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Transfer Prices

Contents:
Definition of Transfer Prices in R/3 Parallel Valuation Approaches

SAP AG 1999

SAP AG

AC610

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Transfer Prices: Unit Objectives

At the conclusion of this unit, you will be able to: Understand the concept of Transfer Prices in R/3 Explain how transfer prices can relate to Profit Center Accounting Outline parallel valuation approaches in R/3

SAP AG 1999

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AC610

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Course Overview Diagram (5)

Actual Data Basic Settings

Transfer Prices

Profitability Management Information System

Profit Center Planning

SAP AG 1999

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AC610

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Transfer Prices: Business Scenario

Profit Center managers are interested in tracking internal revenues between entities within the corporation The transfer of goods from one profit center to another should be conducted at a set transfer price

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AC610

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Strategic Enterprise Controlling

America

Europe/Africa D

Asia

Division A
USA

E F
J

?
MEX

Corporate Executive Board

Division B
BRA

Legal view - that of the independent legal companies Group view - that of the organization as a whole Profit center view - that of the decentralized responsibility areas
SAP AG 1999

The way profits are shown might look entirely different depending on your viewpoint on the organization. When you analyze the organization as a whole, you do not see the individual companies within the group, but rather only the group itself as one company. For the individual companies, on the other hand, only the results of the company are relevant. Managers of profit centers, meanwhile, only want to look at their individual profit center as if it were an independent company.

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Parallel Valuation Views

Group

Legal

Profit Center

Group Company 1 Company 2 Company 3

Profit Center 1

Profit Center 2

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The view of the individual company and the valuation of business transaction according to legal reporting requirements only represents one of several possible perspectives. Balance sheet and tax considerations play an important role in the financial statements of the individual companies. In addition to this legal view, though, successful corporate and group management needs other information that shows business activities from the point of view of the whole group or of individual profit centers. Corporate controlling for the entire group requires you to valuate these business transactions using group production costs. Moreover, in many groups the management structures do not correspond to the individual legal accounting units. Internal prices guide the activities of the individual profit centers according to market principles. Consequently, value flows represented from the point of view of profit centers are vital for the purposes of internal management and profitability.

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AC610

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Definition of a Transfer Price

A transfer price is a price used to valuate the A transfer price is a price used to valuate the transfer of goods and services between transfer of goods and services between independent organizational units. independent organizational units.

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There are transfer prices for each of these views, calculated on the basis of a different valuation approach. (Currently transfer pricing has only been realized in R/3 for goods movements.)

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Transfer Prices in the R/3 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 =
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group production costs management price sales and purchase price

For the purpose of parallel valuation, the corporate group is represented by the controlling area. The transfer prices from the group view result from a group cost estimate. In the profit center view, transfer prices are the prices negotiated by the managers for goods and services. The legal view is the viewpoint of the individual company, represented by the company code. The transfer prices for this view are the sales and purchase prices.

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AC610

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Parallel Valuation Approaches - Example (I)

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

Production order

Production order

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We will use a multistage production process to demonstrate how parallel value flows are updated throughout the system.

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Parallel Valuation Approaches - Example (II)

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

Production order

Production order

Company code 1
PrCtr1 PrCtr2 L 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 P 140 CCtr 20

Company code 3
PrCtr4

75 L G P 70 70 70

220 240

L G P

220 90 240

P 75

Assumed Plan = Actual => No Variances

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The example corporate structure shown above will demonstrate the use of parallel valuation approaches for a multistage production process. From the viewpoint of the profit centers involved, the goods transfer from profit center 1 to profit center 2 appears as a sale valuated with a special price defined in PCA. The goods withdrawal from profit center 2 for an order in profit center 3 is a sale from both the profit center viewpoint and the legal viewpoint, and is valuated separately using the appropriate PCA price and legal price. The same applies to the stock transfer to profit center 4 at the end. For cross-company transfers between profit centers, you currently need to define the prices for both the legal and the profit center viewpoints in SD.

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AC610

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Transfer Prices in Profit Center Accounting (1)
Transferpreis 150 Transfer price
150

Profit Center 1

Profit Center 2

PCA

Material

Production order

120 FI/CO Logistics

Parallel value flows Quantity flow

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If you choose to use profit center valuation in PCA, you can define transfer prices for goods movements between profit centers.

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Flexible Transfer Pricing

Plant Material Rec.PrCtr 0001 A X200 0002 B X300 - - - Material Plant 0001 A 0001 B Plant Product group 0001 C ---

Transfer price 1200 DEM 1300 DEM TP markup 5% 6.25% TP markup 5.5%

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If your organize decides to use transfer prices from the profit center viewpoint, you can calculate special managerial prices for all goods movements between profit centers. This transfer price is a negotiated price between profit centers. It may be oriented on the market price, or it may be determined as a markup on the cost of goods manufactured as seen from the group view or legal view. These markups can depend on a number of factors, such as the profit centers involved, the product, plant, date, and so on. But it would most likely be too much work to store a transfer price for each individual material. To save time, you can group materials under one representative material, and only maintain the transfer price for this material. This technique makes it possible to maintain transfer prices on the basis of an ABC analysis, assigning the A parts an explicit market price or markup and allocating all C parts using across-the-board markups at product group level. You define transfer prices for Profit Center Accounting using the pricing function from the Sales and Distribution (SD) application component.

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AC610

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Transfer Prices in Profit Center Accounting (2)

Profit center 1
PCA
Internal revenue: - 150 Cost of sales Stock + 120 - 120

Profit center 2
Material consumption 150

Material

Production order

120 FI/CO Logistics

Parallel value flows Quantity flow

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Based on a transfer price set at 150.00, the sender profit center records an internal revenue in this amount. This is set off against the "cost of sales", which is calculated based on the internal change in stock. The receiver profit center records an expense of the same amount.

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Unit Summary

You are now able to: Explain the concept of a Transfer Price Understand how transfer prices may be used with Profit Centers.

SAP AG 1999

SAP AG

AC610

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Exercises
Unit: Transfer Prices Topic: Managerial Aspects of Transfer Prices
At the conclusion of this exercise, you will be able to: Understand the general concepts of Transfer Prices Elaborate on the goal of Transfer Prices

1-1 Read the On-line Help Documentation for Transfer Pricing: R/3 Library Accounting Enterprise Controlling Profit Center Accounting Transfer Prices: a) b) Managerial Aims of Transfer Pricing Transfer Pricing Concepts

1-1-1 Which are the three views of material prices that can be obtained using Transfer Prices? ___________________________________________________________ ___________________________________________________________ ___________________________________________________________ 1-1-2 Why may Transfer Pricing be of importance when using Profit Center Accounting? ___________________________________________________________ ___________________________________________________________ ___________________________________________________________

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Solutions
Unit: Transfer Prices Topic: Managerial Aspects of Transfer Prices

1-1 Read the On-line Help Documentation for Transfer Pricing: R/3 Library Accounting Enterprise Controlling Profit Center Accounting Transfer Prices a) b) Managerial Aims of Transfer Pricing Transfer Pricing Concepts

1-1-1 Which are the three views of material prices that can be obtained using Transfer Prices? - Legal view - Group view - Profit Center view 1-1-2 Why may Transfer Pricing be of importance when using Profit Center Accounting? Profit centers are regarded as independent companies within the company Valuation transfer prices helps to coordinate the internal market within the organization

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AC610

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