
5. Stock type
(These levels are called stock management unit. These are all an IM level. At WM level physical inventory is carried out at storage type and storage bin level)
Standard process flow of Physical Inventory

Alternative process flow of Physical Inventory






Important Tcodes in Physical Inventory

MI01 Create Physical Inventory Document
MI02 Change Physical Inventory Document
MI03 Display Physical Inventory Document
MI04 Enter Inventory Count with Document
MI05 Change Inventory Count
MI06 Display Inventory Count
MI07 Post Inventory differences
MI08 Create List of Differences with Doc.
MI09 Enter Inventory Count w/o Document
MI10 Post document, count and difference
MI11 Recount Physical Inventory Document
MI12 Display changes
MI20 Print List of Differences
MI21 Print physical inventory document
MI22 Display Phys. Inv. Docs. For Material
MI23 Disp. Phys. Inv. Data for Material
MI24 Physical Inventory List
MIAD Delete Phys. Inv. Documents
MIAR Archive Phys. Inv. Documents
MIDO Physical Inventory Overview
MB51 Material Document List

Physical Inventory Document
From a Physical Inventory document we can get the following information
1. Where the counting has been taken place ( eg Plant , storage location0
2. Count date
3. Which are the materials to be counted
4. The status of the items
5. The status of the Physical Inventory Document
6. The stock types to be counted

Post difference
1. When inventory difference is posted a Material document and if the material is valuated material then an accounting document is also posted.
2. A tolerance group for each user group can be maintained so that cone cannot post more than that difference .Tolerance group is maintained in IMG -> Materials Management -> Inventory Management and Physical Inventory -> Physical Inventory -> Define Tolerances for Physical Inventory Differences (Tcode OMJ2).
3. While posting the difference, one can maintain the reason for posting the difference also.
4. Be careful when posting the difference. The posting date should lie in the same posting period of the count entering date .If backposting is allowed the you can post the difference in following period also . If your posting date of the post difference is not satisfying these two conditions then you cannot post the difference.

Some important terminologies and settings in Physical Inventory

Posting Block
When you check the posting block check box for any physical inventory document, it will not allow any goods movement until the count results are posted. If you allow goods movement during counting inconsistency in counting result may occur due to that goods movement. So it is best practice to block the goods movement during counting.

Freeze book Inventory
When you check the freeze book inventory check box for any physical inventory document, it will allow goods movement but that will not reflect in the system until the count results are posted. If the time lag between physical inventory document creation and counting is high, this indicator is set, so that business can go on with goods movement. To use freeze book inventory you have to enable it by following the path given below.

IMG -> Materials Management ->Inventory Management and Physical Inventory -> Physical Inventory -> Allow Freezing of Book Inventory Balance in Storage Location.
If you don’t enable it and try to check Freeze Book Inventory while creating the document or changing the document then system will through the following error

Freezing of book inv. balance in stor. loc. is not allowed Message no. M7764

Adjusting book inventory
This is a customizing setting. These setting controls the system behavior when a material is subjected to active physical inventory goods movement of the same inventory has been posted. To set this indicator follow the path given below.

IMG -> Materials Management ->Inventory Management and Physical Inventory -> Physical Inventory -> Settings for Physical Inventory

Batches with deletion flag
If you wish to include those batches of a material that are flagged for deletion in the physical inventory document check this check box.





Business example of Physical Inventory count with solution
Example 1: In your Plant 0001 , storage location 0001 there are 10 nos. of material XYZ according to the SAP system .But physically the quantity is different ( assume only 6 nos. of the material exists in that storage location .Do the physical inventory and post the difference. And also block the goods movement during the counting.

Solution:
1. Create Physical Inventory document.
• Type MI01 in command filed and press enter.
• In plant field give 0001, storage location filed give 0001.
• Press enter.
• In material field give material no XYZ and press enter ( if the material is batch managed then enter the batch also )
• Save the document.
• Note down the document no.

2. Block the goods movement
• Type MM02 in command filed and press enter.
• Give the physical document number created in 1st step and press enter.
• Click on header (the CAP button ) or press shift + F4
• Check the Posting block check box
• Save the document.

3. Enter the count
• Type MI04 in command field and press enter.
• Give the Physical Inventory document no. and press enter.
• In the quantity field in the line item containing material XYZ give 6 and press enter.
• Save the document.

4. Post the difference
• Type MI07 in command field and press enter.
• Give the Physical Inventory document no. and press enter.
• In the reason field give 3 (damaged) and press enter.
• Post the document.
• Note down the material document no.

5. Optional but some important steps.
• Check the stock of material XYZ using TCode MMBE.
• Check the movement type of the material document generated in step 5.Type MB03 in command field. Press enter .Give the material document no. and press enter. Note that the movement type is 702.
• Check the accounting documents ----In MB03 on accounting documents. Note the accounting entries. In this case your Inventory account should be credited and Loss-difference account should be debited.