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SAP Business Process Improvement Series

Transfer Pricing and Material Ledger in SAP

www.Enterprizeerp.com
Transfer Pricing Introduction

• What is Transfer Pricing?


• Transfer Pricing in SAP
• SAP’s Parallel Valuation Concept
• Transfer Prices in SAP components
• Transfer Pricing Options in SAP
• Transfer Pricing Simplified Example
• Transfer Pricing and Material Ledger

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What is Transfer Pricing?

• A transfer price is a price used to valuate the


transfer of goods and services between
independent organizational units.
• The income tax rules in different countries
require that the transactions between
related legal entities between countries be
priced at an arms-length price.
• An arms-length price is the price that a
willing unrelated buyer and seller would
agree upon
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Transfer Pricing – General Comments

• Available in core SAP since Release 4.0


• Not a separate module, but rather functionality used across
many modules
• Consistent settings required across the entire system
• Can implement transfer pricing in an already live
environment
• Can create ALE scenario’s to invoke transfer pricing
functionality across different SAP instances
• Customers are live with transfer pricing functionality –
proven solution

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Transfer Prices in SAP System
Controlling area
CO
Profit center
PCA

Company code
FI

Transfer price from the group viewpoint = group production costs


Transfer price from the profit center viewpoint = management price
Transfer price from the legal viewpoint = sales and purchase price

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Currency and Valuation Profile

Valuation
10
Leg.
Legal
0 30
Grp
Group
1
30
PrCtr 2 PrCtr.
10 30 Currency type

Company code currency

Group currency

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Parallel Valuation Concept

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Why Parallel Valuation?

• Allows transfer of materials between


independent companies according to a legal
reporting requirements (legal view)

• Allows you to valuate the exchange of materials


within the group using a corporate wide
standard cost of goods manufactured with
internal profits between group companies being
eliminated (group view)

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Parallel Valuation Approaches

Group view Legal view Profit center view

Group
CoCd 1 CoCd 2 CoCd 3 CoCd 4
Profit center 1

Profit center 2

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Valuation Approaches

Legal Goods movements valuated with sale or


purchase price

Group Goods movements valuated with group


cost of goods manufactured

Profit center Goods movements valuated with internally


agreed prices

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Quantity and Value Flow

V PCA

A Profit center 1 Profit center 2


L
U CO-
FI OM
E
Overhead costs
CO-
PA
F
L
O
W CO-
Direct costs

PC

Process Purchase Transfer


and Production Sale
data

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The Concept of Parallel Value Flows

PCA

Profit center 1 Profit center 2


V
A
L or or
U FI
CO-
CO-

Overhead costs
E
PA
OM

L
F G
P
L
O CO-
Direct costs

W
L PC
G
P

Stock
L
Process G
and P
data
Material Ledger
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Different Scenarios

Profit Center Accounting


PCA Cur. Cur. Cur.
PrCtr or Grp or Leg.

Financial Accounting Controlling

Cur. Cur. Cur.


mand. CO-
Leg. CO- Leg. mand. PA Leg. opt.
OM
FI Cur. Cur. Cur.
Grp opt. CO- Grp Grp opt.
PC
Cur. Cur. Cur.
FI-AA opt.
PrCtr PrCtr PrCtr opt.

Material Ledger ML Cur.


Cur. Cur.
Leg. mand. Grp PrCtr

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Example I - Group Valuation

Profit Center Accounting


PCA Cur.
Grp

Financial Accounting Controlling

CO- Cur. CO- Cur.


Cur. operational
OM Leg. PA Leg.
Leg.
FI
CO- Cur.
Cur. PC Cur.
Grp
Grp
Grp
FI-AA

Material Ledger
Cur. Cur.
Grp Leg.

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Example II - PCA Valuation

Profit Center Accounting


Cur.
PCA
PrCtr

Financial Accounting Controlling

CO- Cur. CO- Cur.


Cur.
OM PrCtr operational PA
Leg. PrCtr
FI
CO- Cur. Cur.
Cur. PC Leg. Leg.
FI-AA PrCtr

Material Ledger
Cur. Cur.
PrCtr Leg.

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Parallel Valuation - Production Example

Cost center
Raw Finished
Semifin. Distribution
material product
material center Sales
order

Production Production
order order

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Parallel Valuation - Production Example

Cost center
Raw Semifin. Finished Distribution
material material product center
Sales
order

Production Production
order order

Company code 1 Company code 2 Company code 3


PrCtr1 PrCtr2 PrCtr3 PrCtr4
CCtr 20
L 70 L 120
100
75 G 70 G 90
P 75 120 P 140
L 70 L 70 L 120 220 L 220
G 70 G 70 G 90 G 90
P 70 P 140 240 P 240
P 75

Assumed Plan = Actual => No Variances


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Options – Transfer Pricing in SAP

