TRANSFER PRICING

1. TRANSFER PRICING
Presented By:
SOHA MEHROZ,
MBA 1 st year.

2. Definition:
It’s the price at which goods & services are
are transferred from one division to another within
same organisation.

3. Methods of Transfer Pricing:
Transfer
Cost Price
Market
Rate
Pricing
Cost-Plus
Shared
Profit
relative to
Cost
Methods
Standard
Cost
Negotiated

4. Cost Price:
Under this method Goods & services are transferred from one
division to another division on the basis of actual cost of
production.
It is simple and easy to operate ,but the profit of the transferring
centre shall be understimated & that of the centre to which
transfer is made would be over estimated.
So, this method is inappropriate for profit centre analysis.
Cost Plus a Normal Markup:
In this method, a margin of profit say 10% or 15% s added to the actual
cost to determine the transfer price.

5. Standard Cost:
It means pre-determined cost . Under this method, Transfer price is
fixed on basis of standard costing. The difference between
standard cost & actual cost being variants is observed by
transferring division.
This method is simple & easy but, the constant revision of standards
is necessary at regular intervals.
Market Rate Transfer Pricing:
In this method ,the prices charged for intra company transfer are
determined on the basis of market price prevailing in the
market.From the market price,selling and distribution overheads
should be deducted and price thus arrrive should be charged at
transfer price.
MP-S&D

6. Shared Profit relative to Cost:
under this method no price is charged for the intra
company transferer.rather out of total sales revenue
of the company the total cost of various divisions is
deducted to find out the profit of the company and
then profit is shared by various divisions on the
basis of cost.
Negotiated prices:
The transfer pricing may be fixed through negotiation
between selling and the buying division.
Sometimes it may happen that the same product is
available in the market at cheaper price than the
price charged by selling division.

7. In this situation ,overall profitability of firm may
be affected adversely.
Therefore ,it is beneficial for both the divisions
to negotiate at a price which is mutually
beneficial for both.
Transfer pricing in Perfect Competition:
If the transferer has perfect market then he will
desire to get transfer price equivalent to
market price.TP=MP

8. Need for Transfer Pricing:
• Geographically Dispersed:
Now the world has become global village one branch will
be In mumbai another in USA ,Uk etc. Among these
branches transfer of goods takes place which is called
as international transfer pricing.
• Multiple divisions:
There will be multiple divisions in each company and
they may have variousrequirements.
Decentralised organisation:
Every dept is responsible for its own profits.