...Generally speaking, cost-based transfer pricing is top management chooses a transfer price based on the costs of producing the intermediate product. For instance, variable production costs, variable and fixed production costs, full costs (including life-cycling costs) as well as some markup. It is useful when market prices are unavailable or too costly to obtain. When a large organisation transfers product across international borders, transfer prices are relevant in the calculation of income taxes, and are sometimes relevant in connection with other international trade and regulatory issues (Horngren, Datar, Foster, Rajan, Lttner, 2009). When transfer prices are based on full cost plus a markup, it may probaly lead to sub-optimal decisions. Since it causes the buying division to regard the fixed costs and the markup of the selling division as a variable cost. Indeed, the buying division may then purchase products from an external supplier expecting savings in costs that will not exist (Horngren, et al, 2009). In a large company, the transfer price is a major factor between manufacturing and distribution divisions. In order to achieve company profit maximization when decentralized segments of a company interact, a transfer pricing system should be established that treats supplying segments as variable cost recovery centers and setup costs are treated as a variable function of run size. This induces optimal run sizing decisions by the producing and purchasing divisions. ...
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...Culture Shock Culture shock Introduction The topic of the essay is ‘culture shock’, the definition of ‘culture shock’ is a common affect of oversea experience of cultural sojourners. (Zhou.Y.F, Jindal-Snape.D, Topping .K and Todman .J, 2008). It is estimated that there are an increasing number of students going abroad to obtain a better and higher learning environment. If you moved to a new country, you would face to change with excited and enthusiasm, but it also can be disgusting and inadaptable. On the other hand, it is very easy to happen to culture shock phenomena such as eating problems, living, clothing, and traffic difficulties. ‘Culture’ means doing one’s best by a person in the range of mind to represent, warrant and admire the behaviour what individual retain themselves in being. ( Fanon, F., 1968, p.155). Culture can be good or bad. A great culture can change a person’s life. Therefore it is very important for us. This article shows that in the different way to explain culture shock. In my case, however, I experienced culture shock when I came to Australia for the first time. By globalization, people who live with considerable cultures, such as faith, behaviour and law, they become to a style of culture shock. (Wilson .S.L., 2011).It is indicated that nowadays many countries consist of all kinds of culture. Because develop culture, it comes confusing, many times we do not know what is right or wrong. However, multiculture also can...
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...CHAPTER 23: TRANSFER PRICING Chapter Contents: - Definition and Overview - Transfer Pricing Options - Market-based Transfer Prices - Cost-based Transfer Prices - Negotiated Transfer Prices - Survey of Practice - External Reporting - Dual Transfer Pricing - Transfer Pricing and Multinational Income Taxes - Other Regulatory Issues Definition and Overview: A transfer price is what one part of a company charges another part of the same company for goods or services. In the excerpt from Casablanca, Rick apparently loaned Ferrari 100 cartons of cigarettes for which he was never repaid. Now that Ferrari owns both the Blue Parrot and Rick’s Café, he jokes about the fact that what was previously a debt that he owed to Rick, is now a “debt” from one nightclub that he owns to another nightclub that he owns. If Ferrari continues to transfer cartons of cigarettes between the two clubs, he might wish to establish a “transfer price” for cigarettes, but knowing Ferrari, he won’t bother. We will restrict attention to transfers that involve a tangible product, and we will refer to the two corporate entities engaged in the transfer as divisions. Hence, the transfer price is the price that the “selling” division charges the “buying” division for the product. Because objects that float usually flow downstream, the selling division is called the upstream division and the buying division is called the downstream division...