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Case 1: Internal Sales Revenue Tracking
• Situation: There are two products within an organization, Product A and
Product B. Product A is a finished product while Product B is a semi-
finished product. Both products are sold to the outside world. However, B
is a sub-assembly in the bill of material of A. That means every time A is
produced, B is consumed. Or the situation could be that there are two
plants in a company, with one plant transferring materials to the other
plant.
• Requirements: Products A and B have separate product managers and
they each have certain revenue budget requirements. They need a report
that shows how much sales revenue they have generated by selling their
products internally and externally. The reporting requirement is
straightforward in that the product managers are interested only in the
revenue and cost numbers by each product number.
• Facts: The overhead structure of the company is such that the overheads
are applied to both products uniformly. Therefore, there is no need for B
to charge extra if the product is sold to A.
• Solution: In this option, with some additional configuration, the Profit
Center Accounting module can easily meet the needs of the managers of A
and B

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Case 2: Within the Same Plant/Cross Plant
• Situation: Now that the organization has matured, it would like to enhance
the original method implemented for it to track the sales revenues. It
would like to start charging Product A with Product B’s overhead and some
profits. In other words, it wants to treat the A division like an outside
customer for B.
• Requirements: The company wants to charge an extra amount to division
A to cover division B’s overhead structure and make some profit by B,
because B is now treated as an external vendor. Also, the company wants
to pass this information on to the Profitability Analysis (CO-PA) module for
reporting purposes.
• Facts: A and B belong to the same company code. They could belong to
the same plant or not.
• Solution: Use the Profit Center Accounting module and the CO-PA module
with transfer pricing.

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Case 3: Cross-Company Code
• Situation: The transfer of goods is happening between two legal entities.
• Requirements: The corporation is interested in charging the transfer prices
between company codes.
• Facts: A and B belong to separate company codes. The SAP Sales and
Distribution (SD) module uses the functionality to move goods between
company codes.
• Caution: Make sure the legal department agrees with this idea of having
transfer prices in the Profit Center Accounting module and double-check if
the transfer of goods involves cross-country transactions. In the case of
cross-country transactions, you may want to consider using the more
traditional SD pricing to charge the transfer price between company
codes.
• Solution: Use the Profit Center Accounting module with transfer pricing.

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Comparison of the Options
• Case 1 has a very simple solution you can use without worrying
about material ledger or CO-PA. You should think about using that
method before starting to implement the others.
• Cases 2 and 3 become progressively difficult in implementation.
However, it’s more difficult to get the concept adapted in the
business than it is to actually implement it in SAP. The level of
difficulty was in synch with the level of involvement from the
business organization in getting it implemented.
• Cases 2 and 3 add some additional configuration on the Product
Costing side. As you need to maintain the legal and profit center
values in the costed part, the best option would be to set up a
costing variant for Profit Center Accounting using legal calculated
values as a reference. This then populates the Profit Center
Accounting valuation with the same values as legal values once you
run product costing for the Profit Center Accounting valuation. If
your company has split valuation active for costed parts, you will
have a hard time configuring the automatic Profit Center
Accounting cost calculation that is not equal to the legal valuation.

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Impacts on other modules

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Financial Accounting Viewpoint

• Must have the legal valuation stored in Financial Accounting


General Ledger (FI-GL)

• Optional to store other values in Financial Accounting

• Set up is same as parallel currencies in FI-GL

• Receivables and Payables are always represented from the legal


view because this is the value that they will be cleared in

• Same valuation approaches must be in used Asset Accounting as


used in FI-GL

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Controlling Viewpoint
• One value is stored in the CO actual version (operative), and the
other values are stored in other CO actual versions

• The currency and valuation view chosen for the operative CO


version is key. Not all transactions are stored in all chosen
valuations, e.g. internal activity allocation, mfg order variance
calculation, overhead calculation

• Can only perform group costing (enterprise standard cost) within


one Controlling area

• Cannot be used for unvaluated sales order stock

• To calculate WIP correctly using target costs, the operative version


must use the legal valuation approach

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Transfer Prices in PCA
• Only one valuation view is stored in Profit center accounting (either
legal, group, or profit center view)

• Profit centers earn profit just like independent companies.

• Goods movements between profit centers can be valuated using


transfer prices.

• Goods movements between profit centers can be analyzed in CO-PA.

• No internal payables/receivables are posted.

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Purchasing / MM

• Multiple inventory values are stored in the Material Ledger –


Material Ledger is required to store parallel inventory values.
Material ledger stores up to three valuation approaches

• Mutliple values can only be transferred during logistics invoice


verification

• Multiple values can only be transferred across systems using the ALE
or EDI interfaces

• Transfer pricing / paralell valuatoin is invoked during goods


movements only

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Transfer Pricing and Value Flows
• Parallel value flows throughout all of Financials

• The valuation approaches stored in the system are


defined in the currency and valuation profile.

• You can store up to


- 3 valuations in
- 2 currencies

• Inventory is valuated using all active valuation


approaches in parallel.

• The material ledger is a subsidiary ledger in inventory


accounting.
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Transfer Pricing and Value Flows
• Inventories are valuated by plant or company code in
the SAP System.

• Inventories of one material in one plant always


belong to the same profit center.

• No influence on posting logic or account


determination.

• Parallel values posted to the same accounts.

• Parallel valuation approaches are currently only


supported for goods movements.

