Determination of Transfer Prices 

Use

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 define the transfer price for this material. This technique makes it possible to define 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.

Features

You define transfer prices for Profit Center Accounting using the pricing function from the Sales and Distribution (SD) application component.

You can use the following pricing strategies:

●     Cost-plus method

Costs plus a markup or markdown (quantity‑dependent, percentage or fixed amount)

●     Fixed values

Market price or profit center price in the material ledger

●     Receiver‑specific price

Different prices for different partner profit centers

●     Time‑related price

Prices with a limited period of validity, such as for seasonal price changes

You can make the price dependent on any of the following factors:

●     material

●     material type

●     valuation type

●     material group

●     plant

●     division

●     representative material

●     ABC indicator

●     controlling area

●     the sender profit center

●     the receiver profit center

●     the period and the fiscal year

●     WBS element (required with valuated inventory)

●     sales order/sales order item (required with valuated inventory)

Material 1 is produced in two plants. In plant 1, material 1 belongs to profit center 1. In plant 2 it belongs to profit center 2.
In the material ledger, the profit center inventory value for material 1 is USD 7.00.

Material 2 is produced in plant 2 and belongs to profit center 3.
In the material ledger, the profit center inventory value for material 2 is USD 30.00.

The manufacturer decides to use different transfer prices depending on the material, profit center and plant.

●      When material 1 is delivered from plant 1, the profit center inventory value should be taken from the material ledger.

Profit center 1 (in plant 1) supplies material 1 to profit center 4.

–         Profit center price in the material ledger = EUR 7.00

●      When material 1 is delivered from plant 2, a markup of 10% is to be added to this price.

Profit center 2 (in plant 2) supplies material 1 to profit center 4.

–         Profit center price in the material ledger * 10% = EUR 7.70

●      When material 2 is delivered, a fixed price should be used regardless of the profit center inventory value in the material ledger.

Profit center 3 supplies material 2 to profit center 4.

–         Fixed price = EUR 35.00

See also:

Transfer Pricing Using the Conditions Technique

Example of How a Transfer Price is Determined