Transfer Pricing management control system
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Transcript of Transfer Pricing management control system
Transfer PricingTransfer Pricing
1
What is Transfer Pricing ? ? ?
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Objective of Transfer Price
0Optimum trade off between company cost & revenue
0To induce goal congruent decision
0To measure economic performance of individual unit
0To make the system simple to understand and easy to administer
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Fundamental Principle
“ 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”
Two imperative decision :
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Sourcing Decision
Transfer Price
Decision
The Ideal Situation
0Competent people0Good atmosphere 0A market price0Freedom to serve0Full information0Negotiation
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A market price based transfer price will
induce goal congruence if all of
these conditions exits
Constraints on sourcing
1) Limited Market
0 The company is a sole producer of different product0 Company wont use outside source unless outside
source approaches to company’s variable cost0 Internal capacity and external sale
2) Excess of shortage of industry capacity
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Cost-Based transfer prices
1. How to define cost
2. How to calculate the profit markup
0 The Cost Basis0 The profit Markup
1. What the profit markup is based on
2. The level of profit allowed
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Upstream Fixed Costs and Profits
0 Agreement among Business Units0 Two-Step Pricing0 Profit Sharing0 Two sets of prices
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Pricing Corporate Services
0 For central services that the receiving unit must accept but can at least partially control the amount used.0 For central services that the business
unit can decide whether or not to use.
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Control over amount of service
E.g. Information technologyResearch & development
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Optimal use of
services
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Simplicity of The price
Mechanism
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Administration of transfer prices
0 Negotiation0 Arbitration and Conflict Resolution0 Product classification
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Thank you
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