Actual Costs Across Multiple Company Codes Using a New Business Function in SAP Enhancement Package 5 for SAP ERP 6.0

Calculate Actual Costs Across Multiple Company Codes Using a Business Function in SAP Enhancement Package 5 for SAP ERP 6.0New The material ledger records the flow of goods from the initial purchase of the raw material to the final sale of the finished product. It assigns any price differences incurred during purchasing and production to the product sold — or at least it does provided that the goods flow remains within a single company code. Until SAP enhancement package 5 for SAP ERP 6.0, a material sold to another company in the same group was treated as an externally procured material. Instead of the actual costs for the material purchased being transferred to the affiliated company, only the material price was recorded in the material ledger. Learn how to record both the legal view (in which the purchased good is treated as an external purchase for legal reporting purposes) and the group view (in which the actual costs for the purchased good are passed on to the other company and split into their cost components for group reporting purposes) and how to capture the intercompany markups in your cost component split.

In group valuation, actual costs are recorded as if they were incurred within a single entity. They are recorded without the profit markups that are charged when the individual companies buy and sell goods from one another as if they were not related (sometimes called arm’s length trading). This view is used for corporate decision making and controlling and allows organizations to see the actual costs broken down into their cost components (e.g., raw materials, energy, labor, overhead, and freight) across all units. The legal valuation, on the other hand, records the intercompany transactions as sales and purchases by each unit that must be reported to the appropriate jurisdiction for tax purposes.

In today’s global supply chains, it is common for several plants to be involved in manufacturing a single product and for these plants to belong to different legal entities. It’s also common for organizations to have a central distribution center that is being supplied by multiple plants that belong to different legal entities. From a group accounting point of view, you should treat the flow of goods between the plants and distribution center as a single flow, as if the goods were simply moving around the same factory. From a legal accounting point of view, however, the flow is broken because goods are being sold by the one plant to the other plant or distribution center. In this case, the one plant bills the other plant for the goods delivered and generally adds a profit mark-up.

While this business situation is common, companies have only recently started to explore the potential of group costing within SAP ERP. One reason is that in their early implementations, organizations made decisions that constrained their ability to use this function. One constraint is that group costing can only take place within a single controlling area. In many early SAP ERP implementations, organizations set their controlling areas at more or less the same level as their company codes, meaning that they could not view the whole supply chain in managerial accounting (CO) but only that part of the chain that was within each controlling area. Now, many organizations are using landscape transformation services to migrate to a single controlling area.

Another constraint was that the internal invoice that handled the billing between the two companies had to be created using electronic data interchange (EDI). This was partly a technical issue because transaction MIRO does not support the group valuation, but is also a people issue because the accounting clerk processing the invoice should see only the legal valuation (sales price) and not the group valuation (cost of goods manufactured).

Now organizations have matured sufficiently and have automated their billing processes to replace manual processes with EDI. And, of course, there was the functional gap in the process: The material ledger did not account for group valuation for actual costs, but treated goods purchased from affiliated companies as if they were externally procured goods. This gap has been closed in SAP enhancement package 5 for SAP ERP 6.0 using the business function Cross-Company Code Stock Transfer & Actual Costing (LOG_MM_SIT). I will show you how to set up group costing and walk you through the steps involved. I’ll start with preparatory steps before making any postings and then show you the demo steps in the material ledger.

Step 1. Identify the Customers and Vendors Involved in the Intercompany Process Start by creating customer and vendor records for each of the plants participating in the intercompany process. You need to create vendor master records for each supplying plant and customer master records for each receiving plant. To create a vendor master, use transaction XK01 or follow menu path Logistics > Materials Management > Purchasing > Master Data > Vendor > Central > Create. Enter the name of the vendor (e.g., 4444) and the company code for the supplying plant. In the General Data section, click the Control flag. Figure 1 shows the vendor master for the supplying plant. The control data links the supplying plant to the receiving plant via the entry in the Customer field (e.g., 1186). The entry in the Trading partner field (e.g., 2000) identifies the company ID to which the plant belongs for consolidation purposes (see the “Group Costing and Consolidation” sidebar).

Figure 1

The vendor master control data shows the intercompany customer and trading partner

You see the same screen in reverse if you look at the customer master for the receiving plant. To create a customer master, use transaction XD01 or follow menu path Logistics > Sales and Distribution > Master Data > Business Partner > Customer > Create > Complete. Enter the name of the customer (e.g., 1186) and the company code for the receiving plant and click the Control Data tab. Figure 2 shows the customer master for the receiving plant. The control data links the receiving plant to the supplying plant via the entry in the Vendor field (4444 here). The entry in the Trading partner field (1000 in this example) identifies the company ID to which the plant belongs for consolidation purposes.

