You have the option to use the transfer price for intercompany accounting. Transfer price costing occurs when a sales order is created for an intransit transfer, between two internal organizations, in two different operating units. This functionality is flagged in the Transfer Pricing Option profile option.

Transfer pricing is used in calculating Profit in Inventory. The operating unit associates a price list with any operating unit. Features of this functionality include:

• Accounting distributions for internal order transfers are the same entries as an external sales order and purchase order.

• Incoming item cost for the Receiving organization is the transfer price, rather than the item cost of the Shipping organization.

• Profit in Inventory is reported at the individual company level for internal order transfers, and eliminated at time of consolidation.

• The transfer price takes priority over the transfer charge. It is recommended that transfer credit is not set up in the Shipping Network window to avoid the value calculated in new entries. For internal order transfers, freight is not charged directly.

Setup

• Define Intercompany relationships between operating units.

• In the Shipping Networks window in Oracle Inventory, add values for Intransit Inventory and Profit in Inventory accounts. These fields are located in the Other Accounts tabbed region.

• Set the profile option CST:Transfer Pricing Option to Yes.

See: Intercompany Invoicing Process,

Intercompany Invoice Pricing,

Overview of Price Lists, and

Creating a Price List.

Standard Cost Examples for Transfer Pricing

The following list accounting values for standard cost transactions.

• Cost of Goods Sold (COGS) account value is derived from the Shipping organization's inventory cost.

• Intercompany Accrual value equals the transfer price.

• Profit in Inventory value equals the transfer price, minus the Shipping organization's inventory cost.

In these examples: .

• Company 01 has an inventory cost of $102 - material cost of $100, and material overhead cost of $2.

• Company 02 has a standard cost of $108. - material cost of $105 and material overhead cost of $3.

• The transfer price is $120.

Freight On Board (FOB) Shipment Transactions

Two options are available for FOB shipment transactions in standard cost organizations:

• The incoming cost to the receiving organization is the shipping organization's inventory cost.

• The incoming cost to the receiving organization is based on the transfer price.

Receiving Inventory Valued at Sending Cost

Receiving Inventory Valued at Transfer Price

Freight on Board (FOB) Receipt Transactions

Two options are available for FOB receipt transactions when incoming cost is derived from the inventory cost:

• The incoming cost to the receiving organization is the shipping organization's inventory cost.

• The incoming cost to the receiving organization is based on the transfer price. The Purchase Price Variance value is derived from the transfer price. The Profit in Inventory account is not used.

Receiving Inventory Valued at Sending Cost

Receiving Inventory Valued at Sending Cost

Actual Cost Examples for Transfer Pricing

The following are accounting values for average, FIFO, and LIFO cost organizations using transfer pricing:

• The Cost of Goods Sold (COGS) account value is derived from the shipping organization's inventory cost.

• The Intercompany Accrual value equals the transfer price.

• The Profit in Inventory value equals the transfer price, minus the shipping organization's inventory cost.

In these examples, Company 01 has an inventory cost of $102, and Company 02 has a average cost of $108. The transfer price is $120.

Freight On Board (FOB) Shipment Transactions

Two options are available for FOB shipment transactions in actual cost organizations:

• The incoming cost to the receiving organization is the Shipping organization's inventory cost.

• The incoming cost to the receiving organization is based on the transfer price.

Receiving Inventory Valued at Sending Cost

Receiving Inventory Valued at Transfer Price

Freight on Board (FOB) Receipt Transactions

Two options are available for FOB receipt transactions when incoming cost is derived from the inventory cost:

• The incoming cost to the receiving organization is the shipping organization's inventory cost.

• The incoming cost to the receiving organization is based on the transfer price. The Profit in Inventory account is not used.

Receiving Inventory Valued at Sending Cost

Receiving Inventory Valued at Transfer Price

Period Average Costing (PAC) Examples for Transfer Pricing

The following describes transfer pricing support in PAC and includes shipping networks and intransit accounting concepts. Similar to perpetual costing, the application revalues the intransit quantities as part of on-hand inventory for the owning organization. For example, in the case of FOB shipment, the receiving cost group takes ownership of the goods at the time of shipment (goods go into the receiving CG's inventory), and re-averages its inventory with the new costed quantity. The receipt transaction is a cost-derived transaction and serves only as an accounting-only transaction. Similarly, for FOB receipts, the sending organization owns the goods in transit until the receipt is performed, and includes intransit balances when revaluing on-hand inventory before the receipt takes place.

Transfer Price

For setting up and using a transfer price to cost intercompany transactions, the transfer pricing functionality for perpetual costing methods is extended to PAC.

There are two limitations to transfer pricing with internal sales orders:

1. Transfer pricing is supported across operating units only. Within the same operating unit, you must run the transfer as an inter-organizational transfer.

2. Transfer pricing works with intransit transfers only, not with direct transfers.

For an internal sales order transaction with:

INV: Intercompany Invoicing for Internal Orders = "Yes" and CST: Transfer Pricing Option = "Yes, Price as Incoming Cost", consider the following scenario:

• PAC cost of Item in sending org = $110

• PAC Cost in Receiving Org = $80

• Transfer Price between the Orgs = $120

• Quantity transferred = 1 unit

• Perpetual Item Cost of shipment transaction in sending org = $100

For FOB - Shipment transfers with CST:Transfer Pricing Option = Yes, Price As Incoming Cost:

The item cost in the Receiving Org is re-averaged based on the transfer price, when the item is brought into the receiving cost group's inventory (intransit line type).

For FOB - Receipt transfers with CST:Transfer Pricing Option = Yes, Price As Incoming Cost:

For FOB - Shipment transfers with CST:Transfer Pricing Option = Yes, Price Not As Incoming Cost:

For FOB - Receipt transfers with CST:Transfer Pricing Option = Yes, Price Not As Incoming Cost: