Achieve Intra-company Transfer Pricing

using SAP Material Ledger

. A CASE STUDY
Transfer Price

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 methods

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
Profitability & Transfer Price an example

Without Transfer Pricing With Transfer Pricing

Profit Profit Company Profit Profit Company

Center 1 Center 2 Profitability Center 1 Center 2 Profitability

Internal Sales 500 800

External Sales 1000 1000 1000 1000

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

COGS on internal
(500) (800)
transfers

Gross Margin 0 500 500 300 200 500

SAPs Transfer Price mechanism
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

Company Code
Reporting Group Currency
currency

Legal View Legal Y

Group View Group Y

Profit Center view Subunit Y

 Scenario:
Veritys Cement
Manufacturing &
Distribution operations
Clinker (Brisbane)

Verity has a
Manufacturing Plant in
Sydney that
manufactures Cement.
The Sydney Plant sources Cement (Sydney)
Clinker from its Brisbane
Plant.
All Verity Cement is
distributed to its
customers in Australia
through its Distribution
Plant in Melbourne. Distribution (Melbourne)
Veritys current state
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.

V004 V001 V005

Product
Profit Center 1101 Profit Center 1100 Profit Center 1102

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

L = 38.61 L = 38.61
1451 (Cement) G = 40.54 G = 40.54
P = 40.55 P = 48.66
T Accounts (Current State)
Brisbane
transfers
Clinker at cost
Profit Center 1101 Profit Center 1100
to Sydney
V004 Brisbane V001 Sydney

Clinker 134000 Inventory 134000 Inventory

30.27 30.27

Sydney
transfers
Cement at cost
Profit Center 1100 Profit Center 1102
to Melbourne
V001 Sydney V005 Melbourne

Cement 134000 Inventory 134000 Inventory

38.61 38.61
Current State - Issues
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.

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.
Future State -Transfer Price process
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.

A Transfer Price process would give

the executives of Verity an indication
of the efficiency and competitiveness
of its manufacturing operations vis--
vis its competitors.
Transfer Prices

Transfer
Product
Transfer Prices
Sending Plant
are determined
Receiving Plant
as below.
Price Std Cost Transfer Price
Margin over
std cost
method

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

Std cost + 20% =

1451 (Cement) V001 (Sydney) V005 (Melbourne) Cost Based AUD 40.55 AUD 8.11
AUD 48.66
 GL accounts used for posting
Sending Plant/ Profit Center Receiving Plant/ Profit Center

134000 Inventory 134000 Inventory

A A
496000 Change 496000 Change
in Stock in Stock
D
E
495000 Internal 497000
Revenue Internal COGS
B C

GL Account
Step Description GL Account Posting in Plant Expected use
description
A Inventory (A) 134000 Inventory Sending/ Receiving Inventory posting
B Internal Sale (B) 495000 Internal Revenue Sending Sending Plants Internal Revenue
Receiving Plants cost of purchase; this will be the same as
C Internal COGS (C) 497000 Internal COGS Receiving
sending plants internal sale value
Selling Plants COGS; this is the std cost in Material Master.
D Cost of Sale (D) 496000 Change of Stock Sending
Difference of 495000 & 497000 yields the selling plants profit
Receiving Plants offsetting entry against 497000; same value
E Change in Stock (E) 496000 Change in Stock Receiving
as 497000
Stock Transfer of Intermediate Product
Verity Brisbane (V004) transfers 10 TO of clinker to its Sydney plant (V001)
Accounting document (Profit Center view)
Inventory Accounts are offset; additional entries are posted for Transfer
prices. This is the profit center view of the Accounting document.

Notice the additional

accounting entries in
profit center view
T Accounts (Profit Center view)
Profit Center 1101 Profit Center 1100
V004 Brisbane V001 Sydney

134000 Inventory 134000 Inventory

303.70 324.70

496000 Change in Stock 496000 Change in Stock

303.70 324.70

495000 Internal Revenue 497000 Internal COGS

324.70 324.70

Profit Center 1101 (Brisbane) makes a profit of AUD Clinker costs Profit Center 1100 (Sydney) AUD
21.00 on sale of Clinker 32.47/ TO
Accounting document (Legal view)
The legal view of the document does not show the Internal Transfer Price Accounting entries
Stock Transfer of Finished Product
Verity Sydney (V001) transfers 10 TO of cement to its Melbourne Distribution
plant (V005)
Accounting document (Profit Center view)
Inventory Accounts are offset; additional entries are posted for Transfer
prices. This is the profit center view of the Accounting document.

Notice the additional

accounting entries in
profit center view
T Accounts (Profit Center view)
Profit Center 1100 Profit Center 1102
V001 Sydney V004 Melbourne

134000 Inventory 134000 Inventory

405.50 486.60

496000 Change in Stock 496000 Change in Stock

405.50 486.60

495000 Internal Revenue 497000 Internal COGS

486.60 486.60

Profit Center 1100 (Sydney) makes a profit of AUD Cement costs Profit Center 1102 (Melbourne) AUD
81.10 on sale of Cement 48.66/ TO
Accounting document (Legal view)
The legal view of the document does not show the Internal Transfer Price
entries
Product Profitability (Profit Center view) - Brisbane
Brisbane plant reflects a profitability for outbound internal transfer of clinker
to Sydney
Product Profitability (Profit Center view) - Sydney
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) - Melbourne
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.
Verity Business Solutions

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.
Presented by Rajesh Shanbhag
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.
Thank You

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 Shanbhag
W www.veritysolutions.com.au
E rajesh@veritysolutions.com.au
M +61 4 1123 8873