Figure 2

The customer master control data shows the intercompany vendor and trading partner

Step 2. Set Up Group Valuation in Accounting Next, activate group valuation alongside legal valuation (which is always present by default). In legal valuation, the intercompany sale is recorded as a payable by the receiving company and a receivable by the supplying company. In group valuation, the transaction is recorded as if it were simply a stock transfer. The costs are transferred to the other company broken down into their cost components (e.g., raw material costs, labor costs, energy costs, and overhead). Group valuation is activated by setting up a currency and valuation profile and assigning it to the controlling area. To create a group valuation view, follow IMG menu path Controlling > General Controlling > Multiple Valuation Approaches/Transfer Prices > Basic Settings > Maintain Currency and Valuation Profile.

In this example, I’m working with the currency and valuation profile ID01. Click ID01 and choose Details. Figure 3 shows a currency and valuation profile that handles legal valuation in the company code currency, group valuation in the group currency (i.e., the controlling area currency), profit center valuation in the group currency, and a second legal valuation for parallel cost of goods manufactured. I discussed this type of valuation in my article “Provide Parallel Product Costs for Inventory Valuation in the SAP General Ledger,” posted to the Financials Expert knowledgebase in October 2009.

Figure 3

Currency and valuation profile

Now link the currency and valuation profile to your controlling area by following menu path Controlling > General Controlling > Multiple Valuation Approaches/Transfer Prices > Basic Settings > Assign Currency and Valuation Profile to Controlling Area. Material prices for legal valuation purposes are stored in the Accounting view of the material master. However, to use the group valuation, profit center valuation, and parallel cost of goods manufactured, you need to activate the material ledger for each of the plants participating in the intercompany process to capture the additional values. To activate the material ledger, follow IMG menu path Controlling > Product Cost Controlling > Actual Costing/Material Ledger > Activate Valuation Areas for Material Ledger. Figure 4 shows that the material ledger is active for plants 1000 and 2000 in this example.

Figure 4Activate the material ledger Once the material ledger is active, values in group valuation and profit center valuation are also visible in the material master (Figure 5).

Figure 5The Accounting view of the material master shows legal, group, and profit center valuation

Step 3. Set Up the Stock Transfer Process Now you set up the stock transfer order process to handle the delivery process. This process was described at length in Ashim A. Nanda’s article “Cater to Arm’s Length Standards with Automated Intercompany Transfer Pricing Design,” which was posted to the Financials Expert knowledgebase in October 2010, so I won’t reiterate the basics. However, you should review the new options for valuating stock in transit in the business function LOG_MM_SIT, since you need these steps to ensure that the material ledger is able to establish the relationship between delivered material and received material. The new intercompany transfer process ensures that the issue and the receipt are captured in the same document.

Figure 6 shows the new options for this process in more detail.

Figure 6

New options for posting stock in transit in enhancement package 5

The first variant (variant 0) already exists in SAP ERP and uses a one-step delivery to directly transfer ownership of the goods from the sending plant to the receiving plant. Movement types 645 and 101 are executed in one step when the goods issue is made with reference to the delivery.

However, the physical flow of goods may take days or even weeks, so you might need a two-step delivery for stock in transit, where ownership of the transit stock can be transferred from the supplying plant to the receiving plant en route. Regardless of when the transfer of ownership takes place, you must ensure that the material value and quantity are visible at all times. From SAP enhancement package 5, there are three new process variants for this transfer:

1. Sender’s transit stock: The value and quantity of the material in transit is shown in the sending plant until the material physically arrives at the receiving plant. Then a goods receipt is performed and the value and quantity are transferred to the receiving plant. 2. Ownership for the material changes en route: This might happen when the material is loaded onto a ship. The goods issue is then posted to the sender’s transit stock. When the ship arrives at the harbor in the destination country, an employee at the receiving plant triggers the transfer to the receiver’s transit stock. Then the materials are loaded onto a truck. As soon as the truck arrives at the warehouse of the receiving plant the goods movement to the receiver’s free stock can be performed. This transfer takes place using transaction VLPOD. 3. Receiver’s transit stock: The value and quantity of the material is shown in the receiving plant while in transit. Thus, the goods issue of the material from the sending plant results in a direct posting to the in-transit stock of the receiving plant. As soon as the truck arrives at the receiving plant, the material value and quantity can be transferred to the receiver’s free stock.