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...The Fuqua School of Business Duke University International Strategy: WBA 434 Professors Heath, Huddart, & Slotta Transfer Pricing 1. Overview An essential feature of decentralized firms is responsibility centers (e.g., cost-, profit-, revenue-, or investment-centers). The performance of these responsibility centers is evaluated on the basis of various accounting numbers, such as standard cost, divisional profit, or return on investment (as well as on the basis of other non-accounting measures, like market share). One function of the management accounting system therefore is to attach a dollar figure to transactions between different responsibility centers. The transfer price is the price that one division of a company charges another division of the same company for a product transferred between the two divisions. The basic purpose of transfer pricing is to induce optimal decision making in a decentralized organization (i.e., in most cases, to maximize the profit of the organization as a whole). Profit Center : Any sub-unit of an organization that is assigned both revenues and expenses. In a profit center, a manager is treated as an entrepreneur. Typically, a profit center manager is given decision-making power and is held responsible for the profits generated by her center. 2. 2.1 Advantages and Disadvantages of Decentralization Advantages • Decisions are better and more timely because of the manager’s proximity to local conditions. • Top managers are not distracted...
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...submitted Table of Contents Transfer pricing 3 Methods of fixing transfer price 4 1. Market based transfer prices 4 Buyer 4 Seller 4 Group 5 Conclusion 5 2. Full cost transfer prices 6 Buyer 6 Seller 7 Group 7 Conclusion 7 3. Cost-plus a mark-up transfer prices 8 Buyer 8 Seller 9 Group 9 Conclusion 9 4. Negotiated transfer prices 10 Buyer 10 Seller 10 Group 11 Conclusion 11 References 12 Transfer pricing Transfer pricing is the establishing the price of goods that are sold between related legal entities in a company. It is practiced by centralized organizations to monitor the transfer of products or service from one division of the company to another (O'brien & Oates, 2007). For example, the six segments of the General Electric Company are trading amongst themselves (General Electric Company, 2006). Methods of fixing transfer price Market based transfer prices The external market prices for the intermediate products are used to set the transfer price. The strategy presumes that the acquiring division will secure the products from the manufacturing division at the same price as in the external market. Although the external market is usually rarely or never accessed, the competitive price determines the minimal intra-organization transfer price (Feinshreiber, 2004). General Electric uses...
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...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 centers). Transfer prices are used to evaluate the goods and services exchanged between profit centers (divisions) of a decentralized firm. Hence, the transfer price is the price that one division of a company charges another division of the same company for a product transferred between the two divisions. 1. There are no cash flows between the divisions. The transfer price is used only for accounting purposes. 2. The transfer price becomes an expense for the receiving manager and a revenue for the supplying manager. 3. If intra-company transfers are accounted for at prices in excess of cost, appropriate elimination entries have to be made for external reporting purposes. Examples of items to be eliminated for consolidated financial statements include: 4. Intra-company...
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...Strategic Transfer Pricing Author(s): Michael Alles and Srikant Datar Source: Management Science, Vol. 44, No. 4 (Apr., 1998), pp. 451-461 Published by: INFORMS Stable URL: http://www.jstor.org/stable/2634608 . Accessed: 15/08/2011 07:30 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. INFORMS is collaborating with JSTOR to digitize, preserve and extend access to Management Science. http://www.jstor.org Strategic Transfer Pricing Michael Alles * Srikant Datar CBA 4M-202, University of Texas at Austin, Austin, Texas 78712 HarvardBusiness School,Accounting and ControlArea, Soldier'sField, Boston,Massachusetts02163 M\ost research into cost systems has focused on their motivational implications. This paper , takes a different approach, by developing a model where two oligopolistic firms strategically select their cost-based transfer prices. Duopoly models frequently assume that firms game on their choice of prices. Product prices, however, are ultimately based on the firms' transfer prices that communicate manufacturing...
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...determine the economic value of any project, investment, or business organization. The three concepts are; a) Time Value of Money b) Risk-Return Relationship c) Cash Flows • Responsibility accounting This is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts. The objective is to assist in the planning and control of a company’s responsibility centers—such as decentralized departments and divisions. These parts, or segments are referred to as responsibility centers that include: a) Revenue centers b) Cost centers c) Profit centers d) Investment centers This approach allows responsibility to be assigned to the segment managers that have the greatest amount of influence over the key elements to be managed. Responsibility accounting usually involves the preparation of annual and monthly budgets for each responsibility center. Then the company’s actual transactions are classified by responsibility center and a monthly...
