Actual cost calculation in S/4HANA

Situation in ECC

ECC comes with two different material evaluation methods:

Standard Prices

With standard prices you can assign fixed prices to materials. Once the prices are set, goods receipts or invoices doesn’t change them. Instead price differences, which occur during goods receipts or invoice postings, are written to a special ledger.

Moving Average Prices

The second evaluation method uses a moving average price, which is recalculated during goods receipts or invoice posting. That means when committing a posting the system recalculates the stock value and divides it by the stock quantity to determine the new moving average price.

These two evaluation methods can cause problems in practical applications. The standard prices don’t need to match the actual goods receipt or invoice prices and therefore consumption or inventory values can be wrong.

The moving average price generally reflect the reality better than standard prices, but it can be problematic in case of price differences for purchased material. When the material consumption takes place before the invoice is posted, it is evaluated with the price of the goods receipt not the final invoice price.

Situation in S/4 HANA

S/4HANA fundamentally changes material valuation by making the Material Ledger (ML) mandatory. This is the foundation for the Actual Costing functionality, which addresses the limitations of both Standard and Moving Average Prices in ECC.

The Material Ledger works as follows:

1. Standard Price Focus: Within a given period, all material movements (goods receipts, consumption, stock transfers) are initially valued at a Standard Price (or a periodic unit price, which acts similarly).
2. Price Difference Capture: Crucially, the ML captures and tracks all price differences (due to goods receipts, invoices, production variances, etc.) in real-time. These differences are collected separately from the inventory value, associated with the specific material.
3. Period-End Valuation (Actual Costing): At the end of the period, the system performs a Single-Level and Multi-Level Material Ledger Close. This process:
   1. Calculates the Actual Price: It combines the initial Standard Price with all collected price differences for the period to determine the true Periodic Unit Price (PUP). This PUP represents the actual, average cost of the material for that specific period.
   1. Revaluates Inventory and Consumption: The system uses the calculated PUP to revaluate the ending inventory and all consumption for the period, ensuring that both stock and COGS (Cost of Goods Sold) reflect the true actual cost.
   1. Sets the Next Period’s Price: The calculated PUP can be used as the starting Standard Price for the subsequent period.

This means S/4HANA effectively offers the stability of a fixed price during the period (Standard Price) while also ensuring that all postings ultimately reflect the true actual cost at the period end.

Conclusion

The mandatory Material Ledger with the option for Actual Costing in S/4HANA is a game-changer for cost management. It is ideal for companies that face volatile input prices, operate with complex manufacturing processes, or require accurate product profitability analysis.

Actual Costing enables organizations to:

• Determine True Cost of Goods Sold (COGS): Accurately reflect the actual cost of materials in financial statements, leading to more reliable profit margins.
• Achieve Complete Price Transparency: Track and understand where all price variances originate (e.g., purchasing, production efficiency) for better control.
• Manage Fluctuating Prices: By calculating the Periodic Unit Price, companies can manage material costs more effectively and mitigate the risks associated with simply relying on an outdated Standard Price or a susceptible Moving Average Price.

Ultimately, S/4HANA moves beyond the simplistic valuation methods of ECC to provide a powerful, integrated, and regulatory-compliant view of material and production costs.

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