Variance Accounting Using the Material Ledger – A Business Perspective Presented by: Mary L. Ruth...

Variance Accounting Using the Material Ledger – A Business

Perspective

Presented by: Mary L. Ruth – SAP Cost & Pricing Strategy Team Lead, McCormick Global Business Solutions May 20, 2003

Proprietary & Confidential - 2 -McCormick & Company Inc. - Confidential

Agenda

McCormick & Company, Inc. Overview

Beyond 2000 (B2K) Project Overview

Product Costing Implementation

Why use Material Ledger?

Lessons Learned

Questions & Answers


Strategic Partner Confidentiality

The information contained in this presentation is confidential and proprietary information developed by

McCormick & Company, Incorporated.Any disclosure, copying, distribution or unauthorized use of this information without the

prior consent of McCormick is prohibited.


Headquartered InSparks, Maryland

8,100 Employees Worldwide

47 Plants/LaboratoriesIn 17 Countries

Operates In More Than 90 Countries

Largest Spice Company

In The World

$2.4 Billion In Sales

Traded PubliclyOn NYSE (MKC)

Founded In 1889

"Make the best...Someone will Buy it“"Make the best...Someone will Buy it“““Deliver Consumer PreferredDeliver Consumer Preferred™ Flavors.”™ Flavors.”

McCormick & Co., Inc.Flavor Solution Provider


Marinades & Glazes, Batters & Breaders,

Specialty Mixes

Spices, Herbs, Seeds,Seasonings, & Blends

ColorBits®

Tomato PowderSpice Alternatives

Fruit Powders

IQF Herbs, Soft Frozen Vegetables

Flavors, Extracts, Oils& Oleoresins

Vanilla Extract& Flavors

Wet Sauces,Dressings,

Condiments

McCormick Products


F la vors -C o m p un d edS e aso n in gsV a n illaS p ice s/H e rbsO le o re s in s /O ilsC o lo rB its ®

F la vo r-C e ll®T o m ato P ow d erF ru it D is tilla tesF ru it B a se d F la vo rsF la vorS p ice ®

R etail F oo d &B everage

M cC orm ick F lavor

C u s tom C oa tin gsC u s tom S e a son in gsC u s tom Co n d im e n ts

Q u ick S erviceC asua l Din ing

R estau ran t Su p plie rs

G lobal R estaurant

B ra nd e d S p ices & He rbsB ran d ed S e a so n in gsB ra nd e d M a rina d esB ra nd e d S a uce s & G ra v iesB ra n de d F la vo red O ilsB ra n de d Co lo rs & E xtra c ts

F u ll ServiceS u perm arke t Prepared

N o n-C o m m erc ialC a fete r ias /B uffe ts

Food Service

Global Industrial Group McCorm ick/U .S.Consum er Products Division

M cCormick & Co., Inc.


McCormick’s 14 Consumer Brands


McCormick Mission Statement

Our primary mission is to deliver Consumer Preferred™ flavor solutions


Beyond 2000 Project Overview

Objectives

Organizational Structure

Profit Center Scope

SAP Modules

Finance Implementation


Beyond 2000 Is A Coordinated And Synchronized Approach To Major Improvement Opportunities

Global TechnicalSystems

Profitable DemandCreation

Value ThroughService

FinancialReengineering

Supply ChainOptimization

BACKBONE: Enterprise Transactional Effectiveness

Business process improvement enabled by information technology

Common purchasing data and processes to sustain strategic sourcing benefits

Supply chain integration and optimization across the enterprise

Trading partner integration

Automating and streamlining manual transaction processes

Leveraged global technical capabilities

eBusiness support platform (B-to-B, B-to-C, B-to-E)


McCormick’s Organizational Structure

Plant

Hunt ValleyManufacturing

Hunt ValleyManufacturing

Spice Mill Manufacturing

Spice Mill Manufacturing

Global RegionUSA

Global RegionUSA

Controlling Area

Controlling Area

EnterpriseMcCormick & Co.

