Transfer pricing Flashcards
what is transfer pricing
the rules and methods for pricing transactions between enterprises under common ownership or control
who is transfer pricing a problem for
it is a particular problem for a decentralised company
why is transfer pricing needed
need to know costs incurred and selling price for the transfer in order to recognise the profits
what are the aims of transfer pricing
allow realistic measurement of divisional profit,
provide producer with realistic profit and receiver with realistic cost,
give autonomy to managers,
ensure goal congruence and profit maximisation for company as a whole
what are the four different practical methods of transfer pricing *
market price,
cost plus,
two part transfer price,
dual pricing
is it always possible to complete all of the transfer pricing objectives
no, there is often a trade off between objectives when using the different methods
when is market price the best method of transfer pricing
if there is an outside market for the product being transferred, and
this market is perfectly competitive
what is important when using market price as the method for transfer pricing
important to ensure that the division’s product is the same as that offered by the market
what may happen when using the market price method for transfer pricing
it may be adjusted downward for savings,
cost of packaging, advertising, distribution
explain the cost plus method of transfer pricing
the supplying division calculates the cost of producing a unit of product, then may add on a margin to guarantee some profit
when using the cost plus method of transfer pricing what should you do
use the standard cost,
should also keep standards up to date
how does two-part transfer prices work (transfer costing)
transfers taking place at standard variable cost,
crediting the manufacturing division later with an additional amount towards fixed costs and profit
why would a company use two-part transfer prices as a method of transfer pricing
encourages goal congruence/cost control/ easier responsibility accounting
explain dual pricing method of transfer pricing
receiving division records transfers at a TP of standard variable cost, supplying division reports transfers at a higher value (eg cost plus)
what is an advantage and disadvantage of dual pricing method of transfer pricing
should lead to goal congruence however may lead to poor cost control as profits are made more easily
