032006 - Invoice Variances

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SAPtips Cover Story
February 2006 Volume IV Issue 1

Understanding Variances in Logistics Invoice Verification
By Anurag Barua, The Washington Post
Editor’s Note: Did your vendor ship too much material? Does the invoice show an unexpected price increase? If day-to-day Materials Management in SAP weren’t complex and frustrating enough, when you add the element of balancing the associated accounts, you can quickly come to the end of your rope. In our cover story, Financials guru Anurag Barua explains some simple steps to adjust the accounts to bring the goods received and invoiced amounts into balance, even when the vendor throws you some curve balls. And Anurag doesn’t just talk the talk, he shows you how to walk the walk, with several examples that illustrate and explain the exact debits and credits necessary to handle the variances that occur among purchase orders, invoices, and actual goods received. Carefully consider Anurag’s advice and add some stability to your MM account “balancing act”. variances. Either way, you will find the information in this article helpful enough for a good understanding of this important functionality. I will be focusing on variances visà-vis Logistics Invoice Verification (LIV). Invoice verification is one of the “downstream” activities in the logistics supply chain. In LIV, you verify incoming invoices and credit memos for, among other things, correct header and line item information. These include correct dates, quantities, amounts, prices, etc. It is either posted as a blocked invoice (in which case it will need to be released before it can be paid) or unblocked invoice (which makes it ready for payment). Since LIV is integrated with FI/CO, posting an invoice creates relevant entries in the FI and CO modules, not to mention separate documents. In an EnjoySAP world, you use transaction code MIRO to post online invoices in LIV, or MIR7 to park an invoice, or MIRA to run LIV in the background.

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What Are Variances?

A logistics invoice contains variances if you enter certain values that do not match the values proposed by the system (either based on master data or a preceding document such as a goods receipt or a purchase order). Variances can happen in the areas of price or quantity, or some combination of the two. Let’s look at each of these areas in more detail: a) Price Variance – This is a result of a difference between the price per U.O.M (unit of measure) in a PO, and

Introduction

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Have you often wondered what happens with your accounts when there are variances in prices, amounts, and quantities between your invoice and purchase order, and/or goods receipts? Have you often posted invoices without really understanding the overall impact of such variances? Well, I have come across several seasoned SAP® practitioners (not only configurators and developers, but also end users), who seem a little confused with the concept of variances and their impact on accounts. If you are relatively new to logistics (and specifically SAP’s MM module), chances are that you will find yourself scratching your head trying to understand the meaning and implications of posting invoices with

Price control options upon doing a drop-down on price control field

Set

tin

gp

c rice

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Figure 1: Setting Price Control in the Material Master

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February 2006 Volume IV Issue 1
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that in an invoice. This can happen in one of two ways – a) Either your vendor over-charges or under-charges you, and b) The price entered by the data entry person in your Purchasing department varies with the vendor’s price. The accounts to which the difference is posted is dependent on the price control for the material (in the material master). A brief digression into what is meant by ‘price control’, is in order. Price control comes in two flavors: standard price and moving average price (MAP), as illustrated in Figure 1. Note: Price control can be set in the material master (transaction MM01 for creation) in the “Accounting 1” screen (as shown in Figure 1). With the “standard price” feature, a material is always valued at this price. If an IR (Invoice Receipt) or a GR (Goods Receipt) has a different price for the material, the variance is not taken into account, and differences are posted to a price difference account. In the case of “moving average price” (MAP) functionality, any price differences between the IR and GR and the MAP are posted to the inventory/stock account. The exception to this rule is that if the inventory of the material is less than the quantity for which you are being invoiced, the variance is posted to a price difference account. Additionally, the MAP itself is updated, and it is the ratio of the current total value to the current total quantity in stock. Scenario: Let’s take an example for price variance for a material configured with a standard price (control). Material X has a standard price of $5 per piece. An order of 50 pieces of Material X @ $6 per piece is made. A GR for 50 pieces takes place followed by an IR for 50 pieces @ $4 piece. Let’s look at the postings that take place in the table in Figure 2:

