SAP Business Process Improvement Series - Transfer Pricing and Material Ledger in SAP

SAP Business Process Improvement Series

Transfer Pricing and Material Ledger in SAP

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Slide | 2

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

Slide | 3

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

Slide | 4

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

Slide | 5

Transfer Prices in SAP System

Controlling area

PCA

FI

CO

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

Company code

Profit center

Slide | 6

Currency and Valuation Profile

Currency type

Valuation

0

1

2

Company code currency

Group currency

10 30

10

Leg.

30

PrCtr.

30

Grp

Legal

Group

PrCtr

Slide | 7

Parallel Valuation Concept

Slide | 8

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)

Slide | 9

Parallel Valuation Approaches

Group view Legal view Profit center view

Profit center 1

CoCd 1 CoCd 2 CoCd 3 CoCd 4

Group

Profit center 2

Slide | 10

Goods movements valuated with sale or

purchase price

Goods movements valuated with group

cost of goods manufactured

Goods movements valuated with internally

agreed prices

Valuation Approaches

Legal

Group

Profit center

Slide | 11

PCA

Profit center 1 Profit center 2

Quantity and Value Flow

FI CO-

OM

CO-

PA

Direct

co

sts

CO-

PC

Ove

rhe

ad

co

sts

Purchase

Production

Transfer

Sale

Process

and

data

V

A

L

U

E

F

L

O

W

Slide | 12

PCA

Profit center 1 Profit center 2

FI CO-

OM

CO-

PA

Direct

co

sts

O

ve

rhe

ad

co

sts

Material Ledger

CO-

PC

or or

L G P

Process

and

data

V

A

L

U

E

F

L

O

W L G P

Stock L G P

The Concept of Parallel Value Flows

Slide | 13

Different Scenarios

or or PCA

Profit Center Accounting

FI

Financial Accounting

mand.

opt.

opt.

CO- OM

Controlling

CO- PC

CO- PA

mand.

Material Ledger

FI-AA

ML Cur.

Leg.

Cur.

Leg.

Cur.

Leg.

Cur.

Leg.

Cur.

Leg.

Cur.

Grp

Cur.

Grp

Cur.

Grp

Cur.

Grp

Cur.

Grp

Cur.

PrCtr

Cur.

PrCtr

Cur.

PrCtr

Cur.

PrCtr

Cur.

PrCtr

mand. opt.

opt.

opt.

Slide | 14

Example I - Group Valuation

PCA


FI


CO- OM

Controlling

CO- PC

CO- PA

Material Ledger

operational

Cur.

Grp

Cur.

Grp

Cur.

Grp

Cur.

Leg.

Cur.

Grp

Cur.

Leg.

Cur.

Leg.

Cur.

Grp

Cur.

Leg.

FI-AA

Slide | 15

Example II - PCA Valuation


FI


CO- OM

Controlling

CO- PC

CO- PA

Material Ledger

operational

Cur.

PrCtr

Cur.

PrCtr

Cur.

PrCtr

Cur.

PrCtr

Cur.

PrCtr

Cur.

Leg.

Cur.

Leg.

Cur.

Leg.

Cur.

Leg.

PCA

FI-AA

Slide | 16

Parallel Valuation - Production Example

Semifin.

material

Distribution

center Sales

order

Finished

product

Raw

material

Production

order

Cost center

Production

order

Slide | 17

Production

order

Sales

order

Cost center

Company code 1

PrCtr1 PrCtr2 PrCtr3 PrCtr4

75 100

120

CCtr 20

Assumed Plan = Actual => No Variances

220

240

Company code 2 Company code 3

Production

order

Semifin.

material

Raw

material Distribution

center Finished

product

L 120

G 90

P 140

L 120

G 90

P 140

L 70

G 70

P 75

L 70

G 70

P 75

G 70

L 70

P 70 P 240

G 90

L 220

Parallel Valuation - Production Example

Slide | 18

Options – Transfer Pricing in SAP

Slide | 19

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

Slide | 20

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.

Slide | 21

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.

Slide | 22

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.

Slide | 23

Impacts on other modules

Slide | 24

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

Slide | 25

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

Slide | 26

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.

Slide | 27

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

Slide | 28

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.

Slide | 29

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.

Slide | 30

Simplified Examples

Slide | 31

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

Slide | 32

Financial Accounting Postings

Sales Company Distribution Center Co. Code B Co. Code A

Goods Receipt Goods Issue

Invoice Receipt IC Billing

Two Company Example

L Legal Valuation

G Group Valuation

L 50 50 L

G 40 40 G

Goods Issue

Cost of Sales Inventory

10 unit difference represents

difference between ESC and

local standard cost

Slide | 33





Two Company Example

L Legal Valuation

G Group Valuation

L 50 50 L

G 40 40 G

Goods Issue

Cost of Sales Inventory

L 130 130 L

G 40 40 G

Goods Receipt

Inventory GR / IR

90 unit difference represents

intercompany profit in inventory

balances and must be eliminated

Slide | 34





Two Company Example

L Legal Valuation

G Group Valuation

L 130 130 L

G 40 40 G

Goods Receipt

Inventory GR / IRL 50 50 L

G 40 40 G

L 130 130 L

G 130 40 G

L

90 G

Goods Issue

Intercompany Billing

Cost of Sales

IC Acct. Rec.

Non Operating Profit

Revenue

Inventory

Slide | 35





Two Company Example

L 50 50 L

G 40 40 G

L 130 130 L

G 130 40 G

L

90 G

Goods Issue

Intercompany Billing

Cost of Sales

IC Acct. Rec.


Revenue

Inventory

L 130 130 L

G 40 40 G

130 L 130

130 G 40

L

G 90

Goods Receipt

Inventory GR / IR

Invoice Receipt

IC Acc. Pay GR / IR


L Legal Valuation

G Group Valuation

Slide | 36

Transfer Pricing and Material Ledger

Slide | 37

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.

Slide | 38

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.

Slide | 39

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

Slide | 40

For more Information

2262, Petworth Court, Unit 202 C Phone : 1 (630) 649 9235, Fax : 1 (630) 689 9455

[email protected]

Ram Rishi Managing Partner

SAP Business Process Improvement Series - Transfer Pricing and Material Ledger in SAP

Documents

transfer of goods

transfer of materials

transfer pricing introduction

group view slide

grp legal group prctr

profit center viewpoint

group viewpoint

group companies