Transfer Pricing Flashcards
memorise the concept of the theme
What is transfer Pricing?
A transfer Pricing is the price at which goods or services are transferred from one department to another, or from one member of a group to another.
What is the Goal of a Transfer Pricing System?
1) Goal Congruence
2) Performance Evaluation
3) Promote Divisional autonomy
4) Motivate Divisional Managers
5) Optimise Resources Allocation
What are the types of Transfer Pricing systems?
1) Cost- Based Approach: Full Cost and Variable Cost
2) Market- BAsed Approach: Marginal Cost + opportunity Cost and External Market price less selling costs
What are the Drawbacks of Cost- Based approaches?
1 - Cost Based Problems - Problems arise as one party or the other may perceive it as unfair.
a) - Full Cost - The division supplying the product makes no profit on its work so is not motivated to supply internally.
b ) - Variable Cost - The supplying division does not cover its fixed cost.
What if an imperfect external market exists?
The transfer pricing has to be based on cost
What is the problem of using actual costs?
The supplying division has no incentive to keep the cost low, passing on its inefficiencies to the receiving division. A solution would be to use a Standard Cost.
What are the advantages of market based approach?
1) Selling division gets same profit on internal and external sales
2) Buying division pays a commercial price (possibly minus savings in selling and distribution)
3) Equitable performance measurement for both divisions