Global Region Canada – Phase 3

Global Region Canada – Phase 3

Global Region EUR –Phase 4Global Region EUR –Phase 4

MGIL

ProcurementMGIL

Procurement

SalinasManufacturing

SalinasManufacturing

RM Storage

Spices -EastRM Storage

Spices -East

McCormick

& Co.McCormick

& Co.

Global RegionCayman Island

Global RegionCayman Island

MD. Distribution

CenterMD. Distribution

Center

US Industrial

HQ and Plants

Phase 2:

6 Manufacturing

2 Distribution

US Industrial

HQ and Plants

Phase 2:

6 Manufacturing

2 Distribution

CompanyCode

SAL. Distribution

CenterSAL. Distribution

Center

RM Storage

Spices - WestRM Storage

Spices - West

RM Storage

Vanilla - EastRM Storage

Vanilla - East


F la vors -C o m p un d edS e aso n in gsV a n illaS p ice s/H e rbsO le o re s in s /O ilsC o lo rB its ®

F la vo r-C e ll®T o m ato P ow d erF ru it D is tilla tesF ru it B a se d F la vo rsF la vorS p ice ®

R etail F oo d &B everage

M cC orm ick F lavor

C u s tom C oa tin gsC u s tom S e a son in gsC u s tom Co n d im e n ts

Q u ick S erviceC asua l Din ing

R estau ran t Su p plie rs

G lobal R estaurant

B ra nd e d S p ices & He rbsB ran d ed S e a so n in gsB ra nd e d M a rina d esB ra nd e d S a uce s & G ra v iesB ra n de d F la vo red O ilsB ra n de d Co lo rs & E xtra c ts

F u ll ServiceS u perm arke t Prepared

N o n-C o m m erc ialC a fete r ias /B uffe ts

Food Service

Global Industrial Group McCorm ick/U .S.Consum er Products Division

M cCormick & Co., Inc.

Profit Center Scope – Phase 1

US

US


R/3R/3Client / ServerClient / Server

ABAP/4ABAP/4

FIFinancial

Accounting

COControlling

AMFixed AssetsManagement

PSProjectSystem

WFWorkflow

ISIndustry

Solutions

MMMaterials

Management

HRHuman

Resources

SDSales &

Distribution

PPProductionPlanning

QMQuality

ManagementPM

PlantMaintenance

X

X

X = Out of Scope

X

ERP Backbone - SAP 4.6 C

SAP ScopeBusiness

Warehouse

APO

Workplace

KnowledgeWarehouse

Bolt-ons

VISTATrade

Promotions

Win CHEMNew

ProductDevelopment


B2K ERP – FI/CO Implementation

SAP 4.6C Finance Modules

Financial Accounting– GL, AR, AP & Asset Accounting

Controlling– Cost Center Accounting,

– Product Costing

– Activity Based Costing

– Profitabiity Analysis (CO-PA)

– Profit Center Accounting

Material Ledger– Parallel Valuations

– Actual Costing

Reporting – Heavy focus on CO - PA for alternate PA views – ex: Global Customers, Customers serviced by

multiple business units

– Self Service reporting through BW and LIS


McCormick SAP – FI/CO ImplementationKey Design/Policy Decisions

Single Instance – Single Controlling Area for Global McCormick

Legal Entity – All McCormick US Business Units & Plants in a single Company Code

EVA Balance Sheet used for Management Performance Indicators

Previously separate Business Units with separate Financial systems & management

Purpose of single Company Code

– Reduce Intra-company transactions and reconciliation

– Lay foundation for Financial Shared Services

Hyperion will be used for Consolidation – no Special Purpose Ledger, no EC


McCormick SAP – FI/CO ImplementationKey Design/Policy Decisions

Inter-company markups will be implemented to the extent required to meet Legal and Tax requirements

All management reporting will exclude Inter-company markups – difference will be held at Corporate

Parallel Valuations & Material Ledger implemented to exclude IC markup in Reporting

Visibility to Inter-company markup at an item level desired to support Pricing Decisions

