What is a NetSuite Intercompany Transfer Order?
In a global business environment, managing inventory across various subsidiaries efficiently is crucial. NetSuite’s Intercompany Transfer Order (ICTO) is a feature that facilitates seamless inventory transfers between subsidiaries within the same corporate group. This functionality ensures accurate tracking, accounting, and reporting of inventory movements, making it an essential tool for multi-subsidiary organizations.
Why Use Intercompany Transfer Orders?
1. Efficient Inventory Management
ICTOs help balance inventory levels across subsidiaries, minimizing the risk of overstocking or stockouts. This optimization leads to better resource utilization and improved supply chain efficiency.
2. Accurate Financial Reporting
ICTOs ensure that inventory transfers between subsidiaries are recorded accurately in the financial books of both the sending and receiving entities. This accuracy is vital for maintaining precise financial statements and compliance with accounting standards.
3. Streamlined Processes
Automating the intercompany transfer process reduces manual effort, minimizes errors, and enhances the speed and accuracy of inventory movements. This leads to increased operational efficiency and cost savings.
Use Item Cost as Transfer Cost Preference
The “Use Item Cost as Transfer Cost” preference in NetSuite is a critical feature that affects how transfer prices are calculated for ICTOs. When enabled, this preference ensures that the transfer cost is based on the item’s cost, maintaining consistency in inventory valuation across subsidiaries.
How to Enable and Use This Preference
- Enable the Feature:
- Navigate to Setup > Accounting > Preferences > Accounting Preferences.
- In the Order Management > Transfer Orders section, check the box for Use Item Cost as Transfer Cost.
- Save your changes.
- Create an Intercompany Transfer Order:
- Go to Transactions > Sales > Enter Intercompany Transfer Order.
- Select the originating subsidiary and the destination subsidiary.
- Add the items to be transferred and specify the quantities.
- NetSuite will automatically use the item’s cost as the transfer price if the preference is enabled.
- Override at Transaction Level:
- On the Transfer Order document, there is an option to turn the “Use Item Cost as Transfer Cost” preference on or off for each transaction. This allows users to override the global setting in Accounting Preferences for specific transfers.
Impact of Using a Transfer Price
With “Use Item Cost as Transfer Cost” Enabled
When this preference is enabled, the transfer cost is based on the item’s cost. This ensures consistent inventory valuation across subsidiaries. For example, if a product costs $50 in the originating subsidiary, the same cost will be used in the receiving subsidiary.
General Ledger (GL) Impact:
- Originating Subsidiary:
- Inventory Decrease (Credit): $50
- Intercompany Receivable (Debit): $50
- Receiving Subsidiary:
- Inventory Increase (Debit): $50
- Intercompany Payable (Credit): $50
With “Use Item Cost as Transfer Cost” Disabled
When this preference is disabled, the transfer price can be set manually, potentially differing from the item’s cost. For example, if a product costs $50 but is transferred at $60, the transfer price reflects $60 instead of the item’s cost.
General Ledger (GL) Impact:
- Originating Subsidiary:
- Inventory Decrease (Credit): $50
- Intercompany Receivable (Debit): $60
- Intercompany Gain (Credit): $10 (if applicable)
- Receiving Subsidiary:
- Inventory Increase (Debit): $60
- Intercompany Payable (Credit): $60
Example Scenarios
Example 1: Balancing Inventory Levels with Preference Enabled
A company with subsidiaries in New York and California experiences a high demand for a particular product in California, leading to a stockout. The New York subsidiary has excess inventory of the same product. An ICTO is created to transfer inventory from New York to California. With the “Use Item Cost as Transfer Cost” enabled, the transfer cost recorded in both subsidiaries reflects the item’s original cost, ensuring consistent financial reporting.
Example 2: Special Transfer Pricing with Preference Disabled
Suppose the same company decides to transfer inventory from New York to California but wants to use a different transfer cost basis, such as a negotiated price or market value. By disabling the “Use Item Cost as Transfer Cost” preference on the Transfer Order document, the company can specify a custom transfer price. This allows flexibility in special cases where the default item cost may not be appropriate. For instance, transferring at $60 instead of the item cost of $50 can account for additional handling or transportation costs.
Conclusion
NetSuite’s Intercompany Transfer Order feature is a vital tool for businesses operating multiple subsidiaries, offering efficient inventory management, accurate financial reporting, and streamlined processes. The “Use Item Cost as Transfer Cost” preference enhances consistency in inventory valuation but also offers the flexibility to override it on a per-transaction basis. Understanding and leveraging these functionalities ensure optimal management of intercompany inventory transfers and maintain accurate financial records, ultimately supporting better business decisions.
About Us
We are NetSuite Solutions Providers with 30+ years of combined experience. We specialize in implementation, optimization, integration, rapid project recovery and rescue as well as custom development to meet any business need. Although every business is unique, with 40+ NetSuite clients over the last 5+ years our NetSuite Consultants have most likely seen your challenge or created a similar solution. If you would like more information on NetSuite or just have questions on your project, feel free to contact us Here.