material ledger

a closer look!

These are turbulent times. Most industries don’t have the luxury of large profit margins, and even for a business that is profitable it is not always clear, which products, or even business unit(s), provide the best margin. In fact, it may not even be clear which products are profitable, and which are losing money! Material Ledger, or more commonly referred to as, ML in SAP, is the tool that collects the relevant material acquisition and conversion cost as well as material movement quantities, and facilitates the multi-level, ‘actual costing’ functionality

In S/4HANA, the material ledger activation is now ‘mandatory’ due to the data model changes some tables have undergone. These data model changes make material ledger now as crucial to regular processing as the General ledger. Eectively, the material ledger has become the inventory valuation subledger (Table MLDOC), fully supported by Fiori apps. See the sample analytics Apps below.

FIORI Apps for
ML inventory reporting

s/4hana simplifications

The old (pre-S/4HANA) inventory valuation tables, ‘xBEW’ tables still exist in S/4HANA, but now only store material master data. The old ML document (MLKEPH) and summarization table (CKMLKEPH) for cost component split have been replaced with a new document table (MLDOCCCS) in S/4HANA.

ML and inventory
valuation tables

Other simplifications and improvements that come with the Material ledger in S/4HANA:

material movements.

Material movement
table simplifications

ml table simplifications.

Material movement
table simplifications

the material ledger value proposition(s).

here are some of the high-level value creators that are 'enabled' by ml.

The main value creators that Material ledger facilitates

The most obvious value creator here for Multinationals is the ability to track inventory in Multiple currencies and valuations. It would be a nightmare to track inventory accurately in multiple currencies, without ML being active.

company a
  • Legal: $100
  • Group: $100
company b
  • Legal: $110
  • Group: $100
company c
  • Legal: $150
  • Group: $100

Multiple valuations (Group and legal)

The picture above shows that the Inventory value /COGS remains the same for the group valuation when moving a product between companies (NOTE: freight is ignored in this example). Whereas the legal valuation for each company is required to take place at an ‘arms-length’ transaction price, the group valuation automatically eliminates I/C profit so there is no eort required to back out any upcharges in the group valuation for group reporting.

valuation view: group valuation

After Period end, price dierences from the sending
plant will be transferred to the receiving plant in
multi-level settlement, only in group valuation.

Group valuation always retains the COGS detailed components w/o I/C mark up

valuetion view: legal valuation

* Via a BADI implementation it can be achieved to split
markups (e.g. into contributions from dierent parts of
the organization).

Legal valuation in std SAP, no cost component details retained: Option to retain the split with BADI implementation

The Realtime ‘Insights’ are also a great source of information, and very valuable for operational decision making. A company code level report, called the value-flow monitor (Transaction CKMVFM) provides an overview of variances ‘not-included’ (not assigned/ not-distributed) in the month-end amortization process. These variances will not be considered for amortization purposes as the system was not able to tag any inventory to them.

A new S/4HANA report CKMPDB – ‘Price Dierence Balance’ provides an instant quick overview of any ‘problem’ materials by highlighting the number of transactions with variances and provides a total by plant/material. Extensive branching o to further investigate the issues is conveniently provided in the report. Whereas the CKMVFM can ofter run for hours to create a snapshot, and is really the most usefull only AFTER the MLsettlement steps are performed, the CKMPBD typically runs in seconds, and can be used similarly as the GL line item browser (FAGLL03) at anytime during the month.

price difference balance monitor

user interface

Branching o to investigate variances in the CKMPBD report

price difference balance monitor

comparison with value flow monitor
value flow monitor
price difference balance monitor

Major dierences between the value flow monitor and PD balance monitor

price difference balance monitor

technical architecture
classic value flow monitor
price difference balance monitor

Value flow monitor vs Price dierence monitor

The table design for actual costing has been optimized for database space consumption and support of transactional processes and evaluation of the ML data in the context of reporting is very complex. Therefore, several new Database tables were created to support reporting ‘Aggregate’ scenarios and these can be filled on the fly or periodically: FCML_MAT: A table of materials extended by reporting dimensions such as product group, business area etc.

The biggest value creator however, is ‘actual costing’, which can provide a goldmine of information. The benefits of the activation of ‘actual costing’ are now relatively easy to achieve as an active ML (the material ledger), a pre-requisite for actual costing, is already required to be activated in S/4HANA. This is especially true for manufacturing companies that run on slim margins. Actual costing facilitates a variety of reports that allow a company to analyze actual COGS in detail by cost component. This can provide crucial decision-making information when comparing product cost / profitability between e.g.

