P2 - C9 - Transfer Pricing Flashcards
What is Transfer Pricing
Determined value of goods transfers between divisions of an entity
Aims of a good transfer pricing system
- Optimal allocation of resources
- Goal congruence
- Motivate managers
- Provide fair outcomes
- Retain the autonomy and independence of each division
- Be simple to understand and not require frequent revisions
What is Minimum transfer price
The minimum that the selling division will sell a unit for should amount to cost price plus any opportunity cost for selling the unit internally
Maximum transfer price
The maximum price a buying division will pay for an internal transfer will amount to the lowest price that the unit could be acquired for from other supplier
Cost-Based transfer pricing methods
Marginal cost
Marginal cost-plus
Absorption/full cost
Standard cost
Two-Part tariff
Market-Based transfer pricing
Can prove difficult to determine true market cost for many reasons
1. Suppliers quote different prices
2. Buyers command different prices
3. Market prices fluctuate
4. Products not available on the open market
Dual Pricing
- Seller credited cost plus mark up
- Buyer debited marginal cost
- Difference subtracted from group at year end
- Complicated and time consuming
Negotiated transfer prices
- Managers negotiate prices themselves
- Can be time consuming
- May not be able to reach agreement
- Can be unfair
- No goal congruence
Profit Maximising
Maximises profit for the organisation as a whole, but it is difficult to set a price without removing managers autonomy
Opportunity Cost
Distinguishes between selling divisions who can sell externally and those that cannot.
Considers other relevant costs and is goal congruent
Ethical Considerations
Taxation:
Arms length
Advanced Pricing Agreements
Reparation of funds:
Exchange controls in place
Higher transfer prices to get around these
