Inventory valuation in SAP Business One: moving average, standard, FIFO and serial/batch, what each one posts, and what changing the method takes

Perpetual inventory comes first.

Valuation methods only matter with Use Perpetual Inventory selected on the Basic Initialization tab of Administration > System Initialization > Company Details. Then every receipt and release also posts to the inventory accounts; which accounts is explained in G/L account determination in SAP Business One. The same tab holds the settings that shape everything after:

• Use Perpetual Inventory cannot be reversed once there is an inventory transaction.
• Manage Item Cost per Warehouse keeps one item cost per warehouse instead of one for the company, and also locks after the first inventory transaction. Receive 1 unit at 10 in warehouse 1 and 1 unit at 30 in warehouse 2: per company the cost is 20, per warehouse it is 10 and 30.
• Item Groups Valuation Method is the default for new item groups. New items take the Default Valuation Method of their item group; the item itself has the field Valuation Method on the Inventory Data tab of the Item Master Data, and that is what counts in postings. A change at company or group level only reaches records created afterwards.
• Allow Stock Release Without Item Cost lets a delivery or A/R invoice release an item that has no cost yet; relevant for moving average and FIFO.

So one company can use several methods side by side, per item. SAP's own advice on timing is short: decide on perpetual inventory during the initial setup, before posting any transactions.

Moving average.

B1 keeps the cumulative quantity and the cumulative value of the item; the item cost is value divided by quantity. A receipt adds at the price on the document and updates the cost. An issue goes out at the current cost and leaves it unchanged. An example:

• Goods receipt PO, 10 units at 10.00: stock 10, value 100.00, cost 10.00.
• Goods receipt PO, 10 units at 13.00: stock 20, value 230.00, cost 11.50.
• Delivery, 5 units: debit cost of goods sold 57.50, credit inventory 57.50. Stock 15, value 172.50, cost still 11.50.

You cannot type the cost of a moving average item: a new item has cost 0.00 until its first receipt or an Inventory Revaluation. A goods return or A/P credit memo without a base document goes out at the current cost, not at the price you type, and the rest goes to the price difference account. Receive 10 at 5.00, then post an A/P credit memo without base for 10 at 4.50: stock and value go to zero at 50.00, and 5.00 is posted to the price difference account.

Standard price.

A standard item has a fixed cost. Receipts and issues are valued at that standard, and the difference with the actual purchase price goes to the variance account or the price difference account. With a standard of 10.00:

• A/P invoice without a goods receipt PO, 5 units at 12.00: debit inventory 50.00, debit variance 10.00, credit vendor 60.00.
• Delivery, 5 units: cost of goods sold and inventory 50.00, whatever was paid.

You can enter the standard in the Item Cost field, but SAP recommends setting and changing it with an Inventory Revaluation: the change log of the item master can be deleted, a revaluation document cannot. A standard item without a cost creates no journal entry for its inventory value, and the negative inventory adjustment account does not apply to standard items.

FIFO.

With FIFO every receipt creates a layer with a quantity, a cost and a date. An issue takes from the oldest open layer first and closes it when it is empty, whatever goods physically left the shelf.

• Receipt 10 at 10.00 (layer 1), then 10 at 13.00 (layer 2).
• Delivery of 15: 10 × 10.00 from layer 1 plus 5 × 13.00 from layer 2 = 165.00 cost of goods sold. Left: 5 at 13.00. Under moving average the same delivery would cost 15 × 11.50 = 172.50.
• A goods return based on a goods receipt PO uses that receipt's layer while it is still open; otherwise, and for a return without a base, it uses the first open layer, whatever price you type.

Serial/batch valuation.

The fourth method, Serial/Batch, values each serial number or batch on its own. It requires perpetual inventory and items managed by serial numbers or batches with the management method On Every Transaction; Manage Serial and Batch Cost By on the Basic Initialization tab decides whether new serial and batch items get this method or the one of their item group. A serial number goes out at its own receipt cost. A batch has one cost: everything purchased into the batch divided by the quantity purchased, so a later receipt changes the cost of the whole batch, including what was already sold:

• Batch B1: receipt 10 at 10, receipt 10 at 30: cost 20. Delivery of 5: cost of goods sold 100.
• Receipt 5 at 50 into the same batch: the cost becomes (100 + 300 + 250) / 25 = 26. The 20 units in stock are now worth 520, an inventory debit of 220; the 30 that belongs to the 5 units already sold goes to the price difference account.