Within McCormick US, all products will be transferred at Actual Cost

Transfer Pricing module was not implemented

All variances from purchasing and manufacturing are passed through to the selling profit center

Services (such as R&D or Logistics) provided for divisions will be handled via CCA allocations

Manufacturing facilities moving toward a Shared Services model (not fully implemented)

All plants will implement Activity Based Costing methodology for Product Costing


Parallel Valuation - Group Costing

Hunt Valley Plant Virtual MGIL Plant

Goods & Services

US Company MGIL Company

McCormick Group Company

Valuation

Legal View

Group View

Profit Center View

Costing Type

Materials are moved without Inter-company Profit

Individual Statutory requirements are considered. Includes markups between trading partners

Internal Profit can be calculated using Transfer Prices


Product Costing – Process manufacturing with ABC

Recipe

Blend

Sterilize

Quantity Structure

Production Order

Material Cost

Raw Materials $Semi-Finished Materials $

Direct Cost of ProductionBlend Product $Sterilize Product $

Indirect Cost of ProductionQuality Assurance $Scheduling $

BOM CO-PCProduct Costing

ABCActivity based costing

Testing QAProcess (Activity)


Standard Cost Standard Cost EstimateEstimate

Standard Cost Standard Cost EstimateEstimateMaterial MasterMaterial MasterMaterial MasterMaterial Master Material Ledger Material Ledger

Document OverviewDocument OverviewMaterial Ledger Material Ledger

Document OverviewDocument Overview

Document itemsDocument itemsDocument itemsDocument items Source Source documentdocument

Source Source documentdocument

Document Document headerheader

Document Document headerheader

Accounting Accounting documentsdocumentsAccounting Accounting documentsdocuments

FIFIPPPP MMMM

MMMM CO-PCCO-PC

COCOCO-CO-PAPACOCO

Receipts 100 10.000 1.000 110

Cumulative inventory 170 17.000 3.400 120

Ending inventory 140 14.000 100

Other receipts/consumption 50 5.000 2.400 148

Consumption 30 3.000 100

Beginning inventory 20 2.000 100

Prel. val.Category Quantity Price diff. Price

Actual Costing with Material Ledger


Why use the Material Ledger?

Raw Material Prices fluctuate and there is a need to track the the associated variances to the Finished Product

Standard material prices require frequent manual updates due to fluctuating prices

Plants produce products for many Selling Business Units and there is a need to distribute all costs appropriately

Ability to track multiple valuations and/or currencies at the material level.


Why did McCormick chose to use the Material Ledger?

Policy Decisions:

Within McCormick US, all products will be transferred at Actual Cost– Purchasing & manufacturing variances passed on to selling Profit Ctr.

Group Valuation will be used for all Management Reporting

Raw and Packaging material costs are updated monthly to support gross margin analysis for complex products. Utilize system calculated PUP vs. manual updates.

Visibility to both Group & Legal values at material level for Pricing

McCormick US plants produce products for Multiple Profit Centers regardless of formal Reporting Relationship

Enables Shared Services model for manufacturing

Legacy system replacement for Corporate Owned Spice Mill

Replaces “homegrown” mainframe application developed to support requirement to transfer all variances

Manufacturing Shared Services model already implemented for this facility


What does the Material Ledger Do?

The Material Ledger is similar to a sub-ledger for all inventory related transactions. Transactions can be tracked in:

• multiple currencies (Company code plus 2 others)

• multiple valuations (legal, group, profit center)

• at actual cost for each material / plant.

• Actual costing functionality enables the distribution of variances (PPV and manufacturing) to semi-finished and finished product

• Revaluation variance is automatically recorded when the price for a material is updated.

• Revaluation is also tracked at the plant/material level through the material ledger.

• Automated calculation and capitalization of direct material variances


Material Ledger/Valuation practices at McCormick

• At McCormick, two valuations are tracked in the Material Ledger

• Group Valuation – always USD, excludes Inter-company profit

• Legal Valuation – local currency

• At McCormick, Profit Center Accounting uses the Group Valuation from the Material Ledger

• During month end processing, Periodic Unit Prices (PUP) are calculated and variance distribution and capitalization is performed automatically.

• Variances related to Sales remain in the P&L as “net” amounts – not easily traceable

• New transaction for Not Included/Not Distributed amounts helps.

• System calculated PUP is used to update Raw and Packaging Standards for Future period


McCormick Month End Process with Material LedgerMcCormick Month End Process with Material Ledger

The Standard Cost for Raw & Packaging materials is updated each month to equal the Periodic Unit Price.

one-month lag between the price recalculation and price update.

Standard Cost Estimates are generated monthly for all Semi-Finished and Finished Goods to incorporate:

Raw & Packaging price changes

Master Data, BOM & Recipe changes

Currently, Labor, Machine Activity Types and ABC Business Process rates are updated annually or upon significant business change only

Rate variances are not passed through to process orders or materials.

Cost Center and ABC Business Process variances are analyzed off-line and manually distributed to selling Profit Centers.


Reporting & Analysis with Actual Costing/Material LedgerReporting & Analysis with Actual Costing/Material Ledger

Gross Margin analysis is focused on Actual Cost and Cost Component Analysis

Direct material Variances within a period are minimized due to frequent updates.

Planned price fields are populated with Annual standards developed during budget cycle and used for price change analysis.

Cost Component structure incorporates Top 20 commodities to support price change analysis

Reporting not developed yet – looking at BW as a source

- 26 -

How Does Material Ledger work?


Parallel Valuation – thru Material Ledger – Inventory values

Prod.order

Distributioncenter Sales

order

Finishedproduct

Raw materials

Co Code 1101 - MGIL

Plant 1010 - VirtualPlant 1000 Spice Mill Plant 1020 – MDC

Cost center

L $ 70G $70

L $ 70G $ 70

L 120G 90

L 120

G 90

NB PO$100

MfgCCtr $ 20

MfgCCtr $ 20

L $120G 90

- Plant-Plant trfr

Co Code 1100 - US Co Code 1100 - US

Both Values post to FI. PCA is recorded at Group Value only. Both Values are tracked for all transaction until inventory is sold (or Shipped to a unit not on SAP)


Structured Value Chains – Periodic Unit Price

1000

...

...

...

...

250

...

...

...

...

30

...

...

...

...

28.00

...

...

...

...

Cumulative inventory 2000 500 30 26.50

Other receipts/cons. 0 0 0

Preliminary Preliminary valuationvaluation

Preliminary Preliminary valuationvaluationQuantityQuantityQuantityQuantity

1000 250 25.00

PricePricedifferencedifference PricePrice

Beginning inventory

Receipts

Production

Purchase order

Stock transfer

Subcontracting


Price Differences

External procurement (PO value / invoice value)

In-house production (settlement of process orders)

Initial entry of Inventory balances (external value posted)

Transfer price variance (stock transfer – plant to plant)

Subcontracting

Debit / credit of material (MR22)

Revaluation due to a Price Change (CK24, CKME)

Material Ledger – transactions that impact valuation

Material consumptionMaterial consumptionVB 3250

Material InventoryMaterial Inventory3250 VBBI 2500

ZU 2500

GR/IR allocationGR/IR allocationRE 2600 2600 ZU

VendorVendor

2800

Price differencePrice difference

ZU 100RE 200

Posting Example: Purchase Price Variance

GRGR

GRGRIRIR

IRIRIRIR

CNSCNS

CNSCNSGRGR

Standard price: 25 $ per EAPeriodic unit price: 26.50 $ per EAStandard price: 25 $ per EAPeriodic unit price: 26.50 $ per EA

Beginning inventory (BI): 100 EA / 2500 $Goods receipt/purchase order:100 EA / 2600 $Invoice receipt: 100 EA / 2800 $ Consumption: 130 EA / 3250 $Ending inventory: 70 EA

Receipts -PO 100 2500 100 26

Cumulative inventory 200 5000 300 26.5

Ending inventory 70 1750 26.5 105

Receipts-Invoice 0 0 200

Consumption 130 3250 25

Beginning inventory 100 2500 25

Prel. val.Category Quantity Price diff. Price


Period 1 Period 2

Period 1:Prel.ValuationPeriod 1:Prel.Valuation

Inventory Price Dif

Period 1: Act.CostingPeriod 1: Act.Costing

Inventory Price Dif

+

BASIC CONCEPT: Allocation of Price Differences


Costing Cycle with Material Ledger (ML)

Day 0

Open New Period

(MMPV)

Day 0

Open New Period

(MMPV)Day 0

Release new Cost Estimates&

(Material Prices (CKME)

(Post Reval to new Period)

Day 0Release new Cost Estimates&

(Material Prices (CKME)

(Post Reval to new Period)

Day 1 (PM)

Perform OH Allocation

ABC Templates

Day 1 (PM)

Perform OH Allocation

ABC Templates

Day 2 (PM)

Settle Process Orders

(ML updated with variances)

Day 2 (PM)

Settle Process Orders

(ML updated with variances)

Day 3

Execute CCA Allocations

Day 3

Execute CCA Allocations

Day 2 (PM)

ML Single Level Settlement

Day 2 (PM)

ML Single Level Settlement

ML Mark Future Raw & Pkg

Material Prices (CKMPRP)

ML Mark Future Raw & Pkg

Material Prices (CKMPRP)

Pre-close

Create Std. Cost Estimates

(CK40N)

Pre-close

Create Std. Cost Estimates

(CK40N)

Day 3 (PM)

ML Multi Level Settlement

Day 3 (PM)

ML Multi Level Settlement

Day 4Manual variance

Closeout

Day 4Manual variance

Closeout

Day 4 (PM)

Post ML Closing

(Capitalization)

Day 4 (PM)

Post ML Closing

(Capitalization)

Close Complete

1 month lag

For PUP update


Material Ledger- Actual Costing

Preliminary Valuation at Preliminary Valuation at standard and recordingstandard and recordingprice differencesprice differences Price determination:Calculation ofPeriodic Unit Price

Period End Closing:Revaluation of materialswith Periodic Unit Price

Preliminary Valuation at Preliminary Valuation at standard and recordingstandard and recordingprice differencesprice differences Price determination:Calculation ofPeriodic Unit Price


Three Steps in Actual CostingThree Steps in Actual Costing

Receipts

Cumulative inventory 1000 25,000 25.00

Ending inventory 1000 25,000 25.00

Other receipts/consum

Consumption



Beginning inventory 1000 25,000 25.00


Differences between Standard Price and

actual priceReal time valuation with Standard Price

Average Actual price

PERIOD 1PERIOD 1 - Beginning inventory Value - Beginning inventory ValueML STATUS – PERIOD OPEN (MMPV)

Receipts 1000 25,000 3000 28.00

Cumulative inventory 2000 50,000 3000 26.50


Other receipts/consum 0 0 0

Consumption 1300 32,500 25.00





Beginning Inventory+

all Goods Receipts

Average Actual price

Differences between Standard Price and actual price

PERIOD 1PERIOD 1 – Transactions – Transactions ML STATUS – Quantities and values posted


Multi-Level Actual Costing (Overview)

Preliminary Valuation at standard and recording Price Differences Price determination:Price determination:Calculation ofCalculation ofPeriodic Unit PricePeriodic Unit Price


Preliminary Valuation at standard and recording Price Differences Price determination:Price determination:Calculation ofCalculation ofPeriodic Unit PricePeriodic Unit Price



PERIOD 1PERIOD 1 – Closing – PUP determination – Closing – PUP determination ML STATUS – Single Level Price DeterminedSingle Level Price Determined

- Standard price: $25.00 -Periodic Unit Price: $26.50 = $53,000 (Preliminary Valuation at STD + Price Diff)

2,000 (Cumulative Inventory)

Receipts 1000 25,000 3000 28.00


Ending inventory 700 17,500 25

Other receipts/consum 0 0 0 0

Consumption 1300 32,500 25




PricePriceDiDiffff..

