Transfer Prices Essay

1287 words - 6 pages

TRANSFER PRICING

Overview
The essential feature of decentralization in large firms is the creation of responsibility centers (e.g. cost, profit, or investment centers). The performance of these responsibility centers is evaluated on the basis of various accounting numbers, such as standard and actual cost, divisional profit or return on investment. A central role of the management accounting system therefore is to evaluate (i.e. attach a dollar figure to) the transactions between the different responsibility centers. Under the subject cost allocation we studied alternative methods to charge user departments for the services rendered by service departments (frequently cost ...view middle of the document...

9. The use of transfer prices allows the company to generate separate profit figures for each divisions and thereby to evaluate the performance of each division separately.
Alternative Methods of Transfer Pricing
Transfer pricing policies specify the rules that are being used to calculate the TP. In addition, a TP policy has to be specific about the sourcing question, i.e., are divisions free to buy/sell externally or is it the case that internal transfers are mandated.
1. Market-based Transfer Pricing
In the presence of competitive and stable external markets, many firms take the external market price as a benchmark for their internal transfer price. Generally, the external market price provides a ceiling not to be exceeded by the internal transfer price.
Question: How would you argue that market price is the "correct" TP if the external market is perfectly competitive?
Issues with market-based TP:
• Imperfect Competition
• Distress Prices
-Protecting "infant" segments
2. Negotiated Transfer Pricing
Here, the firm does not specify rules for the determination of transfer prices. Divisional managers are encouraged to negotiate a mutually agreeable transfer price. Negotiated transfer pricing is typically combined with free sourcing. In some companies, though, H.Q. reserves the right to interfere in the negotiation process and impose an "arbitrated" solution.
Question: What do you perceive to be the major advantages/disadvantages of negotiated transfer pricing?
3. Cost-based Transfer Pricing
In the absence of an established market price many companies base the TP on the production cost of the supplying division.
1. Full (absorption) cost; either standard or actual. Popular because of its simplicity and clarity.
2. Cost-plus For transfers at full cost the buying division takes all the gains from trade while the supplying division receives none. To overcome this problem the supplying division is frequently allowed to add a mark-up in order to make a "reasonable" profit. The transfer price may then be viewed as an approximate market price.
EXAMPLE: The following example, however, illustrates potential problems with this TP method. The ABC company consists of two divisions: A and B. Division A's output is an intermediate product that is completed and marketed by the B division. The following cost and revenue information applies:
Division A: Fixed Cost : $4000
Variable Cost : $2 per unit
Division B: Fixed Cost : $3,000
Variable Cost : $10 per unit
Each unit of the final product requires one unit of the intermediate product plus certain other inputs (provided by Division B) leading to a variable cost of 10. For the final product y Division B estimates that the market demand curve is given by: P = 19 B .001 * y. Suppose that the supplying division is entitled to a mark-up of 25%...

Other assignments on Transfer Prices

Fiscal Policy Essay

1769 words - 8 pages "spread the wealth around" without forgoing economic growth.” (Taylor, 2014) Impact of Fiscal Policies For ExxonMobil the stability and integrity of any governments fiscal policies play a major role in the companies prices, growth, and success. The oil and natural resources industry play a huge part in our nation’s economic performance. When the companies like Exxonmobil have to cut back on the supply of gas then they too have to make changes

Silvio In India Essay

465 words - 2 pages then adapt and change accordingly when they see how the people react to this nonstandard glass wall elevator. It might be so well received that sales and demand will increase. 4) Recent changes in transfer prices rates have increased from 22 percent to an astonishing 56 percent, which caused the prices of S001 elevators to also increase significantly. Such a large increase (30%) no doubt hurt the competitiveness of Schindler in India

Finance 370 Week 2

1077 words - 5 pages . Hedge funds are supposed have higher returns for high-end investors. Since hedge funds invest heavily in futures, some argue that they have decreased the volatility of the stock market and the United States economy. Bonds also provide some of the liquidity that helps keep the United States economy lubricated. However, when stock prices go up the bond prices go down. The economy would suffer without a developed financial market system

