Week 7- Transfer Pricing Flashcards
what are transfer prices?
The price of one business unit selling goods to another subunit (within one business)
What types of subunits can use transfer pricing?
Profit or investment centres
What is the transfer pricing rule used to achieve goal congruency?
Transfer price = additional unit outlay cost incurred because goods are transferred+ Opportunity cost per unit
what is market-based transfer prices?
Transfer prices that are set based upon the agreed price in which the external market would be prepared to pay for a product.
what is an alternative to market-based transfer prices if the product doesn’t have a market price or it is unreliable?
Negotiated transfer prices
what are negotiated transfer prices?
When the buying subunit and the selling subunit negotiate the price at which the transfer will take place. The selling price is usually a good place to start
what are variable-cost transfer prices?
In the absence of external markets or if the market price is an inaccurate measure then variable production cost represents an alternative transfer price. THEY ARE THE OPTIMAL TRANSFER PRICE WHEN THE SELLING DIVISION HAS EXCESS CAPACITY
what are full cost transfer prices?
Transfer prices that are set at the full cost of producing the product eg. both fixed and variable cost included.
What is the disadvantages of full cost transfer prices?
Pushes the selling divisions fixed costs onto the buying division so not preferred
It is hard to calculate which fixed costs relate to the production of an individual product so the manager can make errors and therefore the opportunity cost may be overstated.
no profit margin
what are full cost plus mark up transfer prices?
Transfer price = Variable+fixed cost + Profit margin.
Similar to full cost transfer prices but allows the selling divison to make a profit. (approximates the market price)
what are the reasons for transfer pricing?
International taxation: multinationals shift profits into low-tax jurisdictions by adjusting the prices of goods as they move around their global operations
How can transfer price conflicts be resolved?
- Top mangement intervention
- Centrally established transfer pricing policies that subunits must follow
- Negotiated transfer prices
what is the difference between an outlay cost and variable cost?
An outlay cost is any that is associated with transferring the goods between two subunits eg. transport
what is a managerial accountant’s primary objective in choosing a transfer pricing policy?
To provide each business unit with the relevant information it needs to determin the optimal trade off between company costs and revenue. This information needs to enable managers to make goal congruent decesions that are inline with the managers incentitives and the organisations goals.
