What is SAP Material Ledger?

Excerpt from Practical Guide to SAP Material Ledger by Rosana Fonseca.

Overview: What is SAP Material Ledger?
The name SAP Material Ledger leads people to think this function resides under the materials management module (MM). In fact, SAP Material Ledger is a component of the product cost controlling (CO-PC) submodule of SAP Controlling (CO) and it is a subsidiary ledger for materials.

SAP CO is the management accounting module in SAP that contains several sub-modules for cost center accounting, overhead accounting, product cost controlling, and profitability analysis. Finance and accounting pertain to the financial accounting (FI) module.
Product costing is a very complex process in any industry and is used to manage costs related to a manufacturing process. In SAP, product costing integrates with many other modules and supplies basic information for business processes used by various other SAP functional areas such as valuation of goods in materials management (MM), costs to determine price in sales and distribution (SD) pricing procedures, and ultimately it sets the standards to measure production efficiency in manufacturing orders in the production planning (PP) module.

Product costing is comprised of the following tools in SAP:

Product cost planning (CO-PC-PCP)

-Costs are planned for the materials and cost objects in cost accounting.

Cost object controlling (CO-PC-OBJ)
-Area that assigns costs incurred to the products manufactured to
inventory or make-to-order production. Examples of cost objects
within cost object controlling are: Production order, process order
for process industries, and cost collectors.

Actual costing/material ledger (CO-PC-ML)
-Material prices are carried in multiple currencies/valuations and
actual costing.

Although product costing is subdivided into three sub-components, this book focuses on material ledger functionality only. It is essential that you are familiar with and have a good understanding of the principles of product costing in SAP to appreciate the value of SAP Material Ledger.

Standard cost is frequently referenced during the course of this book; therefore it is extremely important that you understand what standard cost is and how it is used in SAP before diving into SAP Material Ledger.

Standard cost system is the process by which a company estimates a preliminary target of what it expects a unit of product to cost for a determined period for planning purposes. In an SAP environment with standard cost, all material movement transactions such as purchases of raw materials, production, and transfers across different plants (sites/locations) of the company are recorded at standard values throughout the month.

SAP Material Ledger’s primary function is to handle actual costing. It collects price differences against standards that result from goods and invoice receipts related to purchased orders and production variances, for example. At month end, these variances to standards are allocated back to the cost of the products — from raw material to finished products— across multiple levels of the production structure by using the multilevel cost roll-up function in actual costing with SAP Material Ledger. This process allows companies to have a clear view of the actual performance of the production process in relation to targets while providing a valuable insight into process inefficiencies.

Variances to standards are captured separately in the G/L in the financial accounting module. However, if you use SAP Material Ledger, these variances are not only tracked separately in the accounting module, but they can also be reconciled by product and plant, helping you to carry out analysis and comparisons against targets.

The fact that SAP Material Ledger carries the variances across several manufacturing levels adds a great transparency on the value-added processes.

SAP Material Ledger is a hybrid of standard cost and monthly weighted average cost. The actual weighted average cost is called periodic unit price (PUP). PUP changes periodically as a result of goods movements and invoice entries. It is available only if the material ledger is active for the material and it is set as settlement price control 3 (discussed in Section 2.3). The PUP is used to revalue ending inventory at month end. This is an optional function where actual cost is not a legal requirement. Periodic unit price (PUP) is discussed in later chapters.

Keep reading in Practical Guide to SAP Material Ledger.

Author Rosana Fonseca is an independent SAP Financials consultant who has been working in SAP since 1999. She is SAP certified in FI and CO modules and has extensive experience in SAP global projects in the USA, Canada, Europe, UK, Asia, and South America, which includes different industry segments such as Mining, Oil & Gas, Chemicals, Electronics, Energy, Consumer Goods, Telecom, and Aerospace.
She is originally from Brazil, but is also a Canadian citizen. She currently lives in Toronto in her adopted country Canada.