The document discusses transfer pricing within organizations. It covers introduction to management control systems and responsibility centers. It then discusses transfer pricing models including market-based, cost-based and negotiated prices. It provides an illustration of calculating transfer prices between transportation and refining divisions. It also briefly discusses transfer pricing in perfectly competitive markets, based on full costs plus markup, and with unused capacity. General guidelines for determining minimum transfer prices and issues around multinational transfer pricing are also mentioned.

1. Transfer
Pricing
Group 3
Management Accounting and Control Systems
March 1, 2023

2. Agenda
 Introduction (3-15)
 Calculations (16-
 Transfer Pricing and Perfectly Competitive Markets
 Transfer Pricing based on full cost plus a markup
 Transfer Pricing with unused capacity
 General guidelines for determining a minimum TP
 Multinational Transfer Pricing

3. Introduction
Let’s dive in

4. Management
Control
Systems

5. Management Control Systems
A management control system is a means
of gathering and using information to :
 Aid and coordinate the planning and
control decisions throughout the
organization
 Guide the behavior of managers and
employees.

6. Management Control Systems
 Shared values
 Loyalties
 Mutual commitments
 Company culture
 Unwritten norms about acceptable behavior
 Management Accounting System
 Human Resources System
 Quality systems
 Explicit rules
 Performance measures
 Incentive plans
Formal control system Informal control system

7. Effective Management Control

8. Decentralization:
Benefits
&
Costs

9. Decentralization
Decentralization is the freedom for
managers at lower levels of the
organization to make decisions.
“The greater the freedom , the
greater the autonomy.”

10. Decentralization
 Suboptimal decision making
 Narrow manager’s attention
 Duplication of output
 Duplication of activities
 Greater responsiveness
 Faster decision making
 Increased motivation
 Management development and learning
 Increase in reach of top management
Benefits Costs

11. Decentralization in MNCs
Decentralization enables country managers to make decisions that :
 exploit their knowledge of local business and political conditions
 enables them to deal with uncertainties in their individual environments.
Limitation in the form of lack of control and the resulting risks.

12. Responsibility Centers
 A segment or subunit of the organization whose manager is accountable for a
specified set of activities.
 Management Control System uses one or a mix of 4 types of responsibility
centers:

13. Transfer
Pricing

14. Transfer Pricing
Price which one subunit charges for a
product or service supplied to another
subunit of the same organization.
 Transfer price creates revenues for selling
subunit and purchase costs for the buying
subunit.
 Intermediate product is the product or
service transferred.

15. Criteria for evaluation
As in all management control systems, transfer prices should help achieve a
company’s strategies and goals and fit its organization structure.
There are three main criteria to evaluate transfer pricing. They should:
 Fit the organization’s structure
 Promote goal congruence
 Promote a sustained high level of management effort

16. Calculations

17. Transfer Pricing Models
 Market-based transfer prices
 Cost-based transfer prices
 Negotiated transfer prices

18. Illustration
Lomas & Co. has two divisions:
Transportation and Refining.
 Transportation purchases crude oil in Alaska and sends it to Seattle.
 Refining processes crude oil into gasoline.

19. Illustration
 External market price for supplying crude oil per barrel: $13
 Transportation Division:
 Variable cost per barrel of crude oil $ 2
 Fixed cost per barrel of crude oil 3
 Total $ 5
The pipeline can carry 35,000 barrels per day.

20. Illustration
 External purchase price for crude oil per barrel: $23
 Refining Division:
 Variable cost per barrel of gasoline $ 8
 Fixed cost per barrel of gasoline 4
 Total $ 12
The division is buying 20,000 barrels per day.

21. Illustration

22. Illustration

23. Illustration

24. Transfer
Pricing and
Perfectly
Competitive
Markets

25. Transfer
Pricing based
on full cost
plus a markup

26. Transfer
Pricing with
unused
capacity

27. General
guidelines for
determining a
minimumTP

28. Multinational
Transfer
Pricing

29. Growth by sector
4.3
2.5
3.5
4.5
2.4
4.4
1.8
2.8
2
2
3
5
Q1 Q2 Q3 Q4
Series 1 Series 2 Series 3

30. Growth by sector
Q1 Q2 Q3 Q4
Series 1 4.3 2.5 3.5 4.5
Series 2 2.4 4.4 1.8 2.8
Series 3 2 2 3 5
Series 4 3.4 6 2.3 1

31. Contoso was great to work
with. Patrice was my
representative and she
anticipated my needs and
worked diligently to fix my
issue.
A satisfied customer

32. Timeline
Q1 Q2 Q3 Q4
Jul Aug Sep Nov
Oct Dec Jan Feb Mar Apr May Jun
Product launch
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33. Goals for Q1
Employee opportunities
 End of fiscal celebration on July 15th
 Employee day of learning on August 14th
 Employee Yoga on September 3rd
 Seminar series begins September 10th
Business priorities
 Increase customer satisfaction by 2%
 Maintain growth
 Diversify investment in sector 2
 Initiative partnership with 3rd party
organizations

34. Goals for Q2
Business opportunities
 Increase customer
satisfaction by 2%
 Maintain growth
Added priorities
 Decrease the number of
rotations by at least 2
 Ensure the cost of
development stays below
budget
Employee priorities
 Interns begin
 Indoor rec leagues
 Chess tournaments
 Big Game watching party

35. Summary
We’re delivering for our customers
Last year we supported thousands of
customers and sold 60,000 units
Our business is good
Profits are up in the last quarter by 3%
Our customers keep coming back
We increased customer retention by 4%
We’re getting our work done
We finished the consolidation project
Our team is growing
We welcomed 3 new team members
last quarter
We’re leaders
We are top leaders in the industry across
the board

36. Conclusion
Thanks to your commitment and
strong work ethic, we know next year
will be even better than the last.
We look forward to working together.
Ana
Sales@contoso.com

37. Team
• Sourav
• PraveenYadav
• Pratik Prasad Sah
• SagarVijay
• Allanka Deleep