0

Introduction and Definition of Terms

Content:
 Business Principles of Multiple Valuation Approaches
 Definitions
 The Transfer Price Concept in the Different Valuation
Approaches
 Example of a Value flow
with Multiple Valuation Approaches

 SAP AG 1999

© SAP AG AC650 2-1

0.2
Introduction and Definition of Terms: Objectives

At the conclusion of this unit, you will be able to:

 Explain the business principles

behind multiple valuation approaches
 Describe the concept of transfer prices

 SAP AG 1999

© SAP AG AC650 2-2

0.3
Course Overview Diagram

1. Course Overview

2. Introduction and Definition of Terms

3. General System Settings

4. Determination of Multiple Valuation Approaches

5. Actual Postings with Multiple Valuations

6. Summary

 SAP AG 1999

© SAP AG AC650 2-3

0.4
Introduction and Definition of Terms:
Business Scenario

 You are a member of the project team responsible

for implementing the SAP R/3 Transfer Price
solution.
 The executive board have asked you to provide
them with an initial business-oriented overview of
the concept of multiple valuation and transfer
prices.

 SAP AG 1999

© SAP AG AC650 2-4

0.5
Strategic Enterprise Control (I)

USA E
J
III I I I
MEX

Corporate Executive Board

BRA

 Globalization and International Cooperation

 Complex Value-added Chains
 Dezentralization of Responsibilities

 SAP AG 1999

 More and more companies are merging to form large corporate groups. All of them are seeking to
become 'global players'. Their aim is to be ready to strike and to be more competitive, not a complex
structure of new sales organizations or product lines. And of course they want to use synergies in
common areas such as purchasing or administration.
 The larger the organizations become, the more difficult it is to manage and coordinate them. The
practice of decentralizing responsibility has proven itself.
 Companies do this by setting up separate areas responsible for their own profitability. These are
known as profit centers. This is based on the idea of an internal market within the organization. The
profit centers therefore represent 'companies within the company'. It must be possible to determine
the profitability or contribution to overall profitability of each individual profit center

© SAP AG AC650 2-5

0.6
Strategic Enterprise Control (II)

America Europe/Africa Asia

F
Enterprise Area A
USA E
J
Targets

Reports
MEX

Corporate Executive Enterprise Area B

Board
BRA

 Profitability needs to be analyzed from the viewpoints of the group, the

individual companies, and the profit centers
 Management by targets

 SAP AG 1999

 To manage and coordinate large companies, you need to have information on the profitability of the
organization as a whole, as well as in the individual areas within the organization.
 Assigning responsibility for revenues is difficult, especially with regard to profit centers. Profit
centers that operate directly on the market can often be assigned revenues directly, so that it is easy
to show their operating results. For internal service areas that have no direct revenues, however, this
is more difficult. The same problem presents itself for profit centers set up according to function,
since only the 'sales' profit centers can earn revenue directly.
 You need instruments and information systems that allow you to represent profits in a useful manner
for the entire organization, the individual companies within the group, and for the profit centers.

© SAP AG AC650 2-6

0.7
Strategic Enterprise Control (III)

Amerika Europe/Africa Asia

E
Enterprise Area A
USA
F

?
J

MEX
Enterprise Area B
Corporate Executive
Board
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

 With different views of the company, the trading report is radically different.
 If you analyze the organization as a whole, you do not see the individual companies within the
group. Instead, you just see the group itself as one whole company.
 For the individual companies, on the other hand, the results according to the view of the legal
company are relevant.
 Managers of profit centers, meanwhile, want to look at their individual profit centers as if they were
independent companies.

© SAP AG AC650 2-7

0.8
Views in the R/3 System

Group View Legal View Profit Center View

Group represented
by the Controlling CCode1 CCode2 CCode3 CCode4
Area
Profit Center 1

Profit Center 2

 SAP AG 1999

 In the R/3 system, the group is represented by the controlling area, the legal units by the company
codes and the responsibility areas by profit centers.
 Individual business transactions can be valuated differently according to different views.

© SAP AG AC650 2-8

0.9
CO Integration

Overhead Cost Controlling Profit

Center

Accounting
Element Accounting
Overhead
FI AA MM Order Acctg
Settlement Cost Center Acctg
Activity-
Based
SD PP
Revenue Element
Costing PrCtr 1 PrCtr 4

PrCtr 2
Product
Cost CO Cost Material PrCtr 3 PrCtr 5
FI MM SD PP Controlling Objects Ledger Profit
and Revenue

Centers

Profitability
Analysis
Cost and

FI SD PP
Cost

Profitability
Segments
 SAP AG 1999

 Up to Release 4.0, multiple valuation approaches were not supported. Only one valuation approach
was stored in the system - the legal approach - though this was supplemented in some applications by
methods of calculating assumed or fictitious values. As of Release 4.0, it has been possible to store
three multiple valuation approaches in the system.

© SAP AG AC650 2-9

0.10
What do we need Transfer Prices for?

 When profit centers exchange goods, a profit center

must not be treated differently just because it is
selling to another profit center rather than to the
external market. Without transfer prices, it would not
be possible to assess the profit achieved by a profit
center according to market criteria.

 SAP AG 1999

© SAP AG AC650 2-10

0.11
Definition of the Term ‘Transfer Price’

 A transfer price is a valuation approach which is used

for the transfer of goods and services between
financially independent areas. It is generally set at a
level corresponding to the external market price.

 SAP AG 1999

 There are transfer prices for each view, calculated on the basis of a different valuation approach.
 Later in the course, the term "transfer price" will be used to refer to the profit center
valuation only.
 Currently, transfer prices are only available for goods movements in the SAP system.

© SAP AG AC650 2-11

0.12
Currency and Valuation Profile

Valuation
10
Leg.
Legal 0 31
Grp
Group
1
32
PrCtr 2 PrCtr
10 30 Currency Type

Company Code Currency

Group Currency

 SAP AG 1999

 The currency and valuation profile determines which valuations the system stores in which currency.
The currency dimension has been extended to include the valuation dimension.
 You can store up to three different valuation views in up to two different currencies.
 Once you have defined your currency and valuation profile, you must assign it to the desired
controlling area and activate it.

© SAP AG AC650 2-12

0.13
CO Integration with Multiple Value Flows

Overhead Cost Controlling Profit

Center

Accounting
Element Accounting
Overhead
FI AA MM Order Acctg
Settlement Cost Center Acctg
Activity-Based
Costing
SD PP
Revenue Element
PrCtr 1 PrCtr 4

PrCtr 2
Product
Cost CO Cost Material PrCtr 3 PrCtr 5
FI MM SD PP Objects Ledger Profit
and Revenue

Controlling Center

Profitability
Analysis
Cost and

FI SD PP
Cost

Profitability
Segments
 SAP AG 1999

 The quantity flow for all goods movements can be valuated with up to three different prices. All
three values are stored with both the sender and receiver and can be seen as 'views' in Reporting.
 For the purpose of parallel valuation, the corporate group is represented by the controlling area.
Prices according to the group view result from a group cost estimate.
 Transfer prices according to the profit center view are prices fixed according to management criteria,
such as market prices or target prices.
 The legal view of the individual companies is represented by the company codes. The prices for this
view are the legal sales and purchase prices.

© SAP AG AC650 2-13

0.14
Multiple Valuation Approaches - Example (I)

Cost Center Cost Center

Raw Finished Distribution
Materials Semifinished Product Center Sales
Product
Order

Production Production
Order Order

 SAP AG 1999

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

© SAP AG AC650 2-14

0.15
Multiple Valuation Approaches - Example (II)

Cost Center Cost Center

Raw Finished Distribution
Semifinished
Materials Product Center
Product Sales
Order

Production Production
Order Order

Company Code 1 Company Code 2 Company Code 3

PrCtr1 PrCtr2 PrCtr3 PrCtr4 L 200
CCenter 10 CCenter 20
G 100
L 80 L 120
100 P 240
75 G 80 G 100
P 85 120 P 140
200

240
L 70 L 80 L 120 L 200
G 70 G 80 G 100 G 100
P 70 P 85 P 140 P 240

 SAP AG 1999

 The sample corporate structure shown above demonstrates the use of multiple 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 and is valuated with the transfer 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. (In a later release, SD will access the PCA pricing
tool to determine the profit center price, so that this price will then only need to be defined in PCA).

