Standard vs Moving Average Price

Introduction

When managing inventory and financial accounting, businesses must decide between Standard Price and Moving Average Price (MAP) for valuation. Each method has its advantages and applications, depending on the type of materials and the company's cost accounting strategy. In this article, we’ll explore the differences between standard price and moving average price, their implications on financial reporting, and how SAP calculates moving average prices.

Understanding Moving Average Price (MAP)

Moving Average Price is widely used for valuing raw materials (ROH), spare parts (ERSA), and traded goods (HAWA) due to its ability to reflect real-time cost fluctuations.

Why Use Moving Average Price?

  • Reflects Real-Time Costs: MAP continuously updates based on the latest purchase prices, ensuring inventory valuation aligns with market conditions.
  • Minimizes Variance Analysis: Since the cost fluctuates with purchases, there is less need for complex variance calculations.
  • Lower Administrative Effort: Unlike standard costing, there are no predetermined cost estimates to maintain.
  • Best for Easily Obtainable Items: Materials with small cost variations benefit from MAP as the impact on margins is minimal.

How SAP Calculates Moving Average Price

SAP dynamically updates MAP using the following calculations:

1. Goods Receipt for Purchase Order

When new inventory is received, SAP updates the MAP as follows: New Moving Average Price = Total Value / Total Quantity
  • Total Value = Balance on hand value + Goods receipts value
  • Total Quantity = Balance on hand quantity + Goods receipts quantity

2. Invoice Receipt for Purchase Order

  • Invoice Price > Purchase Order Price: The additional cost is added to the balance on-hand value and divided by the on-hand quantity.
  • Invoice Price < Purchase Order Price: The difference is deducted from the balance on-hand value (up to zero). Any remaining variance is accounted for separately.
Important: When goods issue price consistently exceeds goods receipt price, the MAP can become zero. Also, negative stocks should never be allowed under MAP.

Understanding Standard Price

Unlike MAP, Standard Price is typically used for semi-finished goods (HALB) and finished products (FERT) due to the need for stable and predictable product costing.

Why Use Standard Price?

  • Stable Valuation: Prevents frequent fluctuations due to data entry errors, production inefficiencies, or process variations.
  • Simplifies Cost Accounting: Ensures consistency in financial reporting, as product valuation remains fixed over a period.
  • Required for Standard Costing Practices: SAP and general accounting principles recommend standard price valuation for manufactured goods.

SAP Recommendation for Standard Price

SAP advises that FERT and HALB should use Standard Price, with actual price valuation managed through the Material Ledger. The Material Ledger provides a periodic actual price for valuation, offering a more realistic cost picture. Reference: OSS Note 81682 - Pr.Contr.V for semi-finished and finished products.

Key Differences: Standard Price vs. Moving Average Price

Feature Standard Price Moving Average Price (MAP)
Best for Finished & semi-finished products (FERT, HALB) Raw materials, spare parts, traded goods (ROH, ERSA, HAWA)
Price Fluctuation Fixed, only changes periodically Updates with every purchase
Variance Analysis Required for cost deviations Minimal variance calculations
Administrative Effort Higher, requires cost estimation Lower, no cost estimation needed
Impact on Margins More predictable Varies with market fluctuations
Recommended by SAP Yes, for FERT & HALB Yes, for ROH, ERSA, HAWA

Conclusion

Choosing between Standard Price and Moving Average Price depends on the type of material and the business's accounting needs.
  • Use MAP for raw materials and frequently purchased items where price fluctuations are common.
  • Use Standard Price for finished and semi-finished goods to maintain cost stability.
For companies using SAP, it is advisable to follow best practices and leverage the Material Ledger to obtain a more accurate reflection of actual costs over time.

Frequently Asked Questions (FAQs)

1. What happens if the moving average price reaches zero?

If goods are consistently issued at a price higher than the goods receipt price, the MAP can become zero.  This can lead to accounting discrepancies, so it's essential to monitor cost fluctuations carefully.

2. Can standard price change over time?

Yes, but it doesn’t change automatically like MAP. Standard prices are revised manually, usually at the end of a period or when cost structures change significantly.

3. Why does SAP recommend standard price for finished goods?

SAP recommends standard pricing for FERT and HALB to prevent valuation fluctuations caused by process inefficiencies, incorrect backflushing, or data entry errors.

4. What should I do if I need actual cost valuation but use standard price?

Use the Material Ledger in SAP, which calculates a periodic actual price for a more accurate cost valuation.

5. Are there cases where MAP is not suitable?

Yes, MAP is not suitable for finished or semi-finished products because production inefficiencies can cause large price fluctuations, leading to inaccurate financial reporting.

6. How does SAP handle negative stocks in MAP?

SAP does not allow negative stocks for MAP materials. If negative stocks occur, it may result in incorrect pricing calculations.

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