...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...
Words: 1287 - Pages: 6
...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...
Words: 2245 - Pages: 9
...speed, and slash the price, of international money transfers, raising the prospect of a revolution in the $600bn annual global remittance market. Soaring rates of mobile phone use in developing countries are helping the entrepreneurs compete with more usual forms of money transfer in countries where remittance rates and fees are highest. Many of the world’s poorest people depend on money sent to them from friends and family abroad. According to World Bank figures for 2011, nearly half of Tajikistan’s GDP is derived from remittances, while in Liberia, Lesotho, Nepal and Haiti they account for more than a fifth of GDP. Entrepreneurs claim they are using bitcoin to give some of the world’s poorest people a better deal on the money they receive from abroad. The World Bank calculates the average fee on remittances at 8%, yet charges can be three times as high. A report from the Overseas Development Institute (published in April 2014 , said the benefits of remittance transfers “are lost in intermediation as a result of high charges. Africa’s diaspora pays 12% to send $200 – almost double the global average.” Bitcoin could also cut the time it takes to send remittances. BitPesa, a Kenyan mobile money transfer firm that launched in May, says its remittance transactions are “twice as fast and 75% cheaper” than competitors, because it uses bitcoin to transfer funds. Elizabeth Rossiello, BitPesa’s founder and CEO, said: “We’re looking to bring the price [of sending remittances]...
Words: 761 - Pages: 4
...Transfer Pricing – an illustration Campbell Confectionery Company (CCC) manufactures a range of chocolate based products * The company has 2 profit centres, where managers have autonomy in decision making * Processing Division (comes first, processing transfer) * Chocolate Division (comes next, chocolate receive) * The Processing Division processes raw cacao beans into “Chocolate Liquor” * The Chocolate Division uses Chocolate Liquor as an ingredient in its products * The Processing Division has the following options * Sell Chocolate Liquor to an external market * Transfer Chocolate liquor internally to the Chocolate Division * The Chocolate Division has the following options * Purchase Chocolate Liquor internally from the Processing Division * Purchase Chocolate Liquor from an external market Profit is the only critical thing Profit is the only critical thing 4 PARTIES RELEVANT COSTS * The first issue to address IS NOT the transfer price itself * First we must determine, from a corporate perspective, whether the transfer should actually take place– i.e. The Optimal Sourcing Decision * Should the Processing and Chocolate Divisions undertake an internal transfer of the Chocolate Liquor? OR * Should the Processing Division sell and the Chocolate Division purchase the Chocolate Liquor externally? Information required to make the optimal sourcing decision Costs of Processing Cacao...
Words: 1991 - Pages: 8
...Birch Paper Case 3 General ways a decentralized firm can handle transfer pricing 1) Direct intervention by top management - If this were an extraordinarily large order or if internal transfers were rare, this would be the best solution…but this order represents less than 5% of the volume of all divisions involved. - The disadvantage of direct intervention is that top management could become swamped with pricing disputes, and individual division managers lose the flexibility and other advantages of autonomous decision making. 2) Centrally established transfer price policies - Externally based market prices are generally considered the best basis for transfer pricing when a competitive market exists for the product and market prices are readily available. - A drawback is that this method may require a change to the compensation/incentive system of Division managers Market price-based transfer pricing – A policy that sets transfer price at the market price or a small discount from the market price. From the company’s perspective, this is fine as long as the supplying unit is operating at capacity. Cost basis policy – A seller operating below capacity should transfer at the differential cost of production (variable cost). A seller operating at capacity should transfer at the market price. A seller operating below capacity is indifferent between providing the product and receiving a transfer price equal to the seller’s differential outlay cost or not providing...
Words: 678 - Pages: 3
...to Maple • World leader for the production of smartphones • Division A: manufactures the smartphones’ processors • Division B: assembles the various components (digital screen, processor, frame, etc.) • Both divisions are profit centers • The transfer price for the processor: long-run average market price Business Performance Management – HEC 2014-15 2 Situation We are given the following information for the divisions: Estimated selling price for final product (smartphone) Long-run average selling price for intermediate product (processor) Incremental costs in Division A (manufacturing cost) Incremental costs for completion in Division B (assembly cost) €300 €200 €120 €150 Recent Developments The manager of Division B made the following calculations: Selling price for final product Transferred-in costs (market) IncrementaI costs for completion Contribution (loss) on product Business Performance Management – HEC 2014-15 €300 €200 €150 (€50) 3 Question 1: Should transfers be made to Division B if there is no excess capacity in Division A? Is the market price the correct transfer price? Incremental (outlay) cost approach shows positive contribution for the company Selling price TP for B Incremental costs contribution (loss) A (manufactures) B (assembles) 200 300 200 120 150 80 (50) Business Performance Management – HEC 2014-15 MAPLE 300 270 30 4 Question 1 However, there is no excess capacity...
Words: 1257 - Pages: 6
... In most cases, a company sets the price instead of it being set by the competitive market. 2. In a competitive market, a company is forced to act as a price taker and 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...
Words: 1759 - Pages: 8
...b. Static budget variance=$6228F Flexible budget variance=$3172U Sales volume variance=$9400F proof: $6228F=$3172U+9400F In my opinion, flexible budget variance and sales volume variance are both controllable as they can be managed by the manager. For example, sales volume variance can be improved if the manager improves the work efficiency and flexible budget variance can be improved if he controls the sales price and variable cost. Jatin, do we need to calculate fixed expense variance? I can't find this calculation in the module. Also, just a small suggestion, you may put "F"(positive) or "U(negative) beside every variance, such as those in the table in a and three variances in b. We can say that overall, location is properly managed by manager except : 1) Average revenue per vehicle reduced to 9.5 from 10 per vehicle. Due to this we made a loss of 3173 in margin 2) Fixed expense was not properly incurred. Expense increased by 1180. Note: As we don't have bifurcation of fixed expense, we believe that all the expense incurred in this category would be controllable. Considering following we can say that, location is properly managed. 1) Location profit increase by 5048 compare to 230 (Un controllable portion removed from budget and revised budget considered) 2) Work efficiency is increased. Average vehicle washed per hour was targeted 23/hour which reach to 27/hour. ________________________________________ 1 Return on assets (ROA) is the measure...