PricePrice

PERIOD 1PERIOD 1 – Closing – single level price determination – Closing – single level price determination ML STATUS – Single Level Price DeterminedSingle Level Price Determined

- Standard price: $25.00- Inventory value: $17,500+ $1050(period end)- Periodic Unit Price: $26.50

Receipts 1000 25,000 3000 28.00


Ending inventory 700 17,500 26.50 1050

Other receipts/consum 0 0 0 26.50

Consumption

1300 32,500 25





PricePrice

Not Distributed 1950

PERIOD 1PERIOD 1 – Closing – Multi-level price determination – Closing – Multi-level price determination ML STATUS – Multi-level price determined

-Standard price: $25.00 -- Inventory value: $17,500 + $1050 (period end)- Periodic Unit Price: $26.50

Receipts 1000 25,000 3000 28.00



Other receipts/consum 0 0 0 26.50

Consumption 1300 32,500 1950 26.50





PricePrice

Consumption Multi-level settlement


Multi-Level Actual Costing (Overview)

Preliminary Valuation at standard and recording Price Differences Price determination:Calculation ofPeriodic Unit Price

Period End Closing:Period End Closing:Revaluation of materialsRevaluation of materialswith Periodic Unit Pricewith Periodic Unit Price

Preliminary Valuation at standard and recording Price Differences Price determination:Calculation ofPeriodic Unit Price

Period End Closing:Period End Closing:Revaluation of materialsRevaluation of materialswith Periodic Unit Pricewith Periodic Unit Price



Period 1 Period 2

Price ControlDuring Period: Preliminary Valuation Price (S)After Closing Entries: Periodic Unit Price (V)

For Period 1:

Price Control: S

For Period 2:

Price Control S

For Period 1:

Price Control V

For Period 0:

Price Control V

Revaluation: Change of Price Control

Financial Postings –Period 1

InventoryInventory PayablesPayables

VendorVendor

Procedure Inventory Inventory value$Standard Begin. inventory: 1000 EA at$2$ 1000 25,000 25

Goods receipt : 1000 EA at 28$ 2000 50,000 25

Consumption : 1300 EA at 25$ 700 17,500 25

Invoice receipt : 1000 EA at 28$ 700 17,500 25

ML Closing : 700 EA at 1.5 $ 700 18,550 25 (PUP 26.5)

Procedure Inventory Inventory value$Standard Begin. inventory: 1000 EA at$2$ 1000 25,000 25

Goods receipt : 1000 EA at 28$ 2000 50,000 25

Consumption : 1300 EA at 25$ 700 17,500 25

Invoice receipt : 1000 EA at 28$ 700 17,500 25

ML Closing : 700 EA at 1.5 $ 700 18,550 25 (PUP 26.5)

BIBI

GRGR

CNSCNS

BIBI 25000

25000

1050

25000

25000

1050

GRGR2800028000 GRGR

CNSCNS

2800028000

2800028000

IRIR

ConsumptionConsumption

3250032500

IRIR

CLCL

3250032500

CNSCNSIRIR

Inventory GR/IR Account

Price difference Price difference

CLCL10501050GRGR 30003000

CLCL

Variance (P&L)Variance (P&L)

Receipts




Consumption





PERIOD 2PERIOD 2 – Day 0– Day 0 - Open period – (MMPV) - Open period – (MMPV)

ML STATUS – Period open

Price change 700




Consumption





PERIOD 2PERIOD 2 – Day 0 -– Day 0 -Standard Price Change to $26 Standard Price Change to $26 (Based on info from periods prior to period1)(Based on info from periods prior to period1)ML STATUS – Price change complete

Receipts

Price change 700



Receipts

Consumption



Beginning inventory 700 18,200 26.50 350


PERIOD 2 – Day 4 PERIOD 2 – Day 4 – Period 1 closing posted – Period 1 closing postedML STATUS – Quantities and Values entered

ML Closing

350

Financial Postings –Period 2 (no change in standard price)

Procedure InventoryInventory value$ Standard Begin. inventory: 700 EA at 25$ 700 17,500 25