The system ‘costs’ (calculates the actual prices of) the cost center activities monthly and thereby accommodates an in-depth variance analysis of the assigned spending variances by material/cost component. A new account key in S/4HANA (PRL) also allows a separate GL account for posting these spending variances during the closing entry for increased transparency.

Furthermore, S4/HANA now supports GL account postings for COGS at standard by cost component, with the option to revalue the COGS by component at actual during the ML closing entry posting.

Example: Splitting the Cost of Goods Sold posting
In the account determination for material movements, you have defined account X00000 as the COGS account (GBB/VAX/VAY). Based on the settings, a goods issue in the amount of $1000 is posted proportionally to the target accounts for each cost component as follows:

Note: Lines 2,3 negate each other.
To check the results of the COGS split, you can compare the posted amounts with the (quantity adjusted) cost components of the relevant cost estimate (standard and/or actual).

Even an actual ‘primary’ cost component breakdown can be calculated and posted in cost-based CO-PA (COGS) and the new ‘Margin Analysis’. In fact, the latest S/4HANA releases can also post the actual COGS in FI by cost component, by means of revaluation of the standard COGS at month-end.

Example, Primary cost component split

Moreover, and this is important for manufacturing organizations, the system allows the revaluation of activities at actual (Spending variances) to bypass the Production orders. These variances are now pushed back directly from the cost centers responsible and accountable for them to the manufactured materials. Plant/Production managers normally have no control over the indirect overhead cost nor wage increases that are allocated to ‘their’ production orders, and hence this is a positive development, as this piece of convoluting spending variance information is now removed from the manufacturing order reporting, where it didn’t belong in the first place.

In addition to the activation of actual costing, materials need to be set up correctly before the system starts collecting the supporting information. As per the valuation methods depicted below, that means setting the price determination for all materials involved in manufacturing, e.g. Raw materials, Semi-finished, and Finished products, to a ‘3’ (Actual costing with Single/Multi-level price determination).

valuation method

  • standard costing
  • moving average price
  • balance sheet valuation
  • actual costing

price determination

  • 2(transaction based)
  • 2(transaction based)
  • 2(transaction based)
  • 3(single/multilevel)

Actual costing requires Price determination '3'

Another benefit of the Material ledger, which combines actual costing with the multiple currencies and valuations capability, is the ability to calculate an alternative actual cost and the activation of parallel accounting of COGM based on this alternative. This functionality requires the switch framework activation of business function FIN_CO_COGM. A new menu will open up to configure parallel COGM after this is activated. This can be useful if e.g. IFRS compliance needs to be costed and posted in parallel to local GAAP.

Accounting principles in SAP defined by company code'

E.g. USGAAP vs IFRS compliant actual costing can be set up and executed as depicted below:

value flow for parallel determination of costs of good manufactured

Setting up the AVR run for Parallel COGM

Actual costing provides invaluable information about which materials are contributing the most to the bottom line and can be instrumental in the survival of companies, esp. those with their profit margins under pressure.

period end: revaluation at actual costs
(only legal valuation)

At month-end the costs of production will be re-determined in the production plant. As the group-internal sales is a multi-level process, costs will be adjusted throughout the supply chain. In the legal view the costs will always reflect the invoiced price of the sender.

Actual costing requires Price determination '3'

WIP and consumption can be actualized at the end of each month as well, so the complete variance picture can be reconciled. Actual costing assigns (tries to) all variances from the standard that occurred during the month to the responsible materials and passes these variances on to the next level of manufacturing as materials are ‘consumed’ (issued, scrapped, sold, etc.).

A huge benefit of the system keeping track of all the variances is that the amortization of variances becomes an integral part of the ML month-end close process and the ‘balance sheet on/o’ can be posted automatically.

While not attempting to be complete, here’s an overview of the main categories of variances ML collects:

the bottom line

In order to capture variances, we first have to set a ‘standard’ for a certain timeframe. Minimum time frame is one (1) period/month, but depending on your industry, typically this is a year. While we stated that ML is the enabler, there are some other prerequisites to set the proper standards and make this all work in addition to the ML, and Actual costing activation. Therefore, CO-PC (Product costing) must be set up to provide the correct standard cost for all materials ‘impeccably’, which includes e.g.

NOTE: There is a wide variety of system configuration choices for ML, and actual costing, and those laid out above are the most beneficial choices (when implemented correctly).

We’d be honored to help you/your company make the right choices on your roadmap into the future.