8. Costing - Transfer Pricing

Question 1

How do you calculate the minimum transfer price?

Answer 1

Variable cost up to the point of transfer + Opp.cost to the selling division

Question 2

What are the three transfer price methods?

Answer 2

Cost-based transfer
Market=based
Negotiated

Question 3

What is cost-based transfer pricing?

Answer 3

You apply a mark-up on full/variable costs

Pros: Simple an easy to use

Cons: may encourage decisions taht do not benefit, distribution of profit may not be qeual, may encourage production ineffciencies because costs are passed to the buyer

Question 4

Market based

Answer 4

Only leads to optimal decisions if the following three conditions are satisfied:

• Immediate market is perfectly competitive
• Interdependencies between departments are minimal
• there are no additional costs or benefits to the organization as a whole in using external market isntead.

Pro:
Simple if external market is avaliable
Encourages transfer if they are benefiicial to teh company as a whole if they’re at full capacity

Cons:
external market may not be readily avaliable
Suboptimal decisions may be made if the seller has excess capcitry

Question 5

Negotaited price

Answer 5

Pros:
dividions are given independence and control
divisions build relationships with each other
the price benefits the overall organization

Cons:
price is determined by each division’s negotiating ability
it’s time consuming