This cost is always kept at company level, so Manage Item Cost per Warehouse is ignored, and SAP recommends the same G/L accounts for warehouses that hold the same batch. Managing an item by batch and valuing it by batch are two separate settings; see batch and serial numbers in SAP Business One.

Inventory Revaluation and changing the method.

Inventory > Inventory Transactions > Inventory Revaluation corrects the value without moving stock. It has two types:

• Price Change: a new cost for the item, for FIFO per layer. The posting is the in-stock quantity times the difference: 6 units at 50.00 revalued to 100.00 gives inventory debit 300.00 against the G/L increase account.
• Inventory Debit/Credit: an amount added to or taken off the value; the cost follows. For a standard item the variance account takes the place of inventory. If the quantity in the revaluation exceeds the stock, part of the amount goes to the price difference account.

A revaluation is refused when an item involved has a negative value. Changing the method itself is possible per item on the Inventory Data tab, or for many items at once through Inventory > Item Management > Inventory Valuation Method, which opens the Update Valuation Method window. The conditions: in-stock quantity zero in all warehouses, and no open inventory-relevant documents, such as deliveries not yet copied to an A/R invoice or return and goods receipt POs not yet copied to an A/P invoice or goods return. The window only lists items that meet them, and SAP advises checking with an accountant first. In practice that means bringing stock to zero first, which is why the method is best chosen right the first time.

Common mistakes, and why the exam cares.

• Deciding too late. Perpetual inventory and item cost per warehouse lock after the first inventory transaction; an item's method is stuck as soon as it has stock.
• Expecting a new default to reach existing items. Company and item group defaults only apply to records created afterwards.
• Negative stock. With Block Negative Inventory switched off (Administration > System Initialization > Document Settings, General tab), moving average and FIFO hold the cost static below zero and post differences to the negative inventory adjustment account. SAP does not recommend negative inventory.
• Releases at zero cost. With Allow Stock Release Without Item Cost, a new moving average item can go out at 0.00 before its first receipt.
• Comparing the wrong figures. The item cost in the item master and the cost in the Inventory Valuation Simulation Report can differ, for example after negative stock. Reconcile the inventory accounts with the Inventory Audit Report.

C_TB120, SAP's certification exam for SAP Business One, covers implementation, financials and logistics, and valuation is where logistics turns into financials. It is the kind of subject scenario questions are made of: what an issue posts under FIFO, why the variance account moved, why the valuation method field is greyed out. Working through small examples like the ones above is the quickest way to answer them. Check the current topic list on SAP's certification page.

How KoonLearn approaches it.

KoonLearn, our training simulation for SAP Business One, has its own accounting engine that values stock at moving average, for the company as a whole. In chapter 05 Inventory you post goods receipts and goods issues and see the item cost move, and in the partner part you write an item down with an Inventory Revaluation of type Price Change. FIFO and standard price come up as scenario and troubleshooting questions, not in the engine itself, and serial/batch valuation is not simulated. In chapter 02 Master data you set the valuation method on items and find out why a change of method is refused.

Chapter 03 Purchasing, where goods receipt POs and A/P invoices set the moving average cost, is free without an account: start on learn.koonsystems.com. KoonLearn is exam preparation for C_TB120; it does not replace the official SAP training or the exam itself, and it is not affiliated with SAP SE.

Sources: SAP Business One 10.0 help documentation (Company Details: Basic Initialization tab, Item Master Data: Inventory Data tab, G/L Account Determination: Inventory tab, Inventory Revaluation); SAP's guides How to Set Up a Perpetual Inventory System and How to Use Serial/Batch Valuation Method; the KoonLearn chapter overview. SAP and SAP Business One are trademarks of SAP SE.