Blog Series: SAP S/4 HANA Cloud Public Edition – 02 TM Freight Accounting and Material Valuation

Introduction:

Software-as-a-Service (SaaS) or Public Cloud Edition of SAP S/4 HANA, has high standardization and less flexibility to configure/modify. The common perception is that S/4 HANA Cloud Public Edition does not have some functionalities catering to complex business processes. However, more features are added by SAP regularly. As of now, every year there are 2 major releases in February and August. Smaller fixes are released during these major releases. Systems are upgraded automatically during this release cycle. Hence, it is important to keep track of the available functionalities in each release and frequently monitor the roadmap, so that companies can evaluate the product's suitability to their business requirements. In this blog, a relatively complex freight accounting requirement is addressed to showcase the breadth and depth of S/4 HANA Public Cloud Edition.

Managing cash flow and revenue in businesses, especially ones reliant on vast supply chains, becomes even more intricate when freight costs and transportation expenses come into play. From an accounting perspective freight costs are generally classified as Freight-in and Freight-Out costs. [1,2]

• Freight-In Costs: These are the freight costs associated with the inbound process to transport materials/goods from vendors to the plant/warehouse. Such costs are capitalized, meaning they are added to the value of the inventory. When the inventory is sold, these costs are then recorded as part of the cost of goods sold (COGS), affecting the gross profit
• Freight-Out Costs: These are the freight costs associated with the outbound process to transport materials/goods from the plant/warehouse to the customers. These costs are typically considered operating expenses and are taken directly against revenues in the period in which the sale occurs. They reduce the overall operating income of a business.

Distinguishing between these two types of freight costs is critical as their financial treatment differs significantly. Moreover, when there is consolidation of orders/products in shipments (including consolidation of inbound and outbound moves), distributed freight cost across orders/products is required for accounting. Properly categorizing & accounting for these costs ensures accurate financial statements and helps businesses to make informed operational & strategic decisions.

A good ERP solution should not only be able to segregate these freight costs & capture them in specific G/L accounts but also post these distributed freight costs to respective cost objects so that there is end-to-end visibility. This is especially critical when the freight cost is relatively high compared to the product cost and there is a high variation of transportation costs (because of fuel price fluctuations and unplanned accessorial charges). Additionally, accounting standards (IFRS or US GAAP) have various guidelines for accounting the freight costs, and this is a hot topic during the audit process. [3,4,5]

Business Requirement: Freight-In accounting

For many shippers/manufacturers, a significant number of raw materials and semi-finished goods are required for production. They are procured from suppliers and are transported to the warehouse/plants. Increasingly the shippers would like to manage and pay for the transportation for various reasons. There is a common business requirement to account for these freight costs and update material accounts. These freight-in costs will in turn impact the inventory cost reporting which is audited. If the material is priced at the moving average, then the average cost of the material needs to be updated as soon as the freight accruals are posted. Additionally, if the material is priced at the standard price, then freight costs need to be updated in a separate price difference account which will be used during month-end closing (instead of updating the average cost of the material immediately).? If there is a consolidation of materials in shipment, then the distributed cost needs to be posted. Finally, if the carrier invoice received from the carrier has a variance, even this variance needs to be accounted for and the cost to be posted to respective material accounts using the same distribution logic used for freight accruals. ?

In short, in the above example, after receiving the TG12 (200 PC) and RM15 (20,000 PC) at plant 1710, the inventory value of TG12 (with Price control as Moving Average) should be 79274.74 USD (76274.74+3000) with unit price as 13.67 USD. The inventory value of RM15 (with Price control as Standard Price) should be 20,102 USD (100,510*0.2) with an additional posting of 6000 USD ([0.5-0.2] *20000) to the price difference account. Once the freight accruals are posted for 2200 USD, the distributed cost (for example based on ratio gross weight) of 2000 USD for TG12 should be posted to the inventory account and the total inventory value should be 81,274.74 USD.? For RM15, 200 USD should be posted to the price difference account and the unit price and inventory value is unchanged. Please note these amounts in the price difference account will be used FI team during month-end closing and accounted for appropriately.

Additionally, if the freight invoice is received (from carrier 17386001) for 2420 USD (additional 220 USD), then distributed variance (based on the ratio gross weight in the FO) of 200 USD and 20 USD should be posted to the TG12 inventory account and RM15 price difference account respectively.

Solution:

SAP S/4 HANA Cloud Public Edition is a tightly integrated system, and all the basic requirements of freight accounting are a standard out-of-the-box solution. This is one of the main advantages of having all the processes in SAP. One of the common ways to handle freight costs for inbound movement is to manage it via MM pricing conditions and assign the freight vendor against the condition type. However, this has limitations related to consolidated freight movement and cost distribution scenarios. A sophisticated way to manage freight planning and settlement with comprehensive accounting is to use the Transportation Management area in S/4 HANA Cloud Public Editon. It supports the freight accounting for both Freight-In and Freight-Out scenarios along with cost distribution when there is consolidation of orders & products and inbound & outbound processes. ?The following scope items detail the various processes involved in the end-to-end inbound process from procurement to finance (Procure-To-Pay including transportation) which caters to the above freight-in scenario.

• Procurement of Services (22Z)
• Direct Procurement with Inbound Delivery (2TX)
• Manual Transportation Planning (6W2)
• Freight Settlement (6W4)

Refer to https://me.sap.com/processnavigator for more details related to process flow, set-up & test scripts. A simplified end-to-end process flow is shown below:

Demo:

Please note that, since the blog is focusing on freight accounting and material valuation, only the Journal entries as part of inbound delivery and freight cost allocation documents are detailed in the demo. Before the procurement of 200 PC of TG12 and 20,000 PC of RM15, the total inventory value of products at plant 1710 are 76,274.74 USD and 16,102 USD respectively.

Purchase order 4500000048 is created for 200 PC of TG12 and 20,000 PC of RM15. This automatically created Freight Unit as the Purchasing Group (007) is TM relevant. FUs are planned in the Transportation Cockpit to create Road Freight Order 6600000702. Carrier 17386001 is assigned, and a freight charge of 2200 USD is calculated (based on Freight Agreement master data). Once the FO is confirmed, the inbound deliveries are created from TM. (We usually trigger delivery proposals after confirmation from the material vendor and freight carrier).

Once the products are received at the plant and the Post Goods Receipt process is completed, material documents (5000000126 & 5000000127) get generated, and the accounting documents or Journal Entries (5000000019 & 5000000020) are posted. This updates the material valuation and price difference accounts which is a standard Procure-to-Pay and FI integration process.

After posting the distributed freight cost from TM (freight accruals), a Freight Cost Allocation Document (9000000023) is created, and a Journal Entry/Accounting Document (100000028) is generated. This updated the TG12 inventory value and increased the unit price, whereas for RM15 only the price difference account is updated. The unit price and inventory value remained the same.

The carrier usually sends the invoice in a week or towards the end of the month. Create Supplier Invoice App is used to receive the invoice (5105600116) and the invoice amount of 2420 USD is 220 USD higher than the freight accruals (which is estimated in FO based on carrier contracts). Additional Freight Cost Allocation Document (9000000024) is created automatically, and the Journal entry (100000029) is posted. The cost is distributed based on the same ratio as that in the initial freight allocation document.

As mentioned, the Accounts Payable-related Journal Entries are not detailed in this demo as the blog focuses only on the freight accounting and related material valuation impact. Service PO (5000000009) and Service Entry Sheet (18) are created when we post the freight accruals from TM. Please note that in S/4 HANA Cloud Public Edition, TM Freight Settlement is integrated with the Lean Service Management area and NOT External Services Management (on-premise/private edition). A freight clearing account is used to post Journal Entries across Freight Cost Allocation Documents and Material Documents (5000000128) out of Service PO/SES. When the vendor (17300002) sends an invoice with the same amount as that in the PO (4500000048), it is received using the Create Supplier Invoice App (5105600117) and Journal Entry (5100000009) is posted(If there is a variance in the amount of material PO, it will affect the material valuation). This is a standard Procure to Pay – FI integration process.? The T-Account view after all the Journal entries are posted (before the payment process) is shared below for reference.

The freight accounting process will be a little more complex for stock transport orders and intercompany scenarios. Also, the process is different for outbound scenarios where we account for Freight-Out costs. All these areas can be individual topics for future blogs.

Business Benefits: [1]

• Financial Clarity: Precise records ensure clear visibility into cash flow, revenue, and operating expenses. Better freight accounting can help businesses to accurately forecast budgets, manage finances, and identify areas for potential savings.
• Compliance with Accounting Principles: Freight costs, like shipping charges and invoices, must be recorded in compliance with standard accounting principles. Accurate record-keeping ensures that businesses remain compliant, avoiding potential financial discrepancies or audit issues.
• Inventory Management: The cost of shipping goods, whether it's an inventory purchase or sale, directly impacts inventory costs. By maintaining clear records, businesses can determine the true cost of their inventory, impacting pricing, sales strategies, and profitability calculations.
• Informed Decision Making: With accurate records, businesses can analyze data trends, such as spikes in transportation costs or recurrent overcharges. This analysis can influence negotiations with carriers, the selection of shipping methods, or changes in supply chain strategies.
• Operational Efficiency: A systematic record-keeping process reduces the time and effort spent by accounting departments. A clear system will allow for instant categorization and recording of various freight charges.
• Strategic Logistics Planning: Accurate data paves the way for strategic decision-making in logistics. Knowing exact costs and historical data can lead to better negotiations with carriers, route optimizations, and even decisions about warehousing.
• Building Trust with Stakeholders: Transparency is crucial for maintaining trust. When stakeholders, be it investors, partners, or even employees, know that a business has meticulous records, especially regarding finances, it fosters trust and credibility.

Conclusion:

Freight accounting is a niche and complex business requirement, but it is critical for audit and compliance. SAP S/4 HANA Cloud Public Edition caters to most of the business requirements in this area and integration of TM freight cost with inventory/material valuation is an out-of-the-box solution. It also caters to the carrier invoice variance scenarios thereby demonstrating the breadth and depth of the solution. This blog focuses only on one of the specific scenarios in the Freight-In account. However, SAP supports multiple other freight accounting scenarios in the S/4 HANA Cloud Public Edition. Integration is one of the key differentiator for SAP solutions and Freight Accounting scenario with TM integration clearly shows the robustness and cohesion of end-to-end solution across multiple areas such as Finance, Sourcing & Procurement and Supply Chain & Logistics.

SAP may release more features in this area in the future. Since the S/4 HANA public cloud edition is upgraded automatically every year, customers will be able to explore, evaluate, and implement these new features as per the business requirements. Hence potential SAP customers must evaluate whether SAP S/4 HANA Cloud Public Edition with its current functionality and future roadmap is suitable for their business process and monitor the evolution of the product.

References:

1. https://www.lojistic.com/blog/when-should-freight-costs-be-recorded-in-accounting?
2. https://www.inboundlogistics.com/articles/freight-in-vs-freight-out/?
3. https://kpmg.com/us/en/articles/2023/inventory-accounting.html?
4. https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2021/issued/part-a/ias-2-in...? ?(Para 10)
5. https://www.fasb.org/page/ShowPdf?path=ARB%2043.pdf&title=ARB%2043 Ch.4 Statement 3

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