Transfer Pricing
An Overview
Transfer pricing is a popular topic in management accounting. It is concerned with the price when one department (the selling department) provides goods or services to another department (the buying department). That is, one department generates revenue from the sales of goods or services and the other department incurs expenses from the purchases of goods or services. Transfer pricing is closely related to responsibility accounting in which each department is responsible for its cost, revenue, expense or investment return depending on the type of centre it is. Thus, transfer pricing effectiveness is essential to the success of the overall company. The related key issue is the determination of a transfer
…show more content…
Consequently, the determining factor is whether the buying division is willing to pay the market price. If the buying division is willing to do so, the implication is that the buying division can generate incremental profits for the company by purchasing the product from the selling division and either reselling it or using the product in its own production process. On the other hand, if the buying division is unwilling to pay the market price, the implication is that corporate profits are maximized when the selling division sells the product on the external market, even if this leaves the buying division idle.
Sometimes, there are cost savings on internal transfers compared with external sales. These savings might arise, for example, because the selling division can avoid a customer credit check and collection efforts, and the buying division might avoid inspection procedures in the receiving department. Market-based transfer pricing continues to align managerial incentives with corporate goals, even in the presence of these cost savings, if appropriate adjustments are made to the transfer price (i.e., the market-based transfer price should be reduced by these cost savings).
However, many intermediate products do not have readily-available market prices. Examples are: a pharmaceutical company with a drug under patent protection (an effective monopoly); and an appliance company that makes component parts in the Parts Division and transfers those parts to
conditions being met are crucial to control. A business intends for consumers to buy it’s product.
cheaper product and giving some of it away, it would be necessary to make sure stockholders are satisfied
For example, If you are selling a product that is a normal good with a high rate of competition in the market, raising the price could have negative effects on overall profits because users will simply find another substitute somewhere. Charles stated that market separation may come into play when firms realize there are differing elasticity curves for different consumers of the same product. Firms can maximize profits by evaluating consumer segments within a single market. If the firm notices different demand elasticity for different segments it may opt to engage in price discrimination to maximize profits. Charles gave Microsoft Office as an example; the same software is offered to students, casual users and business users at different price
| managerial approach of seller, capacity of seller to do the work, and ability of seller to make a reasonable make-or-buy decision.
Pharmaceutical companies are often able to achieve temporary monopolies from patents granting them the exclusive right to produce and market drug formulations they have developed. These patents are:
C. Small number of firms, price maker, limited entry and exit, and a standardized product
5) The bargaining power of suppliers: The cost of factors of production (e.g. labor, raw materials, components, and services such as expertise) provided by suppliers can have a significant impact on a company's profitability. As such suppliers may refuse to work with the firm or charge excessively high prices for unique resources.
Allocating overhead costs is one of the important tasks and is necessary to be done by management accountant. One key reason is that in term of pricing strategies, many firms decide their products’ selling price based on their cost. And the selling price has to cover all the costs and profit.
Bhimani, A., Horngren, C., Datar, S., Rajan, M. et al. (2012) Management and Cost Accounting. 5th ed. Edinburgh: Prentice Hall, p.369 - 378.
INTRODUCTION Businesses – from manufacturing, merchandising and service industries alike – take careful consideration in the analysis of their costing systems in order to be able to set up competitive prices in the market. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods which Zauner Ornaments have used or is currently using and, in conclusion, be able to distinguish the advantages and disadvantages of each costing method. CASE CONTEXT The case seeks to assist Zauner’s comptroller, Yu Chia-yi, in determining the best costing method for their overhead costs. In addition we also aim to
The purpose of this paper is to answer a few important questions: Why do companies allocate costs? How do companies allocate costs? And how this cost allocation can affect the decision making of the company. It is important for the companies to find the proper method to allocate the costs. Cost allocation is an important issue in many companies because many of the costs associated with designing, producing and distributing products and services are not easily identified with the products and services that are created. It would have been easier for companies to allocate cost if costs were directly traceable with the products and the cost allocation would have been minor issue for the company. The decision-making
The target costing case literature contains numerous examples of Japanese cost management practices; however, few cases describe the use of target costing by large companies outside Japan. The purpose of the Mercedes-Benz AAV case is to consider the competitive environment of a leading German automotive manufacturer and the company 's response to changing competitive conditions. The teaching plan generally follows the suggested student assignment questions. In places, I recommend considering additional material during the case discussion. These questions are identified by a check mark.
Globalisation could be defined as “the interactive co-evolution of millions of technological, cultural, economic, social and environmental trends at all conceivable spatiotemporal scales (Rennen & Martens 2003). When discussing globalisation, the topic transfer pricing always seem to arise which could be because this multi-nationals trade between themselves and the government also uses transfer pricing. Therefore transfer pricing is used wold wide and could be said to be an important accounting factor which enables the success of a firm due to the fact its set up to induce optimal decision making in decentralized firms.
The company should consider whether the transfer pricing method has simplicity and transparency, which provide objective performance measurements for division managers. With regard to simplicity and transparency, it is best for the company to set market-based transfer pricing because this is more objective than cost-based transfer pricing. In particular, when companies use cost-based transfer pricing, it is difficult to evaluate division performance unless the transfer prices exceed full costs.
Hirshleifer (1956) poses that in order to obtain optimal intra-firm pricing; the transfer price must be equal to the marginal cost of the affiliates producing goods in conditions of