Advantages of transfer pricing, Managerial Accounting

Assignment Help:

Advantages of Transfer Pricing

(a) Transfer pricing is similar to cost apportionment and allocation in that values of one department are passed to another. For cost apportionment and allocation systems, costs of one department are passed to another with the objective of accumulating costs for product cost information purposes. In a sense, apportionment and allocation provides a mechanism of transfer pricing primarily based on input measures such as floor area or direct labor hours.  Under transfer pricing arrangements, values of one department are also passed to another.  Output measures of activities are used to charge departmental costs and allowable profits to other departments. The information produced can be used to accumulate product costs. Where transfer prices are cost based and make no allowance for profits, the results would differ from apportionment and allocation systems only with regard to the basis for transferring costs between departments.

(b) Where performance measurement is linked to rewards such as promotion or salary, the method of transfer price can have a direct impact on the motivation of the divisional manager. For example, a divisional manager appraised on a profit centre basis will be in a position of advantage where high transfer prices are established for the particular division. The effect of motivating managers to improve profits may lead to bargaining for transfer pricing methods which provide the highest transfer prices for their particular divisions. In a transfer pricing situation, as in a number of accounting situations, there will inevitably be winners and losers. The challenge to the accountant is to devise a transfer pricing methodology which ensures that the winners are those who will benefit the organization most in the long term.

(c) Some multinational companies are in a position to use transfer pricing to reduce total taxation costs. This can be achieved by establishing transfer prices towards the higher end of the spectrum of allowable values in countries with low taxation. This would tend to lead to high profits in countries with low taxation and lower profits in countries with higher taxation. Governments in some countries take steps from time to time to regulate the operation of transfer pricing systems for this reason.


Related Discussions:- Advantages of transfer pricing

Participative budgets- budgetary styles, Participative Budgets In this ap...

Participative Budgets In this approach to budgeting, budgets are developed by lower level managers who then submit them to their superiors. The budgets depend on the lower level

Explain the external factors of pricing decisions, Explain the External fac...

Explain the External factors of pricing decisions 1) Demand: the market demand for a product or service obviously has big impact on pricing. Since demand is affected by fact

Control-role of management accountant , Control Control includes a ...

Control Control includes a comparison of actual performance with the plan so that deviation from the plan can be identified and corrective action taken. It can be define

Budget costing, Archie Ltd manufactures a product called Gizmo. It uses th...

Archie Ltd manufactures a product called Gizmo. It uses the following direct inputs: Price Quantity Cost per unit of output Direct materials $4 per gram 10 grams per unit $40 per

Assignment, Application of Information technology in respect of management ...

Application of Information technology in respect of management information system

The basic eoq model-the deterministic models, THE BASIC EOQ MODEL This ...

THE BASIC EOQ MODEL This is the most simple of all the models discussed. In addition to the general assumptions which relate to all deterministic models (i.e. certainty of all

Break event, The Braggs & Struttin'' Company manufactures an engine for car...

The Braggs & Struttin'' Company manufactures an engine for carpet cleaners called the "Snooper." Budgeted cost and revenue data for the "Snooper" are given below, based on sales of

Help, Jackson County Senior Services is a nonprofit organization devoted to...

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three serv

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd