A global manufacturing enterprise has a very complex supply chain value flow. Raw materials used in manufacturing goods can be sourced from an external supplier or from internal business units or subsidiaries. Different steps in the manufacturing of a finished product can be executed across various logistic plant locations, which in financial and managerial accounting terms can be across various legal entities, business units, or profit centers. The products in the manufacturing value chain (e.g., raw materials, semi-finished goods, and finished goods) can move between these organizational units, thus creating scenarios for intercompany and intracompany stock transfers. To adhere to international accounting principles and guidelines, such transfer of goods and services across borders or entities should happen at the arm’s length price, which in the SAP system is called the transfer price. This principle requires organizations to clearly account for internal revenue and cost of sales, and differentiate it from end customer external sales. This way, you can easily know internal intercompany profits and eliminate them (net them out of internal profits) during consolidation. I’ll explain how to implement the material ledger with parallel valuation so you can adhere to this principle and monitor your manufacturing process in your SAP system. In this scenario, the material ledger activation with multiple currencies or valuations enables the capturing of quantity and value information in each of the logistics transactions in the material value flow across different valuation views (e.g., legal, group, and profit center) in real time. Based on this, the enterprise can manage transfer pricing, account for internal revenues and profitability of a specific business unit or profit center, and in parallel manage financial information as required for group consolidation and legal reporting. If the material ledger is not activated, then the SAP system tracks the value flow of material only in legal valuation. The accounting view of the material master holds the inventory value in one default currency (the company code currency) and the default valuation used by the SAP system is the legal valuation. In this case, you need to make necessary valuation entries for internal management reporting at the end of the period by means of financial adjustments. As a first step to understanding the design of the material ledger with parallel valuation, you need to understand and evaluate in detail four key design questions:

1. What does it mean to manage inventory values in parallel currency and parallel valuation and how does it affect other FI settings?
2. What combination of currency valuation settings in the material ledger should an organization choose to meet its inventory valuation and managerial reporting needs and how does this align with the settings done in FI, CO, and profit center accounting (PCA)?
3. If an organization wants to implement the material ledger with parallel valuation, what are the key factors that it needs to consider?
4. If an organization chooses not to implement the material ledger and manage inventory in only one valuation or currency, how can it still meet objectives of viewing group cost and legal cost based on the transfer price?

This article provides practical insights and guiding principles for organizations to understand these questions in detail. Note that many of the concepts I go over are complex and you should not undertake them lightly. There are many points to consider moving forward. For more about that, see the sidebar “Some Notes of Caution.” In the next sections, I’ll explain the meaning and significance of some key terms used with regard to parallel valuation.

Group vs. Legal Standard Cost

Let’s start with a practical illustration to understand the computation of the group cost and legal cost (Figure 1).   In this example, the company is manufacturing part number 8713 in house in Plant A. This part is integrated as a part to manufacture another finished good, number 8715 in Plant B. In Plant A, part 8713 has the product cost based on its quantity structure (bill of material [BOM] and routing). In the example, part 8713 has a total cost of US$25 in Plant A. Subsequently, this part is transferred across the legal entity to Plant B using a stock transfer process. The receiving plant posts goods receipt with the same material number as the sender. Based on the group cost policy, the cost of part 8713 remains unchanged and has the same cost as it had in the original sending plant (US$25). For the legal cost (valuation in the receiving plant based on the transfer price), part 8713 is valuated in Plant B based on the transfer price of US$35. To implement group standard cost, there is one key organizational requirement — a centralized material master database. It is mandatory that the sender and receiver plants use the same material number. Otherwise, the integrated system is unable to find the relationship for the group BOM.

Legal, Group, and Profit Center Valuation

After understanding the concept of group standard cost, it is important to understand what three valuation views in the SAP system mean:

• Legal valuation
• Group valuation
• Profit center valuation

Legal Valuation

This valuation view is mandatory for any implementation as it represents the enterprise’s legal reporting framework. The legal valuation approach must always be reported in company code currency. Financial statements are generated at the individual legal entity or company code level based on the legal valuation view. Consider an example of a global enterprise that operates out of four different countries: the US, Mexico, Germany, and the UK. In each country, the enterprise is registered under a company name and the company has its own legal entity or company code with the respective company code currencies of USD, MXN, EUR, and GBP. It is mandatory for each company to generate financial statements and submit to local legal authorities. The company would define a legal valuation 0 to record all financial transactions and ledger balances in the respective company code currency.