ML Closing (per1) : 700 EA at 1.5 $ 700 17,500 25 (PUP 26.5)

Procedure InventoryInventory value$ Standard Begin. inventory: 700 EA at 25$ 700 17,500 25

ML Closing (per1) : 700 EA at 1.5 $ 700 17,500 25 (PUP 26.5)

BIBI

BIBI 17,500

+ 1050

17,500

+ 1050

RevaluationRevaluation

CLCL

Inventory

Price differencePrice difference

CLCL 10501050

CLCL

10501050Capitalization auto reverses in next period

Financial Postings –Period 2 Procedure InventoryInventory value$ Standard P 1 Begin. inventory: 700 EA at $25 700 17,500 $25

Change Std to PUP: 700 EA at $26 700 18,200 $26

ML Closing (per1) : 700 EA at $1.5 700 18,200 $26 (PUP 26.5)

Procedure InventoryInventory value$ Standard P 1 Begin. inventory: 700 EA at $25 700 17,500 $25

Change Std to PUP: 700 EA at $26 700 18,200 $26

ML Closing (per1) : 700 EA at $1.5 700 18,200 $26 (PUP 26.5)

BIBI

BIBI 17,500

+ 1050

17,500

+ 1050

RevaluationRevaluation

CL1CL1

RVRV

Inventory

Price difference *Price difference *

CL1CL1 10501050

CLCL

RVRV

10501050

RVRV 700700

700700

700700 CL2CL2

CL2CL2 700700

Capitalization auto reverses in next period

Material Ledger Costing Run Summary

Actual Costing Run: Process StepsActual Costing Run: Process Steps

Selection: Selects all Materials with Price Determination 3

Determine sequence: Determines the sequence in which Materials are costed andassigns all Materials to a Costing Level

Single-Level Calculates Actual Prices based on Single-level Price Determination: Price Differences

Multi-Level Calculates Multi-Level Actual Prices, including roll-up of PriceDetermination: Price Differences

Post closing: Closes Period (Material Ledger) and Revaluates Inventory with Periodic Unit Price

Mark material prices: Marks Periodic Unit Price for usage as Standard Price in aFuture Period

Release Future price : Releases the price marked above as the new standard at the start of the new period- Inventory revaluation takes place.Done at the start of the new period.


Lessons Learned

Invalid MM transactions and PO price errors will create issues with Periodic Unit Price

Similar to issues experienced with Moving Average Cost

MR22 and MR11 corrections do not always pass thru Material Ledger Settlement as expected due to Price Limiter function

Multiple valuations require postings in both values

Learning curve is significant. Incorrect postings to one valuation can be difficult to correct if not detected before closing of Material Ledger

Currently, business is taking extra time to review single level and multilevel price differences during month end

At Go-live significant PPV and PPV correction errors occurred

Reliability of data has increased due to up front controls implemented in Purchasing

Anticipate eliminating extra time in closing after Industrial Implementation


Lessons Learned

When analyzing variance for profit centers/materials, need to consider all variance cost elements.

Look at total impact – incurred PPV,TPV, Process order variances, revaluation and capitalization

It is helpful to assign a separate cost element to Material Ledger settlement postings

Co-products required user exit for variance distribution

Variance analysis is complicated when Fixed Price Co-Products are used.

Standard Cost/Material Price updates should be analyzed prior to release

Standard cannot be updated after material movements or ML Closing entries have been performed.


Lessons Learned

Moving from Traditional Standard Cost to “Actual” Costing requires change in mindset for Plant & Operations Controllers:

Focus shifts from variance analysis to total cost analysis

Learning curve can be significant for businesses accustomed to Once a Year standard cost updates

Monthly Forecasting process may change

Business may desire to post manual adjustments – this should be avoided except in case of clear error

Complex process – yet it works!!!

Need to develop analytical reporting in BW to increase understanding of results

QUESTIONS?

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Session Code: 1706

Variance Accounting Using the Material Ledger – A Business Perspective Presented by: Mary L. Ruth...

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