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
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
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
4
Q
Transfer-pricing methods
A
- There are three general methods for determining transfer prices
- Market-based transfer price
- Cost-based transfer price
- 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
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
6
Q
Comparison of methods
A

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
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