Group Valuation

This valuation view is from a consolidation perspective and is completely optional to implement. If an enterprise wants to consolidate its financials across all legal entities, it reports all business transactions in this separate valuation view based on group cost. In this case, when there is a value flow of material across business units, the transaction occurs at group cost with no additional mark-up percentages. In this way, there are no intercompany profits. Technically, in group valuation, you can decide whether to record in company code currency or group currency. However, the common practice is to have a separate group currency defined, especially when each company code has its own currency and there is an N:1 relationship between the company code and controlling area. In the above example, if there are intercompany transactions between legal entities and if the enterprise wants to consolidate its books in USD, then it defines the group valuation view and currency type as group currency.

Profit Center Valuation

In this valuation view, transactions are represented from a profit center viewpoint for internal management reporting. The profit center is a management-oriented organizational unit used for internal controlling purposes. It is treated as a company within the company, and profit or loss is evaluated on an individual basis. Conventional profit center accounting (or in the SAP General Ledger, profit center scenario, which determines what fields in the ledger are updated when it receives a posting from various application components) can help report financials (both profit and loss and balance sheet) at the profit center level. You need to have profit center valuation only when you want to allocate the transfer price for any internal goods movement across profit centers within an organization. Otherwise, it is optional to implement this parallel valuation view in the SAP system. In a typical stock transfer process across profit centers, purchasing and sales transactions are booked using a transfer price. Additional postings in PCA are generated for internal revenues, internal costs, and changes in stock. Internal margins are eliminated during the consolidation of books from a legal perspective. However, from a management reporting perspective, each profit center or business unit can analyze its profitability individually. Let’s extend the above example. Say you want to implement the profit center valuation view for when you need to implement transfer pricing for stock transfers, and use the transfer price as the valuation of the material in the receiving plant for accurate management reporting. Similar to group valuation, even in this view you can decide whether to record the profit center approach in the company code currency or group currency.

Currency Settings Overview

In this section, I’ll explain currency settings in FI, CO, and the material ledger, and see how these are related to each other.

Currency Types in FI

As mentioned earlier, in FI the legal valuation approach in company code currency is mandatory. Other parallel currencies in FI are defined at a company code level in transaction OB22. The first local currency is defined automatically with the currency type as 10 and the valuation as 0 (i.e., the legal valuation) (Figure 2).   Definition of other parallel currencies in FI is optional and the type of currency or valuation to be defined depends on parallel valuation settings in CO. Based on settings in the currency and valuation profile, you can set up customizing of the additional local currency in FI for the respective company codes in transaction OB22. If multiple valuations are activated only in the classic general ledger with PCA, having settings of parallel currencies in FI is optional. However, in the SAP General Ledger (formerly known as the new G/L), the currency and valuation in transaction OB22 should be the same as the valuation approach from the currency and valuation profile so that there are no inconsistencies in currency translation from local currency to group currency across different application components. Even in the classic general ledger, setting up parallel currencies in FI in line with PCA has an advantage. FI does the currency conversion for the multiple currencies and provides PCA directly with translated values, thus eliminating any calculation in PCA. For example, if you’re setting up two additional valuation views (e.g., group valuation with group currency and profit center valuation with group currency) in the currency and valuation profile, you need to set up parallel currencies in FI as:

• Second local currency: Currency type 30, group valuation 1
• Third local currency: Currency type 30, profit center valuation 2

Any change in settings of additional local currencies or addition of new currency types or valuations in FI after go-live is not a simple conversion. Rather, it requires sophisticated conversion tools and has to be managed as a special project. It is critical for organizations to clearly set these global settings at the time of template definition to avoid potential clearing and consolidation issues.

Currency Types in Controlling

The controlling area currency depends on the assignment of company codes in CO and the currency of each of the company code. I’ll make recommendations for which type to use in different situations. You can perform this assignment by using transaction OKKP (Figure 3). Define various settings for the controlling area, including the Fiscal Year Variant, Chart of Accts (chart of accounts), and CCtr Std. Hierarchy (cost center hierarchy). You can also define CO components that need to be activated in the controlling area by going to the Activate components folder in the dialog structure. In the Currency Setting fields, use the values appropriate for your example.   If one or more company codes are assigned to the same controlling area and all company codes have same currency, then you can set the controlling area currency to 10. When you assign the controlling area currency as 10, the enterprise should realize that there is a potential scalability issue if it eventually expands to other countries or geographies resulting in the new company code with different currencies. In this case, you need to define another controlling area separately for these company codes, thus losing an enterprise-wide holistic view of management controlling or you will need to carry out a complex conversion of currency type using SAP or third-party tools. When there is cross company code controlling and currencies of company code differ, then you should set the currency type 30 (group currency) as the controlling area currency. You can also set the controlling area currency to currency type 20 and can have a user-selected currency that is different from company code currency or group currency. You would do this when the business wants to oversee its management reporting in a different currency from the company code currency or group currency. For example, an enterprise operating out of multiple places does financial consolidation in USD, but it wants to manage internal reporting and controlling in EUR. However, if you want to activate parallel valuations, you need to define the currency type in CO as 10 or 30. Other currency types are not supported in this case and you have to do a currency changeover in CO. This conversion is complex and requires sophisticated conversion tools either from SAP or third parties. Currency conversion is also necessary when the controlling area currency is 20, but user-selected currency corresponds to group currency (e.g., 20 is in USD, 30 is in USD) or company code currency (e.g., 20 is in EUR, company code currency 10 is in EUR). In this case, to activate parallel valuation you need to convert the controlling area currency to 30 or 10 depending on the scenario.

Currency Types in the Material Ledger

The material ledger type defines what currencies are used in the material ledger and then the material ledger type is assigned to the valuation area in transaction OMX2. SAP provides a default material type, 0000, that uses currency types from FI and CO as currencies in the material ledger. If there is no parallel valuation (only legal valuation), then parallel currencies in FI along with the currency defined in CO are defined as material ledger currencies. For example, if in FI you manage two currencies, 10 (company code currency) and 30 (group currency in legal valuation), and the controlling area currency is 30, then the material ledger will have 10 and 30 as two parallel currencies in legal valuation. If you need to adopt one or more parallel valuation approaches in the material ledger, then you need to define which valuation approaches are to be recorded with which currency in the currency and valuation profile. You can do this in transaction 8KEM or by following IMG menu path Controlling > General Controlling > Multiple Valuation Approaches/Transfer Prices > Basic Settings > Maintain Currency and Valuation Profile (Figure 4). Then assign the controlling area in transaction 8KEQ or by following IMG menu path Controlling > General Controlling > Multiple Valuation Approaches/Transfer Prices > Assign Currency and Valuation Profile to Controlling Area.   Figure 4 illustrates a case of defining three different parallel valuations in the currency and valuation profile. In this configuration, legal valuation with currency type 10 comes up automatically as the legal valuation in company code currency is mandatory. You must manually enter other currency and valuation view combinations. Parallel valuation approaches defined in currency and valuation profile are also used in the material ledger as parallel currencies and valuations.

Currency and Valuation Settings in PCA

In classic PCA, as opposed to SAP General Ledger with profit center scenario, you use transaction 0KE5 to define what currency and valuation is updated in the controlling area settings. In the currency and valuation profile definition, if profit center valuation is defined as one of the valuation views, then it is mandatory to set profit center valuation in PCA. You also need to set the local currency value in profit center valuation in transaction 0KE5 (Figure 5). Alternatively, follow IMG menu path Controlling > Profit center accounting > Controlling area settings > Basic Settings. Group currency (currency type 30) is set as the profit center local currency.  

Currency and Valuation Settings

As a quick guide to currency types and valuations, consider the following currency and valuation combinations:

• Legal valuation company code currency (10)
• PCA valuation company code currency (12)
• Group valuation company code currency (11)
• Legal valuation group currency (30)
• PCA valuation group currency (32)
• Group valuation group currency (31)

If you want to implement multiple valuations, the recommended currency settings in FI, CO, the material ledger, and PCA (if the classic PCA is active) are based on the following scenarios:

• Currency settings with legal valuation and profit center valuation in group currency
  • FI: 10 and 32
  • CO: 30 (group currency)
  • Currency and valuation profile: 10 and 32
  • Material ledger: 10 and 32
  • PCA: Profit center local currency as 30 and profit center valuation
• Currency settings with legal valuation and group valuation in group currency
  • FI: 10 and 31
  • CO: 30
  • Currency and valuation profile: 10 and 31
  • Material ledger: 10 and 31
  • PCA: Profit center local currency as 30 and group valuation
• Currency settings with legal valuation, group valuation, and profit center valuation in group currency
  • FI: 10, 31, and 32
  • CO: 30 (group currency)
  • Currency and valuation profile: 10, 31, and 32
  • Material ledger: 10, 31, and 32
  • PCA: Profit center local currency as 30 and profit center valuation
• Parallel valuation with PCA and controlling area currency the same as company code currency (this is an exceptional scenario and is generally not recommended — if one or more company codes are assigned to the same controlling area and all company codes have the same currency)
  • FI: 10 and 12
  • CO: 10 (company code currency)
  • Currency and valuation profile: 10 and 12
  • Material ledger: 10 and 12
  • PCA: Profit center local currency as 20 (controlling area currency) and profit center valuation. In this case, profit center local currency and company code currency is the same, thus eliminating any need of currency translation in PCA.

