Competenties Voor Waardecreatie Nevi No 09032011 Benefit Karin Andela
Bab Vi Transfer Pricing Eng (Nevi)
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CHAPTER 6 TRANSFER PRICING Today’s organizational thingking is oriented toward decentralization. One of the principal challenges in operating a decentralized system is to devise a satisfactory method of accounting for the transfer of goods and services from one profit center to another companies that have a significant number of these transastions. Objectives of Transfer Prices The transfer price is the mechanism for distributing this revenue. The transfer price should be designed so that it accomplishes the following objectives : • Provide information on costs & revenues • Promote goal congruence • Help measure unit economic performance • Simple and easy to implement Transfer Pricing Methods The fundamental principle is that the transfer price should be similar to the price that would be charged if the product were sold to outside customers or purchased from outside vendors. When profit centers of a company buy products from, and sell to, one another, two decisions must be made periodically for each product : 1. Should the company produce the product inside the company or purchase it from an outside vendor? This is the sourcing decision.
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Transcript of Bab Vi Transfer Pricing Eng (Nevi)
CHAPTER 6TRANSFER PRICING
Todays organizational thingking is oriented toward decentralization. One of the principal challenges in operating a decentralized system is to devise a satisfactory method of accounting for the transfer of goods and services from one profit center to another companies that have a significant number of these transastions.Objectives of Transfer PricesThe transfer price is the mechanism for distributing this revenue. The transfer price should be designed so that it accomplishes the following objectives : Provide information on costs & revenues Promote goal congruence Help measure unit economic performance Simple and easy to implement
Transfer Pricing MethodsThe fundamental principle is that the transfer price should be similar to the price that would be charged if the product were sold to outside customers or purchased from outside vendors. When profit centers of a company buy products from, and sell to, one another, two decisions must be made periodically for each product :1. Should the company produce the product inside the company or purchase it from an outside vendor? This is the sourcing decision.2. If produced inside, at what price should the product be transferred between profit centers? This is the transfer price decision.
Ideal Situation for Transfer Price Systems Competent people Good atmosphere A market price Freedom to source Full Information Negotiation
Constraints on SourcingIdeally, the buying manager should be free to make decisions. Similarly, the selling manager should be free to sell products in the most advantageous market. In real life, however, freedom to source might not be feasible or, if it is feasible, might be constrained by corporate policy. Limited markets If does not buy or sell the product in an outside market, so the competitive price: published market prices, bids, production profit center, buying profit center, excess or shortage industry capacity.Cost-Based Transfer PricesIf competitive prices are not available, transfer prices may be set on the basis of cost plus a profit, even though such transfer prices may be complex to calculate and the results less satisfactory than a market-based price. Two decisions must be made: (1) The Cost Basis: Standard cost (not actual cost)(2) The Profit Markup Percentage of cost Percentage of investment (pose a practical problem)Pricing Corporate Services Control over amount of servive Standard variable cost of descretionary services Optional use of services (ekternal) Information technology Internal consulting group Maintenance work Simplicity of the Price Mechanism Reduce counterproductive
Administration of Transfer Price Negotiation Arbitration and conflict resolution Product classification Large volume (senior management wish to control) Small volume (no significant disruption)
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