Transfer prices

Description

General

Groups today are the most common form of large organizations. A group is made up of a number of legally independent companies. This division makes it difficult to view the group as a whole. A management-oriented structure (business areas, divisions, profit centers) is often required in addition to the legal units.

These different viewpoints for looking at a group require information systems that valuate business transactions in accordance with each different view.

Previously, valuation focussed mainly on the legally independent reporting units (company codes). In Release 4.0A, transfer prices allow you to valuate material stocks and goods movements from a group-oriented point of view as well as a view based on organizational units (profit centers). In the group-oriented view, goods movements between group companies are represented without internal profits. This makes it possible to show material stocks without the internal profit generated by the sales prices. For Profit Center Accounting, internal goods movements are shown using a third valuation approach. You can specify prices to valuate transfers within the group.

Functions

In order to allow these different views, it is necessary to store multiple value flows at the same time. In Release 3.0, the R/3 System already allowed you to store data in different currencies at the same time. However, group reporting requires that data be valuated from the group point of view, while for profit centers it makes sense to valuate materials and goods movements from the point of view of the individual profit centers.

The transfer pricing project in Release 4.0 allow you to store different methods of valuation at the same time.

Material stocks

Material stocks are stored using different valuation approaches in the material ledger. In Release 3.0 the material ledger already let you store your data in two currencies. Now it lets you store separate valuation methods in the separate fields.

Controlling

In Controlling, the different valuation approaches are stored in different versions. When you define the versions, you can decide which valuation approach should be used as the operational version.

This is regarded as the "main" version in Controlling and forms the basis for central functions like variance analysis and activity price calculation.

Multiple versions are particularly important for the objects in cost object controlling (such as production orders), which store the costs of production primarily for the purpose of valuating stock in the material ledger. Value flows such as order delivery or order settlement therefore supply all three versions with data.

Financial Accounting

In the documents of Financial Accounting, you can store the profit center valuation method or the group valuation method in addition to the legal method.

G/L accounts stored as open items, such as payables and receivables, are only valuated using the legal method, since the payment for this also exists only in the legal method.

Profit Center Accounting

For Profit Center Accounting, you can define and store transfer prices. Transfer pricing works just like external pricing and lets you use the following strategies:

These transfer prices are automatically read and used for internal goods movements (stock transfers, consumption) between profit centers to represent internal sales in Profit Center Accounting. Thus goods movements are represented in different ways in the financials components: for example, as consumption in Financial Accounting and a sales in Profit Center Accounting.

Product Costing

In addition to periodic accounting and inventory management, multiple valuation methods will also be supported in Product Costing. Prices are also calculated in product costing for goods transfers between profit centers and company codes. This makes it possible to display the cost estimate from either a profit center viewpoint or from a group view. This function is referred to as "group costing".

From a profit center standpoint, the use of transfer prices means that for internal transfers of goods, the cost of goods manufactured of the selling profit center is replaced by the transfer price for the receiver profit center.

The structure of group costing means that the cost component splits for the cost of goods manufactured of all the levels involved are added together without the cost component split of the previous levels getting lost. The cost component split is also displayed according to the selling company code and profit center as well.

Limitations

Change system parameters in customizing

Multiple Valuation Approaches/Transfer Prices

Maintain controlling area

EC-PCA: Customizing for Transfer Prices

Planning

As explained above, for Release 4.0 transfer prices will be limited exclusively to goods movements.

In a later release, activity relationships can also be valuated using transfer prices. It is already possible to allocate activities with fixed prices between subprojects. This function will be expanded later to include settlement of orders.

It will also be possible to select and valuate goods movements between profit centers in Profitability Analysis (CO-PA).

A consolidated display of profits based on organizational hierarchies (such as profit center hierarchies) will be developed in a later stage.

Further notes

For a detailed description of the transfer pricing functions, see the online documentation for Profit Center Accounting.