Achieve Intra-company Transfer Pricingusing SAP Material Ledger

……. A CASE STUDY

Transfer Price is the price one subunit charges for a product or a service supplied to another subunit of the same organization

The subunits could belong to the same legal entity or to a different legal entity (these slides focus on Transfer Pricing within the same legal entity).

Transfer Price

Market -based transfer prices◦ The subunits transfer products at prices prevalent in the market for that

product

Cost-based transfer prices◦ The subunit transfers product at its cost plus a margin

Negotiated transfer prices◦ The subunits agree between themselves the price at which the transfer

should take place

Transfer Price methods

Profitability & Transfer Price – an example

Without Transfer Pricing With Transfer Pricing

Profit Center 1

Profit Center 2

CompanyProfitability

Profit Center 1

Profit Center 2

CompanyProfitability

Internal Sales 500 800

External Sales 1000 1000 1000 1000

Cost of Goods Sold (500) (500) (500) (500)

COGS on internal transfers (500) (800)

Gross Margin 0 500 500 300 200 500

SAP transfer price is triggered by transfer of products or services between profit centers. Hence, Profit Center Accounting should be active

Accounting for Transfer Price is reflected in a “profit center view” in Financial Ledgers SAP Material Ledger allows multiple valuation view (group, profit center) of group currency. The legal view is always in company code currency for legal reporting purposes Profit Center view is used to reflect additional accounting entries for Transfer Price. That

way, customers can select the appropriate view to fulfill reporting requirements

SAP’s Transfer Price mechanism

Reporting Company Code currency Group Currency

Legal View Legal Y

Group View Group Y

Profit Center view Subunit Y

Scenario:Verity’s Cement Manufacturing &

Distribution operations

Verity has a Manufacturing Plant in Sydney that manufactures Cement.

The Sydney Plant sources Clinker from its Brisbane Plant.

All Verity Cement is distributed to its customers in Australia through its Distribution Plant in Melbourne.

Clinker (Brisbane)

Cement (Sydney)

Distribution (Melbourne)

Traditionally, all products are transferred within its Australian plants at manufactured cost.

Distribution Depot (Melbourne) V005 books all revenue within its account.

Inventory (standard) cost of Clinker and Cement per TO is as below. L=legal view, G=group view, P=Profit Center view. All currencies are AUD.

Verity’s current state

Product V004Profit Center 1101

V001Profit Center 1100

V005Profit Center 1102

1450 (Clinker)L = 30.37G = 32.47P = 30.37

L = 30.37G = 32.47P = 32.47

1451 (Cement)L = 38.61G = 40.54P = 40.55

L = 38.61G = 40.54P = 48.66

Profit Center 1101V004 Brisbane

134000 Inventory 134000 Inventory

30.27 30.27

Profit Center 1100V001 Sydney

T Accounts (Current State)

Clinker

Brisbane transfers

Clinker at cost to Sydney

Profit Center 1100V001 Sydney

134000 Inventory 134000 Inventory

38.61 38.61

Profit Center 1102V005 Melbourne

Cement

Sydney transfers

Cement at cost to Melbourne

During the last few budget meetings, there has been a heated discussion between the executives of the three units on how profitability of each of the three units can be measured independent of the profitability of the company.

The executive of the Sydney operations says he could procure Clinker in the free market at a price cheaper than what is charged by its Brisbane plant.

Current State - Issues

The Sydney plant does not get any credit for the cost savings they have achieved over the last few years because the cement manufactured by them is transferred to the distribution depot at cost.

• To improve profitability and competitiveness among its plants, Verity decides to introduce a Transfer Price mechanism for all its internal transfers.

• Transfers of intermediate products will be made at a fixed pre-determined price; that is based on the hypothetical procurement cost of that product in the open market.

Transfers of finished products will be made at a fixed pre-determined percentage over manufactured cost.

Future State -Transfer Price process

A Transfer Price process would give the executives of Verity an indication of the efficiency and competitiveness of its manufacturing operations vis-à-vis its competitors.

