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    Transfer Pricing

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    sachinbscagri
    Transfer prices are amounts charged internally for goods and services transferred between divisions of the same organization. They are used to evaluate division performance and motivate managers. Multinational companies also use transfer pricing to minimize taxes. Common transfer pricing methods include cost-based pricing using variable, full, or standard costs, market-based pricing if an external market exists, and negotiated prices. The optimal method depends on the situation and goals of motivating managers and making economically sound decisions for the organization.

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    Transfer Pricing

    Uploaded by

    sachinbscagri
    897 views20 pages
    Transfer prices are amounts charged internally for goods and services transferred between divisions of the same organization. They are used to evaluate division performance and motivate managers. Multinational companies also use transfer pricing to minimize taxes. Common transfer pricing methods include cost-based pricing using variable, full, or standard costs, market-based pricing if an external market exists, and negotiated prices. The optimal method depends on the situation and goals of motivating managers and making economically sound decisions for the organization.

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    Transfer-Pricing

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    Transfer prices are amounts charged internally for goods and services transferred between divisions of the same organization. They are used to evaluate division performance and motivate managers. Multinational companies also use transfer pricing to minimize taxes. Common transfer pricing methods include cost-based pricing using variable, full, or standard costs, market-based pricing if an external market exists, and negotiated prices. The optimal method depends on the situation and goals of motivating managers and making economically sound decisions for the organization.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    897 views20 pages

    Transfer Pricing

    Uploaded by

    sachinbscagri
    Transfer prices are amounts charged internally for goods and services transferred between divisions of the same organization. They are used to evaluate division performance and motivate managers. Multinational companies also use transfer pricing to minimize taxes. Common transfer pricing methods include cost-based pricing using variable, full, or standard costs, market-based pricing if an external market exists, and negotiated prices. The optimal method depends on the situation and goals of motivating managers and making economically sound decisions for the organization.

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    Transfer pricing

    Transfer Prices
     Transfer prices are the amounts (notional
    value) charged by one segment of an
    organization for a product or service that it
    supplies to another segment of the same
    organization.
    Purpose of Transfer Pricing
    -Two provide information to determine
    -Optimum trade off between the cost and reven
    – to communicate data that will lead to
    goal-congruent decisions

    – to evaluate segment performance and


    thus motivate managers toward
    goal-congruent decisions
    Purpose of Transfer Pricing

    Multinational companies use transfer


    pricing to minimize their worldwide
    taxes, duties, and tariffs.
    Advantages and
    disadvantages of basing
    transfer prices on total
    costs, variable costs,
    and market prices.
    Transfers at Cost
     About half of the major companies in the
    world transfer items at cost.
    Transfers at Cost

    What are some examples?


    Full cost plus a profit markup
    Variable costs
    Standard costs
    Actual costs
    Full cost
    Variable Cost Method
    This method is preferred
    because the pricing
    decisions are based on
    CVP analysis that is
    beneficial to the firm as
    a whole.
    Full cost Method

    Total Cost includes both Product and period


    Cost .

    Disadvantage

    Selling Division cannot realise any profits that


    proves disincentive and reflects negatively on
    performance.
    Full Cost Plus Profit
    •Selling Division prefer
    this method

    •Buying Division objects


    to this method

    •Problems of Rate of
    Profit
    Standard Cost
     Does not encourage the Selling Division to
    control Costs
     Transfer prices will include cost of
    inefficiency

     Solution to the Problem


     Buying Division to be involved in fixing
    standard Cost
    Opportunity Cost
    This method is used where the markets is
    imperfect
     i.e. Selling Division and Buying Divisions
    are unable to sell and buy the entire
    quantity in perfectly competitive markets.
     Minimum Price Selling Dept will accept.
     Maximum Price Buying Dept will pay
    Market-Based Transfer Prices

    If there is a competitive market for the product


    or service being transferred internally, using
    the market price as a transfer price will
    generally lead to the desired goal
    congruence and managerial effort.
    Advantages
     i) Real Division Profits measured.
     ii) Inter Firm Comparison possible.
     iii) No Intervention from Top Management
     iv) Conflicts can be resolved.
    Market-Based Transfer Prices
     The major drawback to market-based prices
    is that market prices are not always
    available for items transferred internally.
    Variable-Cost Pricing
     When market prices cannot be used,
    versions of “cost-plus-a-profit” are often
    used as a fair substitute.
    Variable-Cost Pricing

    In situations where idle capacity exists,


    variable cost would generally be the
    better basis for transfer pricing and
    would lead to the optimum decision
    for the firm as a whole.
    Negotiated Transfer Prices
     Companies heavily
    committed to segment
    autonomy often allow
    managers to negotiate
    transfer prices.
    Dysfunctional Behavior

    Virtually any type of transfer pricing policy


    can lead to dysfunctional behavior – actions
    taken in conflict with organizational goals.
    The Need for Many Transfer
    Prices
     The “correct” transfer price depends on the
    economic and legal circumstances and the
    decision at hand.
     Organizations may have to make trade-offs
    between pricing for congruence and pricing
    to spur managerial effort.

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