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Simplified Examples

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Simplified Examples - Assumptions

• Example assumes transfer between two company codes and


no rebilling intermediary
• Example is within one SAP instance
• All currencies are in USD to minimize confusion
• This scenario will only utilize two valuation views (Legal and
Group) – it ignores the profit center valuation.
• Transfer selling price from distribution center to sales
company is equal to sales company local standard cost
• No quantity or price variance between goods receipt and
invoice receipt

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Financial Accounting Postings
Two Company Example

Goods Issue Goods Receipt

Distribution Center Sales Company


Co. Code A Co. Code B

IC Billing Invoice Receipt

Goods Issue
Cost of Sales Inventory
L 50 50 L
G 40 40 G

10 unit difference represents


difference between ESC and
local standard cost

L Legal Valuation
G Group Valuation
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Financial Accounting Postings
Two Company Example
Goods Issue Goods Receipt

Distribution Center Sales Company


Co. Code A Co. Code B

IC Billing Invoice Receipt

Goods Issue Goods Receipt


Cost of Sales Inventory Inventory GR / IR
L 50 50 L L 130 130 L
G 40 40 G G 40 40 G

90 unit difference represents


intercompany profit in inventory
balances and must be eliminated

L Legal Valuation
G Group Valuation
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Financial Accounting Postings
Two Company Example

Goods Issue Goods Receipt

Distribution Center Sales Company


Co. Code A Co. Code B

IC Billing Invoice Receipt

Goods Issue Goods Receipt


Cost of Sales Inventory
Inventory GR / IR
L 50 50 L
L 130 130 L
G 40 40 G
G 40 40 G
Intercompany Billing
IC Acct. Rec. Revenue
L 130 130 L
G 130 40 G

Non Operating Profit


L
90 G
L Legal Valuation
G Group Valuation
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Financial Accounting Postings
Two Company Example
Goods Issue Goods Receipt

Distribution Center Sales Company


Co. Code A Co. Code B

IC Billing Invoice Receipt

Goods Issue Goods Receipt


Cost of Sales Inventory Inventory GR / IR
L 50 50 L L 130 130 L
G 40 40 G G 40 40 G

Intercompany Billing Invoice Receipt


IC Acct. Rec. Revenue IC Acc. Pay GR / IR
L 130 130 L 130 L 130
G 130 40 G 130 G 40

Non Operating Profit Non Operating Profit


L L
90 G G 90
L Legal Valuation
G Group Valuation
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Transfer Pricing and Material Ledger

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What is Material Ledger ?

• Material Ledger serves for recording of real costs of purchased


materials and products that are being produced and at the same
time it takes into consideration and records all factors effecting price
fluctuation. The use of functionality of Material Ledger in the system
SAP enables faster and more effective decision taking on all
purchase and sale management, controlling and production levels

• Real Costs : Upon ascertaining of real prices of purchased


materials, the price of raw materials, commercial goods and
overhead material is influenced by purchase prices and expenses for
the sole purchase transaction. In addition to this the real price of
products and semi-finished products is composed of real costs
connected to production or as the case may be with further
processing of raw materials and material.

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What is Material Ledger ?
• Parallel Currencies: Multinational companies can use Material Ledger
for recording of inventory in up to three parallel currencies, with the
possibility of recording historical exchange rates:
– in the currency of accounting area – valuation according legislation of the given
country with connection to financial accounting
– in the currency of the group – valuation within the group
– in the currency of the profit center – another valuation for goods exchange between
profit centers within the company.

• Stock Valuation: The information system SAP generally supports two


methods of stock valuation, i.e. valuation by means of standard or
variable prices. Material Ledger combines advantages of both methods
– static and stability of standard prices suitable for costing of products
with dynamics and flexibility of variable prices, which more faithfully
reflect the reality. At the same time the history of real and standard
prices gets recorded in time. The tool Material Ledger provides also the
possibility of revaluation of stock on the basis of real calculation, which
is required by valid legislation in some countries.
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Why Materials Ledger?
• Ascertaining of real costs for procuring of material and resulting from this
support of decision taking on optimizing of amount and kinds of material
inventory from the aspect of time
• Decision taking on selection of suppliers with the purpose of elimination of price
variances is made easier
• Possibility of keeping records of inventory in up to three parallel currencies and
from this resulting advantages in consolidation within the companies belonging
to multinational holdings and groups; support in decision-taking on the selection
of the most advantageous currency in purchase of materials and semi-products
• Support of decision taking in selection of the manner of valuation of stock, this
will effect structure and value of the company assets, and at the same time it will
finally effect the profits of the company
• Supporting material for setting the optimum portfolio of the products from the
point of view of real production costs according to individual products (covering
contribution for the production of the product)
• Supporting material for decision taking on the manner of valuation of products
from the point of view of production costs and supporting material for negotiation
with suppliers and clients on provided discounts and bonuses

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For more Information

Ram Rishi
Managing Partner
2262, Petworth Court, Unit 202 C
Phone : 1 (630) 649 9235, Fax : 1 (630) 689 9455
Ram.Rishi@EnterprizeERP.com

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