Step 4. Set Up the Billing Process Then determine how the selling company (vendor 4444) is going to bill the receiving company (customer 1186) for the goods delivered. To check your entries for the intercompany billing process, follow menu path Sales and Distribution > Billing > Intercompany Billing > Automatic Posting to Vendor Account (SAP EDI). In short, you are using two price conditions: PR00 to handle the legal valuation with profit markup and KW00 to handle the group valuation. Price condition KW00 picks up the value of the material in the sending plant and uses this value as the invoice value on the receiving side in group valuation. This value is not a single material price, but the standard cost component split: The actual is assigned during multi-level material ledger settlement at period close.

Note You can find further details about the intercompany billing process in SAP Notes 31126 (Intercompany billing - posting to vendor account using EDI) and 659590 (EDI: Stock transfer and cross-company sales).

Step 5. Store the Profit Markup in the Cost Component Split If you defined a profit mark-up in the legal valuation (based on price condition PR00), then you need to identify a cost component that stores this mark-up during intercompany billing. Note that in the material ledger, this markup is actually stored as a delta in the legal valuation along with the sender and receiver information. In standard costing, you have to use the group view to capture intercompany markups. To assign this mark-up to a cost component, you have to extend your cost component split. To extend the cost component structure, follow menu path Controlling > Product Cost Controlling > Product Cost Planning > Basic Settings for Material Costing > Define Cost Component Structure. Choose your existing cost component structure (01 in my

example). Create a new cost component for the markup (310 in my example) and set the Company Code flag under the Delta Profit for Group Costing heading (Figure 7). It is also important to check the Roll up Cost Component flag to ensure that the profit markup is rolled up as the material is moved through the supply chain.

Figure 7

Cost component structure

You should also review the documentation for the Business Add-In (BAdI) Control of Cross-Company Transfer, which you can find at IMG menu path Controlling > Product Cost Controlling > Actual Costing/Material Ledger. You may wish to use a BAdI implementation to determine how to handle the markups. The default is that all markups are assigned to a single cost component (e.g., 310) but you can use a BAdI to direct some markups to a different cost component, as required.

The following options are available:

•

ROLLUP_COST_COMP_SPLIT: Control that the cost component split is also transferred across company codes in the legal view

•

REVAL_MARKUP_AT_ACTUAL_COSTS: Control that the intercompany profit is calculated on the plan costs of the sender and not using the

actual costs

•

DISPLAY_COST_COMPONENTS: In transaction CKM3 (material price analysis), control that all cost components not relevant to inventory

valuation are displayed (and not just the cost component for the intercompany profit)

•

GET_MARKUP_COMPONENT: Control that the intercompany profit is assigned to any cost component not relevant to inventory

•

MODIFY_MARKUP: Calculate the intercompany profit in accordance with a separate algorithm

Now let’s move on to the demo sequence in the material ledger.

Observe Intercompany Sales from a Legal Perspective I will now show you how the value flow for a stock transport order and its intercompany invoice are represented in the material ledger from a legal perspective. In this example, plant 1000 has purchased material RH-3S-02 from plant 2000. You can access this screen by clicking the Mat. Price Analysis button in Figure 5 or by using transaction CKM3 and entering the material, plant, and period.

First, let’s look at the situation for the material in the supplying plant (2000). If you are an expert in the use of the material ledger, the first difference you notice in Figure 8 is that instead of the receipt being labeled simply as a purchase order (i.e., as if it came from outside the organization), the line title is Purchase order (grp) to indicate that the goods have been purchased from a plant in the same group. This means that you can separate external and intercompany purchases at a glance. If you look at the lines below, you can see that two goods transfers have taken place for 6 kg and 5 kg of the material (i.e., the bottom two lines). Note the document numbers for these two lines. You also see the line Consumption for Next Level RH-3S-02/1000, which represents the flow from the supplying plant to the receiving plant.

Figure 8Sale of goods in legal valuation Now let’s look at the same material in the receiving plant (1000) in Figure 9.

Figure 9Purchase of goods in legal valuation Starting at the bottom of the display, two deliveries have been received: 6 kg were purchased directly from plant 2000 and 5 kg were transferred from a transit stock in plant 1000. Note that the document numbers are exactly the same as the ones in Figure 8. To see details of this posting, double-click the goods receipt line for the 6 kg. Figure 10 shows the goods receipt from plant 2000 (i.e., the supplying plant) to plant 1000 (i.e., the receiving plant). The twin lines in this document are important as the material ledger uses this link to determine which company has purchased goods from an affiliated company when rolling variances through the supply chain during multilevel price determination at period close.