Depending on the scenario relevant for the enterprise, it is important to choose the right settings in the system at the time of template definition. In a production system, if you wish to implement multiple or parallel valuations in the material ledger subsequently, evaluate currency settings across FI, CO, the material ledger, and PCA (if the classic general ledger is implemented).

Subsequent Activations of Parallel Valuations in the Material Ledger

I have already explained in detail the settings required and the associated complexity of making subsequent changes of currency settings in FI and CO. In this section, I’ll explain the effects in the material ledger when subsequent activations occur.

• The material ledger is not active for a plant: There are no conversion effects. The regular process of activating the material ledger by doing all relevant configuration and the execution of transaction CKMLSTART needs to be done.
• The material ledger is active for a plant, but only legal valuation in local currency is active (or multiple currencies and valuations exist but need change): In this scenario, subsequent activation or change in the material ledger becomes complex. The material ledger needs to be deactivated before carrying out the relevant changes in customizing. Then you can activate the material ledger and the system is now set up based on the new customizing settings. However, in this process historical transaction data becomes irrelevant and is deleted from material ledger tables during deactivation. It is not possible to restore historical data without the involvement of SAP or a consulting company with a specialized toolset.

In the next section, I’ll explain key factors to consider when implementing the material ledger with parallel valuation.

Key Factors to Consider Before Implementing Parallel Valuation

The decision to implement parallel valuation is based on enterprise-specific functional requirements in the area of intercompany and intracompany reporting, internal management reporting based on transfer pricing, and consolidation requirements, among other considerations. In addition, based on my experience in various projects, I suggest some additional factors that project managers and implementation consultants should critically evaluate before deciding on the implementation of the material ledger with parallel valuations. These factors, if overlooked, can lead to major issues in production, and affect the accuracy and effectiveness of the costing solution.

Global View of Costing Implementation

I discussed earlier in this article the relationships that exist among FI, CO, and the material ledger while implementing parallel valuation. These dependencies have become even more challenging with the SAP General Ledger because there are no longer separate ledgers for FI, CO, and PCA. So it is necessary not to view product costing or cost controlling implementations as standalone, but to have a global view of enterprise settings as required to activate different functionalities. Business process owners in FI should agree and have a global view or perspective on how business requirements in CO can affect settings in the SAP General Ledger, asset accounting, and other modules. Many times, this global view is not recognized when the template is defined, and you end up in a situation in which settings in production do not enable the activation of parallel valuation. You should be aware of two key points during the implementation of parallel valuation in SAP General Ledger:

• Align the currency and valuations between FI and the material ledger: In SAP General Ledger, the system imposes restrictions that currency and valuation views as defined in the currency and valuation profile in CO should match the parallel currencies in FI.
• Do not mix up classic PCA and SAP General Ledger: In SAP General Ledger, SAP has integrated the classic general ledger and PCA into one application. When implementing SAP General Ledger accounting, if the profit center scenario (FIN_PCA — profit center update) is activated with document splitting, you should not have parallel activation of PCA in CO. Based on my experience, some clients mix settings of classic PCA with SAP General Ledger, resulting in issues for transfer price postings. Transfer price postings are either not generated in the FI document in the respective valuation or currency type, or postings incorrectly happen in the PCA ledger (ledger 8A) instead of posting in SAP General Ledger (ledger 0L).

Conversion Requirements for the Subsequent Activation of Parallel Valuation

As mentioned in an earlier section, if the material ledger is not active in the system, subsequently activating the material ledger with parallel valuation does not require any conversions in production. However, if the material ledger is active and productive, then doing subsequent activation of the material ledger with parallel valuation is complex. In certain cases, conversion of historical data is necessary, which may necessitate involvement from SAP or consulting firms with specialized tools. So, your company should perform a complete analysis of it and recognize the effort and cost involved.

Quality of Data from Other Modules

CO depends extensively on data from other transactional modules such as FI, materials management, inventory management, and production planning. As the degree of solution complexity increases, requirements to have integrated quality data become important. As a result, implementation of the material ledger with parallel valuation (especially when actual costing is also active) imposes a high degree of rigidity, and any issue in data quality can lead to huge variations in actual cost and unexplained price discrepancies across different valuation views.

Organizational Change Management

Implementation of parallel valuation requires a high degree of involvement and complete understanding of integrated design by the business. Organizational change management plays a vital role in determining whether solution implementation will be successful.