GR
Inventory Account GR/IR Account Vendor Account Expense from Price Differences Acct. Revenue from Price Differences Acct. 50 (DB) 250 (DB) 300 (CR)

IR
300 (DB) 200 (CR) 100 (CR)

Figure 2: Postings Resulting from Price Variance (with standard price control)

Explanation: At GR, the inventory account is debited with an amount that equals the product of the quantity of GR and the standard price (50*5 = 250). The offsetting entry is to the GR/IR clearing account and the calculation is done based on the PO price (50*6 = 300). The $50 is debited from the expense account for price differences because the value of the PO is greater than the computed value in the GR. When the IR takes place, the GR/IR account is cleared (debited). The offsetting entries are posted to the vendor account (credit of $200, i.e., 50*4) and the revenue from price differences account (credit of $100, i.e., the price difference between the PO and the IR, times the invoice quantity). b) Quantity Variance – A quantity variance is based on the 3-way match among the PO, the GR, and the invoice. It occurs when the quantity you have been invoiced for does not match the open quantity (based on the amount of goods received) for a PO. There are two scenarios here, and I’ll provide examples for each that will elucidate the point I’m trying to make. GR
Inventory Account GR/IR Account Vendor Account 30 (DB) 30 (CR)

Scenario 1: Let’s assume that you order 10 widgets @ $5 per widget. The initial GR contains 6 widgets, and after this GR you receive an invoice for 7 widgets. This is a clear case of quantity variance, because you have been over-invoiced, and there is an open delivery of 1 widget. In this case, the system expects another GR that delivers at least this 1 widget. But what if this expected GR never takes place? The open balance on the GR/IR account may have to be cleared manually. (This process is known as GR/IR clearing, and is a separate topic in and of itself, but is beyond the scope of this article). Let’s look at the postings that take place to the various accounts, as shown in Figure 3: Explanation: At GR time, the inventory account is debited for $30 (i.e., the product of the quantity delivered, which is 6, and the PO price, which is $5). The offsetting entry of $30 (credit) is to the GR/IR clearing account. At IR time, the GR/IR clearing account is debited with $35, and an offsetting entry is made to the vendor account for a credit of $35. In case there is no subsequent GR IR Subsequent GR
5 (DB) 35 (DB) 35 (CR) 5 (CR)

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Figure 3: Postings Resulting from Quantity Variance (GR<IR)

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February 2006 Volume IV Issue 1
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(to make up for the shortfall of the 1 piece), the $5 sitting in the GR/IR clearing account needs to be cleared manually. In this example, when that remaining 1 piece is received, the GR/IR clearing account is cleared by posting a credit of $5, and the offsetting entry is made to the inventory account for a debit of $5. Scenario 2: Using the same example as above, let’s assume that your order remains the same but with a GR of 8 widgets, and you are invoiced for 7 widgets. In this scenario, you are under-invoiced. This means that the system expects a subsequent invoice for at least this 1 widget. But what if this invoice never arrives? The situation is analogous to the one mentioned in Scenario 1, and some activity needs to be done to clear off the open balance in the GR/IR clearing account. Figure 4 shows the postings involved with a quantity variance. The postings are self-explanatory and closely match those of the previous example, except for the obvious differences. c) Price and Quantity Variance – If you can have a price and a quantity variance in separate invoices, what stops the occurrence of a price and quantity variance in the same invoice? The answer is: nothing. This situation is a combination of (a) and (b). The actual debit and credit postings to the various accounts are influenced by the kind of price control (standard or moving average GR
Inventory Account GR/IR Account Vendor Account 40 (DB) 40 (CR)