Figure 10Material ledger documents for goods receipt Returning to the Material Price Analysis screen, you can see that two invoices have also been received, resulting in further variances (shown in the Price diff column). You can see from the green status flags in the Period Status field in Figure 9 that the material ledger settlement has also been performed for the period. This has resulted in the creation of the Receipts from Lower Levels line, but the value for this line is zero. This is because the rollup of the price variances took place, but in this scenario, the lower levels refer to another company — you only see these values in group valuation or as a delta value in the cost component split. Again, to see details, double-click the Receipts from Lower Level line. Figure 11 shows that EUR 0 have been rolled up as price differences from the lower levels (i.e., the plant in the other company code).

Figure 11Multilevel price determination in legal view Remember, however, that when you configured the cost component split, you created a cost component (310) to store the differences coming from the plant in the affiliated company. If you now return to the Material Price Analysis screen (Figure 9) and switch to the cost components (View field), you see the breakdown of the actual costs into their cost components (Figure 12). If you now scroll to the far right (if you have a large number of cost components, they will not all be visible on the initial screen), you see the Delta Company Code column. This field stores the details of the intercompany markups or deltas from the other company code. Note that this is in a different color to indicate the special nature of this cost component.

Figure 12

Cost components in legal view with profit markup (delta company code)

Observe Intercompany Sales from a Group Perspective Now let’s look at the same information from a corporate perspective. To do this, switch to the group valuation by choosing Group currency, group valuation in the Curr./Valuation field (Figure 9). In Figure 13, you see the same five lines as in Figure 9, but this time EUR 33,06 is shown in the Receipts from Lower Levels line. This is because the price differences from the source plant have been rolled up and update the price and cost component split in the receiving plant during material ledger settlement. In other words, you are seeing actual costs for material RH-3S-02 as if the supply chain were a single flow without the break for the intercompany transfer.

Figure 13

Purchase of goods in group valuation

Again, double-clicking the Receipts from Lower Level line takes you to the results of multilevel price determination (Figure 14), but this time you can see that EUR 33,06 have been rolled up from the plant in the other company.

Figure 14Multilevel price determination in group view The group view gives unequalled transparency into the costs in your supply chain. However, note that owing to the highly sensitive nature of this information, you should restrict access to the group valuation view. You can use authorization object K_TP_VALU to establish which users are authorized to view this information. This authorization object allows you to set per controlling area which users are allowed to see the group valuation view (VALUTYP = 1).

Group Costing and Consolidation The process of eliminating intercompany profit markups is one of the main steps in the consolidation process, whether you consolidate in SAP BusinessObjects Planning and Consolidation, SAP BusinessObjects Financial Consolidation, SAP Strategic Enterprise Management – Business Consolidation System (SEM-BCS), SAP Business Consolidation (EC-CS), or an external tool. During consolidation, the legal view for each unit is extracted to the consolidation system and then the inter-unit eliminations are performed based on rules within the consolidation system. This approach differs from group costing in two important aspects. The first is that in group costing, the group view (without the markup) is transferred to the other unit as the intercompany billing document is posted. It is thus immediately available to corporate controllers with the appropriate authorization,

rather than being calculated during the consolidation process at period close.

The second is that a group costing solution is not necessarily global. (A consolidation solution, by its very nature, must provide a consolidated view of all units, regardless of their business.) You might design your system to have separate controlling areas for strategic business units that do not have significant goods movements with other units belonging to the same organization. In short, while group costing gives you more transparency into your intercompany processes, it does not remove the need for a consolidation solution, since there are legal requirements for your consolidated financial statements over and above the elimination of intercompany profit. Janet Salmon joined SAP AG in 1992. After six months of training on R/2, she began work as a translator, becoming a technical writer for the Product Costing area in 1993. As English speakers with a grasp of German costing methodologies were rare in the early 1990s, she began to hold classes and became a product manager for the Product Costing area in 1996, helping numerous international organizations set up Product Costing. More recently, she has worked on CO content for SAP NetWeaver Business Warehouse, Financial Analytics, and role-based portals. She is currently the product owner for management accounting in SAP ERP. She lives in Speyer, Germany, with her husband and two children. You may contact her via email at [email protected].