Words: 1413 - Pages: 6
...collective output that is the joint benefit. The other businesses operating separately have, presumably, a positive EVA but, as the case states, they serve a less affluent clientele and thus the combined EVA is probably smaller that RCC’s. Following the example of the automobile in page 144, chapter 4 of the book, there is also the advantage for the consumer of having only one transaction cost. Firms emerge to economize on repetitive contracting and consumers seek to have bundles of services under one transaction. The hotel will attract more clients by having entertainment opportunities and gambling possibilities at hand and the gamblers will more likely go to a place with entertainment and good food and lodging. There is in effect a transfer price between the Hotel and Entertainment divisions and the Gambling division. To reflect a good approximation of opportunity...
Words: 608 - Pages: 3
...make organizational changes to relinquish his control over the company, and withdrawal from day-to-day managerial responsibilities * He divided up business into three departments and named trusted employees as managers of each department: * Kevin Foyle, new-mower sales * Grace Chen, used-mower sales * Peter Stockwell, service department * Each manager was told to run her or his department as if it were an independent business (in other words, treated as profit centres) * Managers’ salaries are to be calculated as a straight percentage of their department’s gross profit * A particular customer wanted to trade his old mower as part of purchase price of a new one * Kevin had to decide what amount he would offer for a trade-in value * Kevin would deduct 8% of the new mower’s list price to be competitive in the market without the trade-in * The customer had an inflated view of the worth of his old mower * The new mower the customer wanted to purchase had been in stock for some time, and the model was not selling very well * Chen, Foyle and the customer examined...
Words: 1628 - Pages: 7
...share the revenue. Transfer pricing is the way of distributing the revenue. should provide each business unit with info it needs to determine the optimum trade-off between company costs and revenues Should induce goal congruent decisions Should measure economic performance of business units Should be simple to understand and easy to use 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 decisions must be made: should the company produce the product inside the company or purchase from outside vendor? (sourcing decision) If produced inside, at what price should the product be transferred between profit centre? (transfer price decision) Ideal situation: market-priced based transfer price Competent managers and employees Just transfer prices Alternatives for sourcing exist and managers should be permitted to choose the alternative that is in the own self-interest Managers should have info on alternatives and costs and revenues for each of them Smooth way of negotiating contracts Constraints on sourcing: limited markets: no outside source may exist (if it’s a differentiated product); in highly integrated industry there is little room for intermediate products; if a company invested heavily in facilities, it would want to use them (unless the outside selling price approaches the company’s variable cost (rare)). Need competitive prices! The difference between...
Words: 501 - Pages: 3
... In most cases, a company sets the price instead of it being set by the competitive market. 2. In a competitive market, a company is forced to act as a price taker and 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...
Words: 1759 - Pages: 8
...1. A transfer price is the price of a product or service that is sold internally within a firm between financial responsibility centres. Transfer prices are important because they include cost information for inputs provided internally that can help managers make better decisions by assessing the profitability of the output that uses this input. This helps both the buying and selling managers decide how much product to buy/sell internally in order to maximize profit or some other performance measure. Transfer prices also affect the performance measure of the managers of both the buying and selling financial responsibility centre. There are several different ways to set transfer prices: market price, marginal cost, full cost, full cost plus markup, negotiated, etc. Which one is chosen depends on which fits the situation and goal of the financial responsibility centre the best. Full cost plus markup transfer prices help managers measure how viable a product/service is in the long term. For a product to be viable, it has to be able to recover its full cost plus make a profit. If full cost plus markup transfer price is too expensive for the buying profit centre, then perhaps the product/service is not viable and the selling profit centre should be closed down and the buying profit centre should buy from outside. 2. a. The sourcing decision best for the ISD is to source to Display Technologies Plc in order to minimize cost. The decrease in cost increases profitability and...
Words: 673 - Pages: 3
...1.Prestige Builders has been offered a contract by Excel Ltd. to build Guest Houses for use by top management. The contract will be for a period of one year and the offer price is Rs. 100 lakhs. In addition, Excel Ltd. will also provide 2 grounds of land free of cost for the construction. A Trainee Accountant has prepared an estimate on the basis of which he has advised that the contract should not be accepted at the price offered. His estimate was as follows: (Rs.lakhs) Land (3 grounds @20 lakhs per ground) | 60 | Drawing and design cost | 7 | Registration | 10 | Materials | | Cement and Sand (In stock at original cost) | 12 | Bricks and tiles (To be ordered-current cost) | 4 | Steel (Firm orders placed- purchase cost) | 10 | Others (To be ordered- current cost) | 10 | Labour | | Skilled | 12 | Unskilled | 8 | Supervisor | 3 | Travel expenses to the site | 2 | Site management expenses | 5 | General Overheads | 7 | Total Cost | 150 | Additional Information 1. Total land required for the project- 3 grounds of which 2 grounds will be provided by Excel ltd. 2. Drawings and design: They have already been prepared by consultant architects and the payment will be made in the next month. 3. Registration: The registration expenses have to be borne by Prestige Builders. 4. Material a. Cement and sand are already in stock and are in regular use. Current...
Words: 2209 - Pages: 9
...CHAPTER 22 MANAGEMENT CONTROL 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 ...
Words: 15689 - Pages: 63
