Invoice Variances

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SAPtips.com SAPtips © 2006 Klee Associates, Inc.
Editor’s Note: Did your vendor ship
too much material? Does the invoice
show an unexpected price increase?
If day-to-day Materials Manage-
ment in SAP weren’t complex and
frustrating enough, when you add
the element of balancing the asso-
ciated 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”.
Introduction
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
®
prac-
titioners (not only configurators and
developers, but also end users), who
seem a little confused with the con-
cept 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
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 vis-
à-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, cor-
rect header and line item informa-
tion. 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 cre-
ates 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.
What Are Variances?
A logistics invoice contains vari-
ances 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 combina-
tion 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
Understanding Variances in Logistics
Invoice Verification
By Anurag Barua, The Washington Post
Cover Story
Figure 1: Setting Price Control in the Material Master
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Price control options upon doing a
drop-down on price control field
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SAPtips.com SAPtips © 2006 Klee Associates, Inc.
that in an invoice. This can happen in
one of two ways – a) Either your ven-
dor 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 dif-
ference 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 differ-
ences are posted to a price difference
account. In the case of “moving aver-
age price” (MAP) functionality, any
price differences between the IR and
GR and the MAP are posted to the
inventory/stock account. The excep-
tion to this rule is that if the inven-
tory of the material is less than the
quantity for which you are being
invoiced, the variance is posted to a
price difference account. Additional-
ly, 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 config-
ured 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:

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 wid-
get. 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 bal-
ance 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 inven-
tory account is debited for $30 (i.e.,
the product of the quantity deliv-
ered, which is 6, and the PO price,
which is $5). The offsetting entry of
$30 (credit) is to the GR/IR clear-
ing 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
Explanation: At GR, the inventory
account is debited with an amount
that equals the product of the quan-
tity 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 (cred-
it of $100, i.e., the price difference
between the PO and the IR, times the
invoice quantity).
b) Quantity Variance – A quan-
tity variance is based on the 3-way
match among the PO, the GR, and
the invoice. It occurs when the quan-
tity 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 try-
ing to make.
Cover Story
Figure 2: Postings Resulting from Price Variance (with standard price control)

GR IR
Inventory Account 250 (DB)
GR/IR Account 300 (CR) 300 (DB)
Vendor Account 200 (CR)
Expense from Price Differences Acct. 50 (DB)
Revenue from Price Differences Acct. 100 (CR)
Figure 3: Postings Resulting from Quantity Variance (GR<IR)

GR IR Subsequent GR
Inventory Account 30 (DB) 5 (DB)
GR/IR Account 30 (CR) 35 (DB) 5 (CR)
Vendor Account 35 (CR)
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SAPtips.com SAPtips © 2006 Klee Associates, Inc.
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 differ-
ences). 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 clear-
ing account, and this is based on
the price in the PO. The price
variance is posted to a price dif-
ference account (expense or rev-
enue).

• Price and Quantity Variance
for Material with MAP – In this
case, there is no price difference
account involved. Account post-
ings 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.
(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 offset-
ting 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 situ-
ation is analogous to the one men-
tioned in Scenario 1, and some activ-
ity 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 previ-
ous example, except for the obvious
differences.
c) Price and Quantity Variance
– If you can have a price and a quan-
tity 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 con-
trol (standard or moving average
Cover Story
Figure 4: Postings Resulting from Quantity Variance (GR>IR)

GR IR Subsequent GR
Inventory Account 40 (DB)
GR/IR Account 40 (CR) 35 (DB) 5 (DB)
Vendor Account 35 (CR) 5 (CR)
d) Variances in Order Price Quan-
tity – 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
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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Cover Story
($25). When a variance of this kind
occurs, it is posted to the price dif-
ference 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 Mate-
rial “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 gal-
lons. 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 offset-
ting credit entry is made to the GR/
IR clearing account for $380. When
the IR takes place, the GR/IR clear-
ing account is cleared, based on the
PO price. A corresponding offset-
ting 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 mate-
rial has a MAP control, the difference
(debit of $60) is posted to the inven-
tory account.
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
Figure 5: Postings Based on Order Price Quantity Variance

GR IR
Inventory Account 380 (DB) 60 (DB)
GR/IR Account 380 (CR) 380 (DB)
Vendor Account 440 (CR)
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, NetWeav-
er™, 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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