Lesson 2 of 5
Valuation approaches
10 min
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Every valuated goods movement asks the same question: at what price does this quantity go into or out of stock? With standard price (price control S) the answer is fixed for the period, and any gap between that price and what was actually paid or produced is a price difference. With moving average price (price control V) the actual price flows into the stock value and the average moves, so differences only appear in edge cases such as an invoice arriving after the stock has been consumed. Contoso, like most manufacturers, values its own products and key components at standard price.
How a price difference arises
Take the rotor CMC-RTR-200 in plant 1710 Detroit, with a standard price of $40. Contoso receives 1,000 rotors from Lakeside Components on a purchase order at $42 each. The goods receipt values the stock at standard: inventory is debited $40,000. The invoice comes in at $42,000. The $2,000 gap has to go somewhere, and the account determination sends it to a price difference account. The same happens on the production side: when a production order for CMC-ALT-100 is settled, the difference between the actual costs collected on the order and the standard value of the alternators delivered is a production variance.
- Goods receipt1,000 rotors at standard $40: inventory debit $40,000, GR/IR credit $40,000
- Supplier invoiceInvoice $42,000: GR/IR debit $40,000, price difference $2,000, supplier credit $42,000
- Material ledgerRecords the $2,000 against CMC-RTR-200 in plant 1710 for the period, in every ledger currency
- Period endWithout actual costing: the $2,000 stays in the P&L. With actual costing: it is distributed to stock and consumption
| Line | Account | Debit (USD) | Credit (USD) | Material / plant on the line |
|---|---|---|---|---|
| 1 | GR/IR clearing | 40,000.00 | CMC-RTR-200 / 1710 | |
| 2 | Purchase price differences | 2,000.00 | CMC-RTR-200 / 1710 | |
| 3 | Payable, Lakeside Components (17300001) | 42,000.00 | none (supplier line) |
The rotor invoice in the Universal Journal (company code 1710, ledger 0L; account names illustrative). The material ledger records the same USD 2,000 against CMC-RTR-200 for the period.
The key word in that flow is records. Without actual costing the $2,000 is posted once, to the price difference account in the P&L, and the inventory value stays at standard. The material ledger still records the difference against the material, which is useful for analysis, but nothing revalues the stock. With actual costing, the ledger collects the period's differences per material and, at period end, uses them to calculate what the material really cost and to adjust the closed period.
| Question | Standard price, no actual costing | Standard price with actual costing |
|---|---|---|
| Inventory value in the period | Standard price | Standard price during the period |
| Where differences go | Price difference account in the P&L at posting | Price difference account at posting, then redistributed at period end |
| Ending inventory | Stays at standard | Can be revalued to the periodic unit price |
| Consumption and COGS | At standard; variance shown separately | Revalued with its share of differences, rolled up through the BOM |
| Effort at close | Low | An extra run each period, with error handling |
Valuation views: legal, group and profit center
Currencies answer "in which money?". Valuation views answer "from whose point of view?". The ledger supports up to three views. Legal valuation treats each company code as a separate legal entity, so intercompany sales carry transfer prices and margins. Group valuation treats the corporate group as one entity and removes intercompany profit from inventory. Profit center valuation treats profit centers as units that trade with each other at internal transfer prices. Parallel valuation needs the material ledger and extra configuration, so activate only what you will report.
Contoso's intercompany flow makes this concrete. Contoso Parts Distribution LLC (company code 1810, plant 1810 Toledo) buys alternators from company code 1710 at a transfer price above the Detroit standard cost. In legal valuation, the alternators sitting in Toledo are valued at what 1810 paid. In group valuation they are valued at what the group paid to make them, without the internal margin. Contoso has not activated group valuation; consolidation eliminates the intercompany profit instead. That is a legitimate design choice, and it is exactly the sort of decision that should be written down, because it defines which numbers a tester should expect.
What would you do?
Dan asks why the September price difference account for plant 1710 shows $2,000 for rotors when inventory still values the 200 rotors left in stock at $40 each. Contoso does not run actual costing. What do you tell him?
- With standard price, gaps between standard and actual are price differences, posted to price difference accounts and recorded per material in the ledger.
- Without actual costing, differences stay in the P&L and inventory stays at standard.
- With actual costing, differences are collected per material and distributed to ending inventory and consumption at period end.
- Legal, group and profit center valuation views are optional; activate only what you will report and test.
Check your understanding · not graded
Lesson check
1. A rotor with standard price $40 is invoiced at $42. Contoso does not run actual costing. Where does the $2 per piece go?
2. Which valuation view removes intercompany profit from inventory?
3. Why should a company activate only the valuation views it needs?
4. On the rotor invoice journal entry, which line carries the USD 2,000 that the material ledger records for CMC-RTR-200?