Moving Average and Standard Price scenarios

Manufacturing Project
Moving Average Price (MAP)
Changes with every receipt of goods at a price different than existing MAP
Withdrawal of goods doesnt impact the MAP because the withdrawal happens at the existing
MAP

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 Scenario1: No difference between Goods receipt and Invoice
Existing stock= 1000 KGs at 10 per kg
PO is created for 1000 more kgs at 11 per kg
Invoice is also received for 1000 kgs at 11 per kg
Details Stock Quantity Stock Value MAP (Value/Qnty)

Existing stock 1000 10000 10

Goods receipt of 2000 21000 10.5

1000 @ 11 per kg
Invoice receipt for 2000 21000 10.5
1000 @ 11 per kg *No change

GR/IR Account Vendor Account

Stock Account GR/IR Account
G +10000 (existing)
IR -11000 -11000
R +11000 -11000
+11000 ------------
------------ ------------
------------ -11000
+21000 -11000
00000 ------------
------------ ------------
------------

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Scenario 2: Price difference between Goods receipt & invoice
but no stock is withdrawn in between
Existing stock= 1000 KGs at 10 per kg
PO is created for 1000 more kgs at 11 per kg and goods received at same price
No goods were withdrawn in between
Invoice is received for 1000 kgs at 12 per kg which is different from PO price

Details Stock Quantity Stock Value MAP (Value/Qnty)

Existing stock 1000 10000 10

Goods receipt of 2000 21000 10.5

1000 @ 11 per kg
Invoice receipt for 2000 22000 11
1000 @ 12 per kg

The difference between the PO price of 11 and invoice price of 12 will be adjusted to
stock when invoice is posted. So, stock value changes to 21000+1000=22000 and MAP
will be 22000/2000=11

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 Scenario 2 (refer previous slide): Accounting entries
At Goods receipt (GR)
Journal Entry at GR:
Stock Account GR/IR Account
+10000 (existing)
Debit. Stock Account 11000
+11000 -11000
Credit. GR/IR Account -11000
------------
+21000 ------------
------------ -11000
------------

At invoice receipt (if you agree to pay the vendor when the difference is not too high)

GR/IR Account Stock Account Vendor Account Journal Entry at Invoice

receipt:
-11000 +10000 (existing) -12000
+11000 +11000 Debit. GR/IR Account 11000
------------ +1000 (invoice difference ------------ Debit. Stock Account 1000
00000 ------------ -12000 Credit. Vendor 12000
------------ +21000 ------------
------------

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Scenario 3: Price difference between Goods receipt & invoice
but stock is withdrawn in between
Existing stock= 1000 KGs at 10 per kg
PO is created for 1000 more kgs at 11 per kg and goods received at same price
1500 kgs of stock was withdrawn before invoice was received
Invoice is received for 1000 kgs at 12 per kg which is different from PO price of 11 per Kg
Details Stock Quantity Stock Value MAP (Value/Qnty)
Existing stock 1000 10000 10
Goods receipt of 2000 21000 10.5
1000 @ 11 per kg
Goods withdrawn 500 (1500 was 5250 10.5
withdrawn)
Invoice receipt for 500 (stock remaining) 5750 (adjusted only 11.5
1000 @ 12 per kg for remaining stock)

There is price difference of 1$ between PO and invoice, the total PO quantity is 1000 kgs however you cannot
adjust the entire value of 1$*1000 Kgs because you have only 500 kgs in stock. Adjusting full value will lead to
unrealistic MAP calculation so system will adjust only to the extent of remaining stock and the balance goes to
Price Difference Account (P/L) this is called Stock Coverage which I was mentioning in yesterdays meeting

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Scenario 3 (refer previous slide): Accounting entries
At Goods Receipt
Journal Entry at GR:
Stock Account GR/IR Account
+10000 (existing)
Debit. Stock Account 11000
+11000 -11000
Credit. GR/IR Account -11000
------------
+21000 ------------
------------ -11000
------------

At Goods withdrawal/ issue to sales/ consumption (1500 kgs * 10.5=15750)

Stock Account COGS or Sales Account Journal Entry at Goods
withdrawal:
+10000 (existing) +15750
+11000 Debit. COGS Account 15750
-15750 ------------ Credit. Stock Account 15750
+15750
------------ ------------
+5250
------------

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Scenario 3: Accounting entries continued
At invoice receipt (remember you have withdrawn 1500 kgs so balance is 500 kgs of stock
only):