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...SYSTEMS, TRANSFER PRICING, AND MULTINATIONAL CONSIDERATIONS 22-1 A management control system is a means of gathering and using information to aid and coordinate the planning and control decisions throughout the organization and to guide the behavior of its managers and employees. The goal of the system is to improve the collective decisions within an organization. 22-2 To be effective, management control systems should be (a) closely aligned to an organization's strategies and goals, (b) designed to fit the organization's structure and the decision-making responsibility of individual managers, and (c) able to motivate managers and employees to put in effort to attain selected goals desired by top management. 22-3 Motivation combines goal congruence and effort. Motivation is the desire to attain a selected goal specified by top management (the goal-congruence aspect) combined with the resulting pursuit of that goal (the effort aspect). 22-4 The chapter cites five benefits of decentralization: 1. Creates greater responsiveness to local needs 2. Leads to gains from faster decision making 3. Increases motivation of subunit managers 4. Aids management development and learning 5. Sharpens the focus of subunit managers The chapter cites four costs of decentralization: 1. Leads to suboptimal decision making 2. Results in duplication of activities 3. Focuses managers’ attention on the subunit rather than the company as a whole 4. Increases costs of gathering...
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...must emphasize minimizing and controlling costs. 3. The difference between the target price and the desired profit is the target cost of the product. 4. In a competitive environment, the company must set a target cost and a target selling price. 5. The cost-plus pricing approach establishes a cost base and adds a markup to this base to determine a target selling price. 6. The cost-plus pricing model gives consideration to the demand side—whether customers will pay the target selling price. 7. Sales volume plays a large role in determining per unit costs in the cost-plus pricing approach. 8. In time-and-material pricing, the material charge is based on the cost of direct materials used and a material loading charge for related overhead costs. 9. The first step for time-and-material pricing is to calculate the material loading charge. 10. The material loading charge is expressed as a percentage of the total estimated cost of materials for the year. 11. Divisions within vertically integrated companies normally sell goods only to other divisions within the same company. 12. Using the negotiated transfer pricing approach, a minimum transfer price is established by the selling division. 13. There are two approaches for determining a transfer price: cost-based and market-based. 14. If a cost-based transfer price is used, the...
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...to believe they have agreed on the best deal possible * Negotiating and determining transfer prices will enhance the autonomy/ independence of both divisions b Negative * The result of a negotiated transfer price between divisions may not be optimal for the firm as a whole and therefore will not be goal congruent The negotiating process may cause harsh feelings and conflicts between divisions c 2. Not suitable for a decentralized structure when the autonomous divisions are measured on profitability, as the selling unit is unable to realize a profit Can lead to decisions that are not goal congruent if the buying unit decides to buy outside at a price less than the full cost of the selling unit d 3. A change in policy may be interpreted by the divisional managers as an attempt to decrease their freedom to make decisions and reduce their autonomy e If managers lose control of transfer prices and, thus, some control over profitability, they will be unwilling to accept the change to uniform prices Selling divisions will be motivated to sell outside if the transfer price is lower than market, as this behavior is likely to increase profitability and bonuses f Standard full manufacturing costs plus markup * The selling division will be motivated to control costs * The buying division may be pleased with this transfer price if the market price is higher g Market selling price of the products being transferred ...
