Lecture 8 Flashcards

1
Q

Transfer pricing

A
  • A transfer price is the price one subunit charges for a product or service supplied to another subunit of the same oraganisation
  • The transfer price creates revenues for the selling subunit and purchase costs for the buying subunit, affecting each subunit’s operating profit
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2
Q

Intermediate products

A
  • Intermediate products are the products transferred between subunits of an organisation
  • Intermediate products can either be
    • processed further by the receiving subunit
    • or resold to an external customer
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3
Q

What is the rationale for transfer prices?

A

The rationale for transfer prices is that subunit managers, when evaluating decisions, need only focus on how their actions wille affect subunit performance without evaluating their impact on company-wide performance

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4
Q

Transfer-pricing methods

A
  • There are three general methods for determining transfer prices
  1. Market-based transfer price
  2. Cost-based transfer price
  3. Negotiated transfer price
  • Different transfer-pricing methods produce different operating profits for individual subunits
  • In determing transfer prices, management may choose to use the price of a similar product or service publicly listed (market-basted transfer price)
  • Management may choose a transfer price based on the costs of producing the product (cost-based transfer price)
  • In some cases , the subunits of a company are free to negotiate the transfer price between themselves and then to decide whether to buy and sell internally or deal with outside parties (negotiated transfer prices)
    • Arise from the outcome of a bargaining process between selling and buying divisions
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5
Q

Dual pricing

A
  • There is seldom a single cost-based transfer price that simultaneously meets the criteria of goal congruence, management effort, subunit performance evaluation and subunit autonomy.
  • Dual pricing is using two separate transfer-pricing methods to price each interdivision transaction
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6
Q

Comparison of methods

A
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7
Q

Minimum transfer price =

Incremental costs per unit incuured up to the point of transfer + oppurtunity costs per unit to the selling division

A
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8
Q

Multinational transfer pricing

A
  • Transfer prices can reduce profit tax payments by recognising more profit in low tax rate countires and less profit in high tax rate countries
  • Tax regualtions of different countries restrict the transfer prices that companies can choose
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