GR/IR Account Stock Account Price difference Vendor Account

Account
-11000 +10000 (existing) -12000
+11000 +11000 (goods receipt) +500 (for the quantity
------------ -15750 (withdrawn) that is not in stock) ------------
00000 +500 (invoice difference) -12000
------------ ------------ ------------ ------------
+5750 (500 kgs only) +500
------------ ------------

Journal Entry at Invoice

receipt:

Debit. GR/IR Account 11000

Debit. Stock Account 500
Debit. Price Difference 500
Credit. Vendor 12000

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So How it works?
If there is a difference in the invoice price when compared with PO price, the system will
adjust the difference to stock only if the quantity in stock is equal to or greater than the
invoice quantity.
If the stock quantity is less than the invoice quantity then the price will be adjusted to stock
only proportionately. Example: if stock= 10 quantity and invoice quantity is also 10 then the
difference will be completely adjusted to stock.
If the stock=10 quantity and the invoice quantity= 12 then system will adjust the price of
stock proportionately to the extent of 10 and the price for balance 2 quantity will go to Price
difference account. This is called stock coverage.

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Standard Price
Once set the goods receipts will always be valued at standard price and the PO price will be
ignored for inventory valuation.
The standard price fixed in the material master is considered for valuing inventory any
deviation from this price is considered as price difference and will be posted to the price
difference account which is a P/L account which will impact the contribution margin.

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Scenario1: Standard and PO price are same
If standard price and PO are same which is seldom the case, we do not have any price
difference account posting.
Existing stock= 1000 KGs at 10 per kg
PO is created for 1000 more kgs at 10 per kg and goods received at same price
Invoice is received for 1000 kgs at 10 per kg

Details Stock Quantity Stock Value Standard Price

Existing stock 1000 10000 10

Goods receipt of 2000 20000 10

1000 @ 10 per kg
Invoice receipt for 2000 20000 10
1000 @ 10 per kg *No change

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Scenario2: PO price is different from Standard Price and invoice
price is different from PO price
Existing stock= 1000 KGs at 10 per kg
PO is created for 1000 more kgs at 11 per kg and goods received at same price
Invoice is received for 1000 kgs at 12 per kg which is different from PO price

Details Stock Quantity Stock Value Standard Price

Existing stock 1000 10000 10

Goods receipt of 2000 20000 10

1000 @ 11 per kg
Invoice receipt for 2000 20000 10
1000 @ 12 per kg *No Change

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 At Goods receipt (GR)

Price Difference GR/IR Account

Stock Account Journal Entry at GR:
+10000 (existing) +1000 (at GR)
-11000
+10000 Debit. Stock Account 10000
------------ ------------ Debit. Price Difference 1000
+1000 ------------
+20000 Credit. GR/IR Account -11000
------------ -11000
------------
------------
At invoice receipt (if you agree to pay the vendor when the difference is not too high)

GR/IR Account Stock Account Price Difference Account Vendor Account Journal Entry at Invoice
receipt:
-11000 +10000 (existing) +1000 (At GR) -12000
+11000 +10000 +1000 (At IR) Debit. GR/IR Account 11000
------------ +0 (GR difference) ------------ Debit. Price Diff Account
00000 +0 (invoice difference) ------------ -12000 1000
------------ ------------ +2000 ------------ Credit. Vendor 12000
+20000 ------------
------------

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Points to consider
You can see the same example when looked at with MAP and Standard Price scenarios we
have following impact on Profit and Loss account (Price difference) in turn the contribution
margin:

MAP Standard
Price difference Price Difference Account
Account
+1000 (At GR)
+500 (for the quantity +1000 (At IR)
that is not in stock)
------------
------------ +2000
+500 ------------
------------

** The numbers look bloated due to simple example however the impact is clearly visible **

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Points to consider
It is difficult to set a standard price when you are procuring the materials regularly from the
market.
The prices are driven by market conditions (demand and supply- Business to confirm this)
If you procure from multiple vendors and it is obvious that every vendor doesnt supply at
same price then how can you set a Standard price? There will always be Price difference
which will go to P/L instead of inventory.
Deloittes solution has been built around the exceptional cases that occur rarely like
difference between PO and Invoice value.
In a practical business case the business will not pay the vendor if the invoice value has big
difference compared to PO. Minor variances are accepted and this will not impact the
business much when MAP is being used.
Price variance accounting is an accounting method which can be used however the utility of
this is limited for our business. On the flip side it could be have adverse impact if our
standard price is not set correctly.
Having evaluated all these scenarios I stick to my opinion from Day 1 that MAP works better
for Raw and Externally procured materials however the decision is for the management.

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 Hope this helps. Thank You !

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