The below article will explain one of the approaches through which Inventory can be valued on FIFO basis

in SAP
We have two approaches to present our Inventory on FIFO basis

1. Batch Input Method A batch capturing the Receipt Value and the Quantity for every GR is
maintained in the system. At the time of Goods Issue, the system will fetch the value from the
batches in the ascending order.
2. Balance Sheet Valuation Method In this approach, the goods are valued at the Moving
Average Price throughout the period and at the Period-end date, an adjustment entry is posted
to bring the inventory at the FIFO method.

I will discuss the configuration steps of Balance Sheet Valuation Method here.
Before beginning with the configuration of this approach, let me explain with an example for what
exactly this approach will do
Taking a single Material (say A) for which below movements happened

S.No. Movement Quantity (Kg) Price per Unit ($/Kg) Amount ($) Moving Average Price ($)

1. Goods Received 10 100.00 1000.00 100.00

2. Goods Received 30 150.00 4500.00 137.50

3. Goods Issued 15 137.50 (MAP picked up) 2062.50 137.50

4. Goods Issued 10 137.50 (MAP picked up) 1375.00 137.50

Closing Stock @ MAP = 15 Kgs @ Rs. 137.50 = Rs.2062.50/-

Closing Stock @ FIFO = 15 Kgs @ Rs. 150.00 = Rs.2250.00/-

Valuation Variance = +Rs. 187.50/-

Under this approach, system will identify the material movements (in/out) within the period based on
assigned Movement Types (Transaction Code OMW4) and calculate the FIFO price as Rs. 2250.00.
The FIFO run can then compare the FIFO value with the Book Value and revalue the inventory to the
FIFO Price and post the revaluation entry. It will use the accounts in OBYC INV and PRD based on
the valuation class of the material and post the below entry to bring in the financial impact of above
valuation

Inventory Account Dr. 187.50

Price Difference Cr. 187.50

The above entry will post the differential amount entry to bring the Inventory Value of selected
materials at FIFO without changing the transactional data entered during the period.
Now, explaining on the configuration steps to achieve the above functionality
1. Activating FIFO Valuation

Menu Path: SPRO>IMG> Material Management> Valuation and Account Assignment>

Balance Sheet Valuation Procedures Configure LIFO/FIFO Methods> General Information>
Activate/Deactivate LIFO/FIFO Valuation (Tcode OMWE)

2. Defining Valuation Levels

SPRO>IMG> Material Management> Valuation and Account Assignment> Balance Sheet

Valuation Procedures Configure LIFO/FIFO Methods> General Information> Define
LIFO/FIFO Valuation Levels (Tcode OMWL)
This is an important step because we can set valuation level either at Valuation Area or
Company Code level. Once saved and entries posted for valuation, changing this will require
changing database and a program needs to be called up to pursue that.
3. Define FIFO Relevant Movement Types

SPRO>IMG> Material Management> Valuation and Account Assignment> Balance Sheet

Valuation Procedures Configure LIFO/FIFO Methods> General Information> Define
LIFO/FIFO Relevant Movement Types (T.Code OMW4)
This is another step which will define the valuation. We have to define the FIFO relevant
Movement Types which can be used for Inventory Value calculation. You may check SAP
Note # 167330 Relevant receipts for LIFO/FIFO valuation to select relevant movement
types for FIFO.
4. Define FIFO Methods

SPRO>IMG> Material Management> Valuation and Account Assignment> Balance Sheet

Valuation Procedures Configure LIFO/FIFO Methods> General Information> Define
LIFO/FIFO Methods. (T.Code OMWP)
The method can be copied from any of the standard methods or can be created afresh.
Method 6 digit alphanumeric identifier for the method.
Sample SAP provided 6 samples as shown below. 01 is only to be used for FIFO. Rest
others are for LIFO.
Single Receipts indicator This indicator will identify if you allow the system to value on
each inward movement or not. If this is unchecked, then system will pick collective monthly
movements.
Quantity Comparison This field will identify the comparison inventory value with which SAP
will check the FIFO value and show/post the variance. It has four options provided by SAP
VOM Previous Month If this option is assigned to a FIFO Method, system will check the
FIFO value calculated against book value of material as on last date of the previous month
(MM Period). For e.g. If the previous period is October and current period is November, then
System will check the FIFO value calculated (say $100) with the Material Book Value as on
October 31 (say $95), and display/post the variance of $ 5.
VVM Month before Last Using this option means System will check the FIFO value
calculated ($100) with the Material Book Value as on September 30 (say $97), and
display/post the variance of $ 3.
GJE Previous Year Using this option means System will check the FIFO value calculated
($100) with the Material Book Value as on October 31 last year (say $90), and display/post
the variance of $ 10.
CUR Current Using this option means System will check the FIFO value calculated ($100)
with the Material Book Value as on FIFO run date (say $99), and display/post the variance of
$ 1.
5. Configure FIFO Valuation Areas (Defining Base Year)

SPRO>IMG> Material Management> Valuation and Account Assignment> Balance Sheet

Valuation Procedures Configure LIFO/FIFO Methods> FIFO> Configure FIFO Valuation Areas
With the above five steps, configuration is complete to allow system to run Balance Sheet Inventory
Valuation on FIFO Basis.
Now, from end-user point of view, three transaction codes needs to be executed to complete the FIFO
run during Month-end

1. MRF4 FIFO Valuation: Flag Materials

Logistics> Materials Management> Valuation> Balance Sheet Valuation> FIFO Valuation>

Prepare> Select Materials
Executing this transaction code will flag the materials for getting picked in FIFO run. User can
restrict the run for specific materials/company codes/plants etc. Material Codes which are not
flagged for FIFO will not be considered for FIFO Valuation Run.

Note Make sure to tick the Update Material Master and FIFO Index Table option. Without ticking
this, nothing will happen.
2. MRF3 FIFO Valuation: Create Document Extract

Logistics> Materials Management> Valuation> Balance Sheet Valuation> FIFO

Valuation> Prepare> Create Document Extract
This step will allow system to select the transactions to be considered for FIFO Valuation. This
selection is based on the FIFO method defined (OMWP)(Single/Monthly receipts tick) and the
movement types defined as FIFO relevant (OMW4)
The output will show the Movements in the materials included/excluded while drafting the
document extract for FIFO run.

Note Ensure ticking Update Receipt Data. Otherwise nothing will get selected for FIFO run.

3. MRF1 Execute FIFO Valuation

This is the main step where user can select

Whether any financial postings should be made or only report display is needed.
Lowest Value Principle needs to be considered or not.
FIFO Price tables to be updated or not.
Material Master data to be updated with the FIFO price or not.
These above decisions are purely business requirement based.
The output of this step will display the material wise variance (Book Value and Calculated FIFO
Value) and GL Account wise variance as well.
This concludes the entire FIFO Valuation Run which can help you revalue the inventory on FIFO Basis
in the Financial Statements without touching the MM module. Further, it can be put to use for displaying
the impact of change in accounting policies wherein a shift from FIFO to MAP is made by any
organization.