Global Management Accounting Strategies

Question 1

What is the purpose of transfer pricing in a multinational corporation?

Answer 1

Transfer pricing is used to set prices for transactions between company divisions to manage revenue and costs distribution effectively, ensuring fair performance evaluations and aligning with strategic financial management.

Question 2

What are the five different Transfer Pricing methods?

Answer 2

• Market Based
• Cost plus
• Variable/ marginal cost
• Full cost
• Negotiated

Question 3

Describe the market based transfer pricing method and its benefits:

Answer 3

Market-based transfer pricing sets prices equivalent to external market prices.
Benefits:
- Ensures divisions are evaluated on a basis comparable to external competitors (helps in fair performance assessment and aligns divisional profits with market realities)

Question 4

How does transfer pricing affect a company’s divisional and overall profits?

Answer 4

TP affects the allocation of costs and revenues between divisions, influencing each division’s reported profitability. The method can be used to shift profits across divisions, impacting the company’s overall financial performance and tax obligations.

Question 5

How does transfer pricing impact a company’s taxation?

Answer 5

By shifting profits between different tax jurisdictions, transfer pricing can significantly affect the amount of tax payable by a company, potentially lowering overall tax liabilities if managed strategically.

Question 6

What are key considerations when choosing a transfer pricing method?

Answer 6

• Alignment with external market conditions
• Ability to reflect true cost and profitability
• Compliance with tax regulations
• Method’s impact on motivating divisional performance