Valuing Inventories in SAP using Purchasing documents

Valuing Inventories in SAP using Purchasing documents


Inventories can be costed in SAP automatically using existing Purchasing documents in the system.  Purchasing documents could be Source Lists, Purchase Info Records, Purchase Orders, Contracts. If the Product Costing variant is configured to pick Purchasing documents, it will search for Purchasing documents in a specific order and use the value on that document as the source to value the product.

Inventories are valued at landed cost of the material. Extracting cost of the procured material could be a laborious task if done using reports in Procurement. To align with Accounting Standards, we have to ensure cost used to value Inventories reflect the latest and more realistic cost. Hence, a one-off low cost purchase or cost from purchase made over a year ago cannot accurately reflect the cost of inventory. SAP Product Costing can be configured to automatically pick cost from Purchasing documents. The accuracy of this method of identifying cost is dependent on the discipline in maintaining Procurement documents.


Assumptions for this blog

I will assume that you have already configured SAP Product Costing; I will only demonstrate that part of configuration necessary to explain the scenario in this blog. The demo system I used for this blog is set up for Material Ledger; this setup is not mandatory to execute this scenario. This blog will demonstrate scenario for Legal / Company Code currency valuation; this scenario and result will apply similarly to the other valuations.


What am I demonstrating

In this blog, I will explain the logic SAP Product Costing uses to extract cost from Purchasing documents. Then, I will explain why this cost may not be the correct cost at which you might want to value Inventories. In subsequent blogs, I will elaborate the alternative options available to extract cost information from Purchasing documents.

Scenario: A retail company procures products from three locations – 2 overseas and 1 local. The company has a Source List for this product. Depending on various configuration of costing variant, source list and vendor, the system will pick product cost from one of the three vendors.


Set-up of SAP Costing Variant

The Valuation Variant is configured to search for “Price from Purchasing Info Record” before it searches for other prices. If you have activated multiple valuations (profit centre valuation, group valuation) then configure all Valuation Variants similarly. This setting is sufficient for the system to search for a Purchasing Info Record.

Configuration of Valuation Variant

The system uses a sequence to determine a Vendor that fits the search criteria, and then finds a Purchasing document for that Vendor, and then it identifies the “Purchase Price”. It uses this “Purchase Price” to cost the product. The “Purchase Price” is defined in the sub-strategy of the Costing Variant > Material Valuation screen. The sequence that SAP uses to determine a Vendor is internally coded and cannot be changed or configured.


Determine the Vendor: the sequence

SAP uses the algorithm shown below to determine the Vendor, Purchasing document and the price. This slide is self-explanatory and I will not go into the details of the sequence. I have created a few (master) records to demonstrate the scenario mentioned above.

Determination of Vendor sequence for Product Costing

Purchasing Info Record

The retail company in our scenario sources product “Bomber Jacket 8” from 3 vendors. The Purchasing Info Record for the 3 Vendors is shown below.

Xi Chi Dong in China

Purchasing Info Record for Vendor 75011


Deshbandhu Industries in Bangladesh

Purchasing Info Record for Vendor 75012


Southern Cross Clothing in Australia

Purchasing Info Record for Vendor 75013


The summary of Purchase cost is as below

Summary of Purchasing Info Records


Source List

Source List is configured as a requirement in Plant V001. Configure as below:

[IMG] Materials Management > Purchasing > Source List > Define Source List Requirement at Plant Level.

Configuration of Source List Requirement at Plant Level

The 3 Vendors have been updated in the Source List as shown below.

Source list updated with 3 vendors


Determine the Vendor: the scenarios

Scenario 1: Vendor 75013 is set as a “fixed” source of supply Vendor

Vendor 75013 (Southern Cross Clothing) is defined as a preferred or “Fixed” source of supply indicator in the Source list; the relevant indicator is set against Vendor 75013.

Vendor 75013 updated as “fixed source of supply”

As per the algorithm, this setting has precedence over all other settings. When the retail company performs its cost estimate for the product, the system will select Vendor 75013 as the Vendor, identify Purchasing Info Record against this Vendor, use the Price on that Info record and cost the product. SAP Cost Estimate will reflect the following result.

07 fixed vendor ck11n-redo

Cost Estimate in “Fixed Source of Supply” scenario


Scenario 2: There is no “fixed” source of supply Vendor; Regular Vendor is configured as a requirement.

[IMG] Materials Management > Purchasing > Source Determination > Define Regular Vendor

Regular Vendor defined by Plant

Vendor 75011 is the Regular Vendor for the material. The “Regular Vendor” indicator is set on the Purchasing Info Record.

Vendor 75011 defined as “regular vendor”

As per the algorithm, the system will select the “regular” Vendor 75011, identify the Purchasing Info Record associated with that Vendor, use the Price in that info record and cost the product.

Cost Estimate with Regular Vendor

Scenario 3: There is a vendor in the source list that is a “Fixed” source of supply and another vendor that is a “Regular” vendor

In this scenario, the Vendor that is a “Fixed” source of supply is determined as a vendor for the purposes of costing the material. Fixed Source of Supply vendor has priority over Regular Vendor as per Determination rule.


Scenario 4: There is no “fixed” source of supply Vendor and no “regular” Vendor

As per the algorithm, the system will select the Vendor with the lowest net price in the info record. Since Vendor 75012 has the lowest net price, this Vendor is selected.

Cost Estimate with no Fixed and no Regular Vendor



When you want to cost a material using purchasing documents, SAP has a pre-determined sequence to determine the Vendor and the Purchase Price. This sequence is not configurable.  Depending on your organisation’s purchasing strategy, the system will determine the most appropriate Vendor and Purchase Price. The default Vendor and Purchase Price is the Vendor with the lowest Purchase Price. The limitations of this costing methodology are:

  • It assumes you religiously maintain a Source List. If you do not maintain it accurately, the material cost calculated will be inaccurate. If you do not maintain one, it will pick the Vendor with the lowest Purchase Price among ALL Purchasing Info Records since the implementation of the system (records that are valid on the date the costing is run).
  • It does not have the flexibility of choosing between Purchasing Info Records, Purchase Orders, Receipts, Contracts, or Scheduling Agreements. Customers might want to pick lowest Receipt Price or the last Receipt price for the material; not the lowest Purchasing Info Record price. SAP functionality “Balance Sheet Valuation: Market Prices” has flexibility to allow such selection. We will look at this functionality in a future blog.
  • It picks Purchase Price from one Purchasing Info Record. It does not calculate a proportional material costing to represent average Purchase Price from all or some representative vendors. It does not apportion actual or planned procurement volumes to the cost. Hence, even though the “fixed” source might be used to cost, the Vendor might have supplied only 50% of all volumes during the year. Adopting the Purchase Price from this vendor will give rise to larger Purchase Price Variances when receipting goods from other vendors. We will look at “Mix Costing” in a future blog.

Needless to say, the costed price should be evaluated before you mark and release the price into Inventories.


Please Share

I hope this blog has helped you understand the sequence SAP uses to determine the Vendor when costing a material. Please do leave your comments below whether this article was helpful; and whether you have any suggestions/ comments; or if you would like to share your experience with readers.

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Rajesh is an accomplished and successful Finance professional with over 20 years experience in Finance processes and related technologies. He is a qualified accountant; he has worked in Finance departments of multinational companies. With this strong foundation in Finance, he has managed to successfully implement best-in-class Finance processes in IT (primarily SAP). Over the last few years, Rajesh has led Finance teams on large SAP implementations and provided his insights and experience to provide a workable and an improved solution for his customers. Rajesh is a SAP Certified Application Professional.

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