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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

SAPs 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 scenarios 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


CO
Controlling area
PCA

Profit center

FI

Company code

Transfer price from the group viewpoint = Transfer price from the profit center viewpoint = Transfer price from the legal viewpoint

group production costs management price = sales and purchase price


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Currency and Valuation Profile

Valuation
10

Legal Group PrCtr

Leg.

0
Grp

30

1 2 10
30 PrCtr.

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 Goods movements valuated with group cost of goods manufactured Goods movements valuated with internally agreed prices

Group

Profit center

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Quantity and Value Flow


V A L U E F L O W
PCA

Profit center 1
COOM Overhead costs

Profit center 2

FI

COPA

Process and data

Purchase Production

Direct costs

COPC

Transfer Sale
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The Concept of Parallel Value Flows


PCA

L G P

Direct costs

F L O W

L G P

Overhead costs

V A L U E

Profit center 1

Profit center 2

or

or COPA

FI
COOM

COPC

Process and data

Stock L G P

Material Ledger
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Different Scenarios
Profit Center Accounting
PCA Cur. PrCtr Cur. Grp Cur. Leg.

or

or

Financial Accounting
Cur. Leg.

Controlling
COOM COPC
Cur. Leg. Cur. Grp Cur. PrCtr

mand. opt. opt.

mand.

COPA

Cur. Leg. Cur. Grp Cur.

opt.

FI

Cur. Grp Cur.

opt.
opt.

FI-AA

PrCtr

PrCtr

Material Ledger

ML

Cur. Leg.

mand.

Cur. Grp

Cur. PrCtr

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Example I - Group Valuation


Profit Center Accounting
PCA Cur. Grp

Financial Accounting
Cur. Leg.

Controlling
COOM COPC
Cur. Leg.

operational

COPA

Cur. Leg. Cur. Grp

FI
FI-AA
Cur. Grp

Cur. Grp

Material Ledger
Cur. Grp Cur. Leg.

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Example II - PCA Valuation


Profit Center Accounting
PCA Cur. PrCtr

Financial Accounting
Cur. Leg.

Controlling
COOM
COPC
Cur. PrCtr

operational

COPA

Cur. PrCtr

FI
Cur. Cur. Leg.

Cur. Leg.

FI-AA

PrCtr

Material Ledger

Cur. PrCtr

Cur. Leg.

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Parallel Valuation - Production Example

Raw material

Cost center Semifin. material Finished product Distribution center Sales order

Production order

Production order

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Parallel Valuation - Production Example


Cost center Raw material

Semifin. material

Finished product

Distribution center

Sales order

Production order

Production order

Company code 1
PrCtr1 PrCtr2 L 75 L G P 70 70 70 G P 70 70 75 L G 70 70

Company code 2
PrCtr3 100 120 L 120 G 90 P 140 L 120 G 90 CCtr 20

Company code 3
PrCtr4

220 240

L G P

220 90 240

75

P 140

Assumed Plan = Actual => No Variances Slide | 17

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 semifinished 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 Bs 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 Bs 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, its 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
Co. Code A
IC Billing
Goods Issue Cost of Sales Inventory L 50 G 40

Sales Company
Co. Code B
Invoice Receipt

50 L 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


Goods Issue Two Company Example Goods Receipt

Distribution Center
Co. Code A
IC Billing

Sales Company
Co. Code B
Invoice Receipt
Goods Receipt Inventory GR / IR L 130 G 40

Goods Issue Cost of Sales Inventory L 50 G 40

50 L 40 G

130 L 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


Goods Issue

Two Company Example


Goods Receipt

Distribution Center
Co. Code A
IC Billing
Goods Issue Cost of Sales Inventory L 50 G 40

Sales Company
Co. Code B
Invoice Receipt
Goods Receipt Inventory GR / IR L 130 G 40

50 L 40 G

130 L 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
Co. Code A
IC Billing
Goods Issue Cost of Sales Inventory L 50 G 40

Sales Company
Co. Code B
Invoice Receipt
Goods Receipt GR / IR 130 L 40 G

50 L 40 G

Inventory L 130 G 40

Intercompany Billing IC Acct. Rec. Revenue L 130 130 L G 130 40 G Non Operating Profit L 90 G

Invoice Receipt IC Acc. Pay GR / IR 130 L 130 130 G 40 Non Operating Profit L 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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