© SAP AG AC650 2-15

0.16
Scenarios: Possible Views in Various Applications

Controlling Profit Center

Accounting
CO- Curr.
OM Leg. Mandatory

Curr.
Grp
Optional
CO-
PC Curr.
Financial Accounting Optional PCA
PrCtr

Curr.
FI Mandatory
Curr.
Leg. Leg.
ML
Curr. Curr. Curr. Curr. or
Optional Curr.
Grp Leg. Grp PrCtr
Grp
FI-AA or
Curr.
Optional Mandatory Optional Optional Curr.
PrCtr PrCtr

CO-
PA
Curr. Curr. Curr.
Leg. Grp PrCtr

Optional Optional Optional

 SAP AG 1999

 Each additional valuation approach must be stored in CO and in the Material Ledger.
 The legal valuation approach in company code currency must be stored in the Material
Ledger.
 The operational valuation approach in CO is the one where Controlling actually takes place.
Certain functions can only be carried out for the operational valuation approach. Legal
valuation must be stored in the company code currency in CO (but need not necessarily be
the operational valuation).
 Only one valuation approach is stored in PCA. To be able to use transfer prices in PCA, you
must use profit center valuation in PCA.
 CO-PA can store all three valuation approaches. You can update the group valuation view in
addition to legal valuation by transferring the group cost estimate and the legal cost estimate
to separate value fields.
 The legal valuation approach must be stored in FI. Additional valuation approaches are
optional.
 Currently, FI-AA can only store valuation approaches that are stored in FI. The valuation
approach in FI-AA is aligned with the depreciation area.

© SAP AG AC650 2-16

0.17
Example I - Group Valuation

Controlling Profit Center

C&V Profile
Accounting
CO- Curr.
Curr. OM Leg. Mandatory
Leg.
Curr.
Curr.
Grp
Mandatory
Grp CO-
PC
PCA

Curr.
Optional
Leg.
ML
Curr. Curr.
Financial Accounting Leg. Grp
Curr.
Optional
Grp
Curr.
FI Mandatory Mandatory Mandatory
Leg.
Either/or
Curr.
Grp Optional CO-
FI-AA PA
Curr. Curr.
Leg. Grp

Mandatory Optional
 SAP AG 1999

 The main focus is on group costs of goods manufactured as an instrument for corporate and group
control. A possible scenario is storing the group valuation as a parallel view in the system.

© SAP AG AC650 2-17

0.18
Example II - PCA Valuation

Controlling Profit Center

C&V Profile
Accounting
CO- Curr.
Curr. OM Leg. Mandatory
Leg.

CO-
PC Curr.
Optional PCA
Curr. PrCtr
PrCtr

ML
Curr. Curr.
Financial Accounting Leg. PrCtr

Curr.
FI Mandatory Mandatory Mandatory Curr.
Leg. Mandatory
PrCtr

CO-
FI-AA PA
Curr. Curr.
Curr.
Optional Leg. PrCtr
PrCtr

Mandatory Optional
 SAP AG 1999

 If you have set up separate areas of responsibility and valuate goods movements between these using
an independent valuation approach, the profit center valuation approach is the main point of interest.
A possible scenario here is to store the profit center valuation approach as a multiple valuation
approach in the system.
 To be able to work with prices agreed between profit centers, for example, you must use the profit
center valuation approach in Profit Center Accounting. It is not possible to use other valuations in
PCA.

© SAP AG AC650 2-18

0.19
Restrictions

 Currently, transfer prices are only available for

goods movements and measures.
 To be able to use transfer prices for goods
movements and measures with valuated project
stock, you must be using the Material Ledger.
 Multiple valuation approaches can only be used
within a single controlling area.
 Multiple valuation approaches are only possible
with invoice verification in Logistics.

 SAP AG 1999

 Group costing can only be performed within a single controlling area

 Multiple valuation approaches cannot be stored for non-valuated sales order stock.

© SAP AG AC650 2-19

0.20
Introduction and Definition of Terms:
Summary

You are now able to:

 Explain the business principles
behind multiple valuation approaches
 Describe the concept of transfer prices

 SAP AG 1999

© SAP AG AC650 2-20