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...must emphasize minimizing and controlling costs. 3. The difference between the target price and the desired profit is the target cost of the product. 4. In a competitive environment, the company must set a target cost and a target selling price. 5. The cost-plus pricing approach establishes a cost base and adds a markup to this base to determine a target selling price. 6. The cost-plus pricing model gives consideration to the demand side—whether customers will pay the target selling price. 7. Sales volume plays a large role in determining per unit costs in the cost-plus pricing approach. 8. In time-and-material pricing, the material charge is based on the cost of direct materials used and a material loading charge for related overhead costs. 9. The first step for time-and-material pricing is to calculate the material loading charge. 10. The material loading charge is expressed as a percentage of the total estimated cost of materials for the year. 11. Divisions within vertically integrated companies normally sell goods only to other divisions within the same company. 12. Using the negotiated transfer pricing approach, a minimum transfer price is established by the selling division. 13. There are two approaches for determining a transfer price: cost-based and market-based. 14. If a cost-based transfer price is used, the...
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...Introduction Transfer pricing has long been an important cost management topic for transactions among domestic subsidiaries. The concern is to promote actions and behaviors that seek to maximize the corporate performance and profitability rather than the subsidiary performance. Unlike transfer pricing between two divisions of the same company, this transactions between subsidiaries cross international boundaries, involve tax issues concerning the determination, analysis and adjustment of prices between this related entities. I. Transfer price 1. Transfer price definition The transfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associate enterprises. They are the prices charged for any transaction between affiliates entities. This transfer may be commercial, financial or technical. According to the OECD, two companies are associated if one of the enterprises participates directly or indirectly in the governance, management, control or the capital of the other or if the same persons participate directly or indirectly to the management, control or the capital of both enterprises. They can be defined simply as transactions prices between companies of the same group and resident in different states. This type of transactions involves intra-group transactions crossing borders. Example: Within a MNE group, a subsidiary A established in France sells computers to another subsidiary B established...
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...Transfer pricing By John C. Hollas Illustration: Susanna Denti How to apply the appropriate transfer pricing methods to intercompany financial transactions In Canada, taxpayers are seeing an increased scrutiny of and more audit focus on intercompany financing transactions by the international tax auditors from the Canada Revenue Agency. The related party financial transaction being most commonly audited by the CRA are intercompany loans, factoring of trade receivables and provision of financial guarantees. This environment of rising transfer pricing controversy risk with respect to intercompany financial transactions conflicts directly with the multinational corporation's (MNC) increasing need to finance its foreign operations through intercompany, crossborder financial transactions. The transfer pricing risks and implications remain very significant both from a tax compliance standpoint and from a controversy risk management perspective. Today, MNCs need to mitigate the risk of significant transfer pricing adjustments by local and foreign tax authorities. While our focus is limited to the Canadian tax environment, it is critical to recognize that in all international related party transactions, with financial transactions being no exception, the transfer pricing issues include the other tax jurisdictions of the foreign related parties that are involved in the intercompany transaction. As such the transfer pricing legislation in those foreign tax jurisdictions must...
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...Performance Measurement & Control | BHP Billiton & PotashCorp: Chinese distribution | Transfer Pricing | | Your Name | 1/17/2011 | | Contents Executive Summary 3 Introduction 4 Transfer Pricing 4 Transfer Pricing: Cost rates, dual rates & market prices 7 PotashCorp Transfer Pricing policy 9 Performance Management issues 12 Conclusions 14 References 15 Appendix 16 Executive Summary In the constantly improving transfer pricing laws of China and given the Chinese fertilizer market’s future potential, it is worth to enter the market with a BHP Billiton’s division established there. The planned imports from PotashCorp provide the possibility for the use of transfer pricing to improve tax efficiency and thus the benefit of the whole organization. If performance measurement tools are used, this may underestimate the performance of the division using most of the methods such as market price and dual cost. The cost plus method turns out to be more on the division’s side but as the Chinese prices are lower than that of the world, the conditions appear to be supporting the method as beneficial to the company as a whole while the division is able to generate revenues for company at a low tax. Performance measurement tools seem to be less beneficial for large divisions based organization, where differences in dynamics render the largely homogeneous performance measurement indicators unable to serve the intended purpose. Introduction ...
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