price) in the material master of the material that is being purchased. I had mentioned earlier when talking about price variances the impact that the price control of a material has on the postings to various accounts. Since this variance is a combination, obviously the price control factor will play a big role in determining which account(s) the variances are posted to. So, let’s look at these in more detail: • Price and Quantity Variance for Material with Standard Price – Variances are posted to price difference accounts (i.e., expense from price differences and revenue from price differences). When a GR takes place, the inventory account is posted to (or debited from) based on the standard price. An offsetting entry is made to the GR/IR clearing account, and this is based on the price in the PO. The price variance is posted to a price difference account (expense or revenue). • Price and Quantity Variance for Material with MAP – In this case, there is no price difference account involved. Account postings are made to the first three accounts (i.e., inventory, GR/IR, and vendor account). Postings to the inventory account are based on the difference between the GR and invoiced quantities, and the actual debits or credits to this account are based on the level of inventory.

If you can have a price and quantity variance in separate invoices, what stops the occurrence of a price and quantity variance in the same invoice?

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IR

Subsequent GR

35 (DB) 35 (CR)

5 (DB) 5 (CR)

Figure 4: Postings Resulting from Quantity Variance (GR>IR)

d) Variances in Order Price Quantity – Before trying to understand this variance, it is important to understand the difference between Order Unit (OUn) and Order Price Unit (OPUn). The order unit is the unit in which a material is ordered in a PO, and the order price unit is the unit in which the material is priced. It is necessary to enter the ratio of OPUn to OUn in the PO in order to compute the amount. Let’s say you order 60 pieces (OUn) of material X @ $5 per dozen (OPUn). Of course we know that a dozen is equal to 12 pieces. The ratio of the two units will give you the amount of the PO

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($25). When a variance of this kind occurs, it is posted to the price difference accounts (if the material has standard price), or to the inventory account (if the material has MAP). The actual postings are similar to those for price variances of the kind explained in (a). Scenario: Let’s take an example in which 20 containers (OUn) of Material “X” are ordered. The OPUn is in gallons and the price (MAP) per gallon is $10. The amount of the PO is $400. The conversion factor is 1:2 meaning 1 container is equal to 2 gallons. The PO is followed by a GR of 20 containers containing a total of 38 gallons. There is therefore a variance of 2 gallons between the GR and the PO. This is followed by the receipt of an invoice for 20 containers of 44 gallons each @ $10 per gallon, for a total of $440. Figure 5 shows the postings to the various accounts. Explanation: Let’s understand the postings. At GR, a debit of $380 is posted to the inventory account. It is the product of the delivered quantity (38) and PO price ($10). An offsetting credit entry is made to the GR/ IR clearing account for $380. When the IR takes place, the GR/IR clearing account is cleared, based on the PO price. A corresponding offsetting credit for $440 is posted to the vendor account. It is the product of the invoiced quantity (44) and the invoice price ($10). Since the material has a MAP control, the difference (debit of $60) is posted to the inventory account.

GR
Inventory Account GR/IR Account Vendor Account 380 (DB) 380 (CR)

IR
60 (DB) 380 (DB) 440 (CR)

Figure 5: Postings Based on Order Price Quantity Variance

have hopefully provided you with a good overall understanding of these variances. Anurag Barua is Manager of SAP Systems Support for the Customer Competency Center (CCC) at The Washington Post in Washington, D.C. He has over 13 years of experience in conceiving, designing, managing, and implementing complex software solutions, including 8 years of SAP experience. He has been associated with several SAP implementations in various capacities. He worked at SAP Labs for 5 years. Anurag’s areas of specialization and expertise include FI/CO, Logistics, BW/BI, NetWeaver™, ABAP, SOX compliance, reporting, and Project Management. Anurag was a speaker at SAP TechEd 2005 in Boston and frequently writes for several SAP publications. He has a B.S. in Computer Science and an MBA in Finance. He can be reached at [email protected]. ≈

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Conclusion

There are four kinds of variances associated with Logistics Invoice Verification. Each generates its own set of postings. These postings are influenced by the price control in the material master of the material being ordered. The concepts and the examples provided in this article will

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February 2006 Volume IV Issue 1
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