Transfer Prices

Transfer Prices are determined as below.Product Sending Plant Receiving PlantTransfer

Price method

Std Cost Transfer Price Margin over std cost

1450 (Clinker) V004 (Brisbane) V001 (Sydney) Market based AUD 30.37 AUD 32.47 AUD 2.10

1451 (Cement) V001 (Sydney) V005 (Melbourne) Cost Based AUD 40.55 Std cost + 20% = AUD 48.66 AUD 8.11

GL accounts used for posting

Sending Plant/ Profit Center

134000 Inventory

496000 Change in Stock

495000 Internal Revenue

A

D

B

134000 Inventory

497000 Internal COGS

496000 Change in Stock

Receiving Plant/ Profit Center

A

E

C

Step Description GL Account GL Account description Posting in Plant Expected use

A Inventory (A) 134000 Inventory Sending/ Receiving Inventory posting

B Internal Sale (B) 495000 Internal Revenue Sending Sending Plant’s Internal Revenue

C Internal COGS (C) 497000 Internal COGS Receiving Receiving Plants cost of purchase; this will be the same as sending plants internal sale value

D Cost of Sale (D) 496000 Change of Stock Sending Selling Plants COGS; this is the std cost in Material Master. Difference of 495000 & 497000 yields the selling plants profit

E Change in Stock (E) 496000 Change in Stock Receiving Receiving Plants offsetting entry against 497000; same value as 497000

Verity Brisbane (V004) transfers 10 TO of clinker to its Sydney plant (V001)

Stock Transfer of Intermediate Product

Inventory Accounts are offset; additional entries are posted for Transfer prices. This is the “profit center view” of the Accounting document.

Accounting document (Profit Center view)

Notice the additional accounting entries in

profit center view

T Accounts (Profit Center view)

Profit Center 1101

V004 Brisbane

Profit Center 1100

V001 Sydney

134000 Inventory

496000 Change in Stock

495000 Internal Revenue

134000 Inventory

497000 Internal COGS

303.70

303.70

324.70

324.70

324.70

496000 Change in Stock

324.70

Clinker costs Profit Center 1100 (Sydney) AUD 32.47/ TO

Profit Center 1101 (Brisbane) makes a profit of AUD 21.00 on “sale” of Clinker

The legal view of the document does not show the Internal Transfer Price Accounting entries

Accounting document (Legal view)

Verity Sydney (V001) transfers 10 TO of cement to its Melbourne Distribution plant (V005)

Stock Transfer of Finished Product

Inventory Accounts are offset; additional entries are posted for Transfer prices. This is the “profit center view” of the Accounting document.

Accounting document (Profit Center view)

Notice the additional accounting entries in

profit center view

Profit Center 1100V001 Sydney

134000 Inventory

496000 Change in Stock

495000 Internal Revenue

134000 Inventory

497000 Internal COGS

405.50

405.50

486.60

486.60

486.60

496000 Change in Stock

486.60

Profit Center 1102V004 Melbourne

Cement costs Profit Center 1102 (Melbourne) AUD 48.66/ TO

Profit Center 1100 (Sydney) makes a profit of AUD 81.10 on “sale” of Cement

T Accounts (Profit Center view)

The legal view of the document does not show the Internal Transfer Price entries

Accounting document (Legal view)

Brisbane plant reflects a profitability for outbound internal transfer of clinker to Sydney

Product Profitability (Profit Center view) - Brisbane

Sydney plant reflects a profitability for outbound internal transfer of cement to Melbourne. The profitability for inbound internal transfer of clinker from Brisbane will reflect when clinker is sold to an external customer; or will reflect as cost of goods manufactured if it is consumed in production of cement.

Product Profitability (Profit Center view) - Sydney

Melbourne Plant reflects a “profitability” for inbound internal transfer of cement from Sydney. The profit/ loss will reflect after the cement is eventually sold to an external customer.

Product Profitability (Profit Center view) - Melbourne

Verity provides the vision, and the framework for a successful Finance process and technology transformation and re-engineering.

We at Verity believe we have the experience to make success happen for our clients. This belief comes from our track record of successfully engaging customers in their pursuit of the best-of-class business solutions. We believe that this search with Verity is short because of our past experience, and fruitful because we do not simply deliver an end-result, but strive to deliver value-added service that earns us the trust and confidence of our customers.

Verity Business Solutions

Rajesh is an accomplished and successful Finance professional with over 20 years’ experience in Finance processes and related technologies.

He is a qualified accountant, and he has worked in Finance departments of multinational companies. With this strong foundation in Finance, he has managed to successfully implement best-in-class Finance processes in IT (primarily SAP).

Over the last few years, Rajesh has led Finance teams on large SAP implementations and provided his insights and experience to provide a workable and an improved solution for his customers. Rajesh is a SAP Certified Application Professional.

Presented by Rajesh Shanbhag

• Contact us if have any questions, need clarification.

• For more resources on SAP & Finance, visit our Resources page on www.veritysolutions.com.au/resources

Rajesh ShanbhagW www.veritysolutions.com.auE rajesh@veritysolutions.com.auM +61 4 1123 8873

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