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Chapter 4
The Receiving department must match the goods receipt with the purchase order that
initiated it, to make sure the exact materials ordered have been received, so Accounting can
pay the vendor. It is possible for the quantity of material entered in the goods receipt to differ
from the quantity specified on the purchase order. Depending on the configuration settings,
the SAP ERP system might block entry of the receipt if the discrepancy is too large. If the
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discrepancy is small, then the receipt may be allowed, with the difference posted to the
correct variance account, which allows the transaction to be processed but maintains a
record for management to review, to see if there is a consistent problem with a vendor over
shipping or “shorting” an order (consistently shipping less than was ordered).
When the receipt is successfully recorded, the SAP ERP system immediately records
the increase in inventory levels for the material. On the Accounting side of the system,
this causes the value of the inventory shown in the general ledger account to automatically
increase as well. This is an important feature of an integrated information system: the
goods receipt is recorded once, but the information is immediately available to both
Manufacturing and Accounting—and the information is consistent. An integrated
information system also has the ability to adjust for changes in material costs. If the cost
of the material changes frequently, the system can be configured to reevaluate the value of
all the inventory of the material that the company has.
For example, suppose Fitter has 10,000 pounds of cinnamon that it bought at $3 per
pound. The company would value its inventory of cinnamon at $30,000. Then suppose the
price of cinnamon rises to $4 per pound, and Fitter purchases 1,000 pounds of cinnamon
at the higher price. What is the value of the 11,000 pounds of cinnamon that Fitter now
owns? The SAP ERP system can be configured to use a moving average formula to
reevaluate the inventory based on the current market prices. Depending on the exact
nature of the formula, the cinnamon would be valued at somewhere between the $3 per
pound previously assumed and the $4 per pound that was just paid. The system can
perform this calculation automatically each time material is received.
Using an ERP system to record data does not necessarily make the shop-floor
accounting data more accurate. The ERP system allows employees to enter data in real
time, but the system requires employees to follow the process. If employees can take
material out of inventory without recording the transaction, then the real-time information
in the ERP system is worthless. Technologies such as bar-code scanners and RFID tags can
help in this process, but accurate data require both a capable information system and
properly trained and motivated employees. However, when done accurately, capturing
data for manufacturing and inventory purposes on the shop floor means that it is captured
at the same time for accounting and inventory management purposes—eliminating any
need to reconcile Accounting and Manufacturing records.

Exercise 4.7
Briefly describe how the implementation of SAP ERP might change the relationship
between Production and Warehousing at Fitter.

ERP AND SUPPLIERS

Fitter is part of a supply chain that starts with farmers growing oats and wheat and ends
with a customer buying an NRG bar from a retail store. Previously, companies used
competitive bidding to achieve low prices from suppliers, which frequently led to an

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