Issue

The purpose of this document is to provide a comprehensive assessment of the two Product cost valuation approaches currently utilized in Syensqo: the revaluation on actuals with the use of the Material Ledger and the Semi-standard approach. This evaluation aims to determine the most suitable approach to implement in the S4 system, based on a collaborative assessment by business and IT stakeholders.

Recommendation

Background & Context

We currently have two systems with two different valuation approaches and ways of working. These differences stem from mergers and acquisitions (M&As), where the acquired organizations used different valuation methodologies. Additionally, there were fiscal requirements that necessitated deviations from standard operating procedures. In this document, the two approaches are referred to as follows:

• • Re-valuation on actuals with Material ledger for PF1
  • Semi-standard for WP1

Assumptions

• Currently we have two different approaches for assigning company codes to controlling areas in the two systems. These are, 
  • PF1: single controlling area 
  • WP1: Four controlling areas by Region (Europe, APAC, North America, South America) + one for Financial companies, total five controlling areas
• In S4 we anticipate having a uniform enterprise structure. Especially on lower controlling objects like cost centers, profit centers, segments etc
• In S4 we will have a single costing approach for all Legal entities. Local deviations are expected due to local fiscal requirements.
• The product cost system will be S4
• The implications of Universal Parallel Accounting, whether positive or negative, on the valuation question are not considered in this KDD. There will be another KDD to address Universal Parallel Accounting's new features and their overall implications for product costing.
• Manufacturing is using Manufacturing Execution Systems (MES) as well as planning systems, specifically Dynasys, and in the future, Kinaxis. MES and in some instances spreadsheets and manual input feeds SAP processes and production orders with confirmations and consumptions. 
• Currently, in PF1 the confirmation is on std quantities and hour
• Currently, In WP1, some plants confirm actual quantities and hours, while others do not.
• Std prices are calculated in both systems
• Activity prices are entered manually. Although in WP1, there is an activity calculation process, the capacities are loaded manually. Please see below on the additional information sections   

Constraints

• In S4 material ledger is mandatory. But This does not imply that actual cost is mandatory.
• If the transfer price functionality is implemented then actual costing has to be activated. Transfer price functionality is addressed to a separate KDD with the same title.
• For actual costing (Single-level/multilevel price determination
  (indicator 3) the material price control has to be S. 

Impacts

Business Rules

Options considered

Option A: 

Revaluation on actuals with Material Ledger

The Material Ledger consists of two main functionalities: actual costing and parallel valuation. A common misconception about the Material Ledger is that it refers solely to actual costing because actual costing tends to get the most attention. Therefore, when hearing the term “Material Ledger,” many immediately think of actual costing, not parallel valuation. Conversely, when the actual costing functionality is mentioned, it’s usually referred to generically as a “Material Ledger functionality.”  Furthermore, the Material Ledger falls within the CO menu, but it has as much impact on the FI module as it does in the CO module because of its impact on the inventory transactions that are posted to the general ledger. The Revaluation on actuals program with ML creates postings to the general ledger and relevant cost objects.

The purpose of actual costing is to use the transactions that occur for a material during the month to calculate its actual cost. This actual cost is typically the addition of the standard cost of the material plus the variances that occurred for the month. It sounds simple when mentioned that way, but it can get complicated depending on the processes that occur for the material, such as goods receipts, invoice receipts, process and production order confirmations, consumption, and so on. In addition, if the material is maintained in multiple currencies or is used in several other materials, more layers of complexity are added to the calculation. Synensqo has products with more than ten levels of production.

This actual price for each material, is calculated at the end of the period and it is called the periodic unit price (PUP) and is used to revaluate the ending inventory (stock) and COGS (or other consumptions) for the period to be closed. This actual price can also be used as the standard price for the next period (Not the opening period). Alternatively, inventory revaluation can be avoided, and postings can be made to accrual accounts instead . Actual costing programs determine the portion of the variance debited to the next-highest level using material consumption. Variances are rolled up over multiple production levels to the finished product. The revaluation on Actuals with Material Ledger makes it possible to use an actual cost system in addition to the standard cost system. 

Option B: Semi standard

The semi-standard approach emphasizes the importance of accurately calculating and allocating costs in a manufacturing environment. It distinguishes between fixed and variable costs and ensures proper accounting and variance tracking to maintain cost efficiency and accuracy. The semi-standard costing method is highlighted as a key practice for effective cost management.

Raw materials, trading goods, semi-finished and finished products, and packaging are controlled under Price Control S (standard price), while spare parts use Price Control V (moving average price). In SAP, the Moving Average Price (MAP) is calculated regardless of the material's price control designation. If a material is under Price Control S (standard cost), the MAP serves only as statistical information. The MAP is calculated at every goods receipt by considering the quantities and values in stock along with the quantities and purchase price of the goods receipt (GR). If the invoice does not match the quantities and values of the GR, the variances are also considered in the MAP, provided there are stocks available at the time of invoice verification. 

Exceptionally, in Brazil and Korea, raw materials are valued at the moving average price (Price Control V) due to tax authorities' requirements. Strategic raw materials can have their prices entered manually if the MAP is not adequate for calculating the semi-standard cost of the period.

A new standard price is recalculated monthly for raw materials, packaging, semi-finished products, finished products, and trading goods. This recalculated price is then released, revaluating the inventory accordingly.

The strategy sequence used in the semi-standard approach (WP1) is as follows:

- Commercial price

- MAP (Moving Average Price) plus any additive cost

- Purchase price (info-record)

- Standard price

This valuation strategy ensures that with the new standard price calculation, the Moving Average Price becomes the standard price for raw materials, trading goods, and packaging. Using the cost roll-up method, these new standard prices for the Bill of Materials (BOM) components will roll over multiple production levels all the way to the Semi Finished and finished products.

In summary, the semi-standard approach is also a "revaluation on actuals" process with notable similarities and differences, which are summarized below.

1. Similarities and differences 

The two methods might sound different but are quite similar. ML Actual valuation allocates cost variances from lower levels of production to higher levels, whether these variances come from purchasing or production. Similarly, the semi-standard approach does the same but instead of allocating variances, it recalculating the standard prices by using the moving average price.

One major difference between the two approaches is that the ML approach revaluates not only the inventory but the COGS and other consumptions, as well.

Broad Similarities and differences:

There are some important similarities and differences between the two approaches that we need to look at closely. The similarities are not about the system used (which is SAP in both cases) but more about the accounting and management aspects. On the other hand, there are also some key differences between the two approaches. Below, we will list these differences and similarities and see what can stay the same regardless of the final choice. 

Option C: 

Option D: 

Evaluation

	Option A	Option B	Option C	Option D
Criterion 1	Pro Con	Pro Pro	Pro Con	Pro Con
Criterion 2	Pro Con	Con	Pro Pro	Con Con
Criterion 3	Pro	Con	Con	Pro

See also

Change log

Workflow history