How to settle purchase price variances to sales order item

[sanjay_ram]

Hi,

I have a sales order item which is supplied using a in house produced finished goods. The raw materials were procured from various vendors to produce this FG internally and delivered to the sales order item.

During the procurement of the raw materials there were some purchase price variances realized and posted to price difference accounts. As such now we want to settle the PPV amount to the respective sales order items for which we bought the raw materials precisely.

For example :-

Sales order item A incurred PPV of $50 during the purchase of raw materials to produce the sales order item finished goods.

Sales order item B incurred PPV of $60 during the purchase of raw materials to produce the sales order item finished goods.

Sales order item C incurred PPV of $70 during the purchase of raw materials to produce the sales order item finished goods.

The required settlement :-

$50 is to be settled to Sales order item A

$60 is to be settled to Sales order item B

$70 is to be settled to Sales order item C

How can we do this?

[kamalkumar_biswas2]

Hi

Are you telling that diff of PO price and Inv price which is posted in PRD a/c ? or manually posted in FI ?

Make the process clear to understand

kamal

[sanjay_ram]

Yes sir, purchase price variances occurs in 2 situations :-

1) Price differences between the PO price and material standard price during GR

2) And the Invoice price and the PO price difference during invoice receipt

So both the above price variances must be settled to the sales order item related to it.

[kamalkumar_biswas2]

Hi Sanjay

   This will only distribute/settle if ML/Actual costing is run  otherwise it will remain in PRD a/c and only you can give adjustment entry in FI during closing to make inventory and consumption in right place but at material level (MM) it will not flow.

   So solution ML/Actual costing

   Kamal

[sanjay_ram]

Hi Kamal,

Will Actual costing with ML settle this to the respective sales order items? Remember what we want is this :-

$50 is to be settled to Sales order item A

$60 is to be settled to Sales order item B

$70 is to be settled to Sales order item C

[kamalkumar_biswas2]

Hi

Process is like that....

These PRD will reevaluate the inventory and consumption (including PGI in SO items) ..so the proportionate price diff value will also distribute to SO item also and if no inventory left for that item then fully absorbed in SO item.

Example:

RM1  used for GF1 (SO item)

PRD for RM1 is 100 for qty 10 and used 5 for FG1 then 50 will go to FG by consumption of RM1 and 50 to Inventory RM1

I think you have understood

Kamal

[sanjay_ram]

Hi Kamal,

Yeah that is the problem, the material ledger will not assign the price difference based on the exact PPV that is related to the sales order item.

Instead of that it totals up all the PPV recorded and allocate it proportionately, hence we will not know the exact PPV that is to be allocated to the sales order item.

However what we need is the exact PPV to be assigned to the sales order item and not the average PPV. Is this still possible?

[kamalkumar_biswas2]

Hi Sanjay

  Frankly speaking I could not understand your point of arguments regarding ML/Actual costing?

From where you are putting the logic of average distribution pf FRD...it is always material wise not all material combined.. But in FI you can see it in one GL a/c as you have assigned single GL for PRD but in material level you can see it in your report.

  However...I do not find any otherway to solve this issue. If anybody can give some better solution..let us wait

  kamal

[sanjay_ram]

Hi,

I know it is material wise but that will not assign the exact PPV that is related to the respective sales order item. This is the issue. We need the exact PPV to be assigned to the respective sales order item.

[kamalkumar_biswas2]

Hi

Can you justify by example what you are telling..may be some solution may come. Give both scenario..

1. In case of ML

2. What you want

Kamal

[sanjay_ram]

Hi Kamal,

Let me expand the current example to include one more PPV from another purchase of raw material which was inventorized instead, so the final PPV standing will be as follows :-

Sales order item A incurred PPV of $50 during the purchase of raw materials to produce the sales order item finished goods.

Sales order item B incurred PPV of $60 during the purchase of raw materials to produce the sales order item finished goods.

Sales order item C incurred PPV of $70 during the purchase of raw materials to produce the sales order item finished goods.

PPV of $20 from Purchase of raw material which was inventorized.

Let's assume all the above raw materials purchases is for the same raw material with 1 unit only to keep the math simple.

When we run material ledger, the settlement will be as follows :-

Total of all PPV = $200 (50 + 60 + 70 + 20)

Settlement of PPV by ML based on 1 unit of purchase :-

$50 will be settled to Sales order item A

$50 will be settled to Sales order item B

$50 will be settled to Sales order item C

$50 will be settled to ending inventory

See the same amount of PPV of $50 is settled to all sales orders instead of the respective PPV?

However the settlement that we require is as follows :-

$50 is to be settled to Sales order item A

$60 is to be settled to Sales order item B

$70 is to be settled to Sales order item C

$20 is to be settled to ending inventory

Because only then we can compute the true actual cost of each sales order items for computation of profit margin purposes.

[kamalkumar_biswas2]

Hi Sanjay

  No..This is not the situation..again you may have some diff with me..

RM1  suppose no inventory

  PRD at the time of ML run 50

  Consumed fully to FG1...so 50 will book to FG1 (SO item)

RM2  Inventory PRD  20

  PRD at point of Invoicing 60

  Total PRD 80 at point of  ML run 80

  Consumed qty 50% and Inv 50%

  So PRD at consumption (SO Item) 40 (proportionate)

  So..where is wrong?..if you want that PRD at Inventory will be skipped and current PRD only to be booked ...is not possible  at least I don't any idea..otherwise item level system is doing correct.

Kamal

[sanjay_ram]

Hi Kamal,

I think you misunderstood my example. My example uses the same raw material with purchasing qty of 1 unit for all 4 purchases. Based on that i will have the ML settlement as follows :-

Total of all PPV = $200 (50 + 60 + 70 + 20)

Settlement of PPV by ML based on 1 unit of purchase :-

$50 will be settled to Sales order item A

$50 will be settled to Sales order item B

$50 will be settled to Sales order item C

$50 will be settled to ending inventory

However in your example you are using 2 different raw materials so you don't see the problem.

[kamalkumar_biswas2]

Hi Sanjay

  You mean to say under diff invoice of same mat having diff PPV should go SO item ...according to consumption pattern..

  In standard I never seen this ..may be some work around...other may please reply

  kamal

[sanjay_ram]

Yes you are right. That's what we want. One solution is, when we buy the raw materials for the sales order item, we assign the purchase to that sales order item in the purchase order using the account assignment category B or C so that the price differences arising from the purchase order is assigned to the that sales order item specifically. Is this correct?

[kamalkumar_biswas2]

Hi Sanjay

  Your logic seems to be right but I have doubt whether system will track PPV  for item level for so many PO for same item. Can test and then only be confirmed.

Kamal

[sanjay_ram]

Hi Kamal,

In MM there is something called Individual Purchase Orders, which will allow the purchase orders to be linked to sales orders so that the full COGS of the sales order item is captured from the final AP invoice and NOT from the material standard prices. This is a very good purchase order type because it tracks and posts all the AP invoice value differences to the same sales order COGS it is tied to. Hence even if you have subsequent debits, sub. credits, invoice cancellation, credit memo and so on, the system will still keep track of all these and continuously update the sales order item COGS in real time hence the COGS of this sales order item will always have the full value of the cost matching the AP final invoice.

This is a great tool for us to capture the full actual cost of the raw material purchases 🙂

[kamalkumar_biswas2]

Hi Sanjay

  Then its great to solve the issue ...our concern was how to link SO item to individual Invoice variance..if this works ...then cheers and go ahead

   Kamal

[sanjay_ram]

Hi Kamal,

That's where the following sales order account assignment category comes in handy in the purchase order line items options. We can link any sales order items to any purchase order line items using this function :-

[kamalkumar_biswas2]

Hi sanjay

Yes..I know it..my concern was Ind SO is linked with ind PO is alright but whether PPV arise from this PO item also will flow to SO item individually has to be tested..then its alright.

Kamal