Monetary Policy

873 words - 4 pages it helps to increase aggregate demand by increasing government spending, increasing transfer payments such as social security, unemployment compensation, or welfare payments or decreasing taxes. When taxes are reduce disposable incomes and consumer spending increases. Also if the indirect taxes on goods and services are cut consumers may expand their demand for goods and services as after-tax prices falls. If the demand for goods and services

State Led And Market Assisted Land Reforms

4318 words - 18 pages established systems of governance (FAO: 2006). Land reforms involve the changing of laws, regulations or customs regarding land ownership. Land reforms may consist of a government initiated or government- backed property redistribution, generally of agricultural land. In sight of the above, land reform can therefore refer to the transfer of ownership of land from a relatively small number of wealthy owners with extensive landholdings such as

Asignment On Mission Of Lulu Exchange

1569 words - 7 pages by setting high standards in customer satisfaction and compliance. Our motto is being your remittance and exchange partner. Reduce Anti Money Laundering! Mission Analysis : Preferred supplier We aim to become the preferred choice of customers by providing an enjoyable money transfer experience resulting from a unique, creative approach and a commitment to delivering quality products and uncompromising service. Customer focus We are

Trader

2039 words - 9 pages weighted average selling prices of ROSNEFT selling in the same month flat. | | |Price formula for REBCO: | | |Rosneft Pricing Formula with no differential. | | |Rosneft Pricing Formula with a Fixed Differential

Term House

484 words - 2 pages McBride financial is an organization that needs to focus and adhere to compliance issues within the organization. Two effective ways of ensuring this is for McBride Financial to implement charters and bylaws. Doing so will transfer authority of the organization from the CEO to the independent Board of Directors. “Bylaws established by the board of director’s authority include the specific rules that govern the corporation and its business

A Tale Of Two Is Projects

600 words - 3 pages in order to compete with the larger airlines. This means that when customers use their site they must be able to easily see their prices and book their flights. The reservation system will effect operational activities because it shows the number of reservations booked, and this helps to know how many planes will be needed during a specific amount of time. The reservation system also helps to know when to have special deals on flights, so that

Company Research

618 words - 3 pages The Company I am going to be working for is Morales & Associates Incorporated. 1. The position I am interested in would be a sales rep. 2. The job consists but not limited to: fillinng customers' mail and telephone orders from stored merchandise in accordance with specifications on sales slips or order forms. Other duties include computing prices of items, completing order receipts, keeping records of out-going orders, and

Finance

2493 words - 10 pages cost of implementation may be too high. In addition to this, TeleFones4U together other mobile operators believe that our accounts will be left more open to human errors as well as distortions. The summary of the comments and responses that touch on the allocation of transaction prices are described as follows: 1. Inquire for further clarification and guidelines Most respondents’ seek for clear clarification and proper guidelines on the two

Similar Documents

House Prices In The Uk Essay

1011 words - 5 pages not the young. Buyers with large mortgages are extremely vulnerable to financial shocks - such as interest rate rises, illness or redundancy. Rising prices is considered an ill. But with houses most of us see ourselves, for most of the time, as latent sellers, and only occasionally as active buyers. Nevertheless ever higher prices have some ill effects. They effectively transfer wealth from those without houses to those who have them. Rising

You Decide Gm 545 Essay

589 words - 3 pages You Decide Exercises. The U.S. economy has fallen into a recession. It is a severe and deep recession, and one that some economic analysts say may persist for at least another year. The unemployment rate has risen to levels not seen in over 20 years. The current unemployment rate is at 8% and is expected to rise further. The inflation rate is -2.4 percent, meaning that overall, prices are falling. After I read all the recommendation I can

Chapter 1 Essay

2290 words - 10 pages artwork is inkjet printer using special dye-sublimation inks and transfer paper. The transfer paper is only a temporary stop for the printed image. Once printed, the transfer paper is wrapped around and affixed to the mug or other dye-sublimation product. The image on the transfer paper is actually mirrored or backwards because it's being transferred directly to the surface of the blank. The blank mug and imaged transfer paper are placed in a heat

Mktg Essay

401 words - 2 pages achieving six first place baggage handling, first place on time-performance by also offering a program that allows passengers to earn mileage for each paid flight. US Airways utilize a system that helps to attract more customers, generate more revenues and saves cost that are not necessary. US Airways makes contracts with smaller carriers agreeing that these small carriers would transfer the passengers from a low-density market to their main hubs