Verity Cement uses SAP Material Ledger to implement intra-company transfer pricing between its manufacturing plant in Brisbane, plant in Sydney, and distribution center in Melbourne. Previously, transfers were done at cost without reflecting individual profitability. The new system uses negotiated transfer prices based on market costs for intermediate goods and a margin over standard cost for finished goods. This allows each subunit to measure independent profitability and improve competitiveness through the profit center view in SAP.

1. Achieve Intra-company Transfer Pricing
using SAP Material Ledger
……. A CASE STUDY

2.  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

3. 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

4. Profitability & Transfer Price – an example
Without Transfer Pricing With Transfer Pricing
Profit
Center 1
Profit
Center 2
Company
Profitability
Profit
Center 1
Profit
Center 2
Company
Profitability
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

5.  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

6. 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)

7.  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
V004
Profit Center 1101
V001
Profit Center 1100
V005
Profit Center 1102
1450 (Clinker)
L = 30.37
G = 32.47
P = 30.37
L = 30.37
G = 32.47
P = 32.47
1451 (Cement)
L = 38.61
G = 40.54
P = 40.55
L = 38.61
G = 40.54
P = 48.66

8. Profit Center 1101
V004 Brisbane
134000 Inventory 134000 Inventory
30.27 30.27
Profit Center 1100
V001 Sydney
T Accounts (Current State)
Clinker
Brisbane
transfers
Clinker at cost
to Sydney
Profit Center 1100
V001 Sydney
134000 Inventory 134000 Inventory
38.61 38.61
Profit Center 1102
V005 Melbourne
Cement
Sydney
transfers
Cement at cost
to Melbourne

9.  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.

10. • 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.

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

12. 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

13.  Verity Brisbane (V004) transfers 10 TO of clinker to its Sydney plant (V001)
Stock Transfer of Intermediate Product

14.  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

15. 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

16.  The legal view of the document does not show the Internal Transfer Price Accounting entries
Accounting document (Legal view)

17.  Verity Sydney (V001) transfers 10 TO of cement to its Melbourne Distribution
plant (V005)
Stock Transfer of Finished Product

18.  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

19. Profit Center 1100
V001 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 1102
V004 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)

20.  The legal view of the document does not show the Internal Transfer Price
entries
Accounting document (Legal view)

21.  Brisbane plant reflects a profitability for outbound internal transfer of clinker
to Sydney
Product Profitability (Profit Center view) - Brisbane

22.  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

23.  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

24. 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

25. 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

26. • 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
Thank You