Transfer pricing refers to the pricing of goods and services transferred between divisions within a decentralized organization. The key objectives of transfer pricing are to encourage optimal cost-revenue tradeoffs, goal congruence between divisions and the overall company, and accurate measurement of divisional performance. Common transfer pricing methods include market price, cost-based methods like marginal cost and full cost, and negotiated prices. Proper administration of transfer prices includes clear communication of strategies, documentation, and establishing negotiation and conflict resolution procedures.
Role of board of directors -Corporate GovernanceRehan Ehsan
This Presentation states the role of board of directors in respect of corporate governance of Pakistan. Reviewing this clear the concept of their legal role in Pakistan.
Role of board of directors -Corporate GovernanceRehan Ehsan
This Presentation states the role of board of directors in respect of corporate governance of Pakistan. Reviewing this clear the concept of their legal role in Pakistan.
OECD Ministers adopted the revised G20/OECD Principles of Corporate Governance at the annual OECD Ministerial Council Meeting on 7-8 June 2023. In their ministerial statement adopting the Principles, Ministers recognised the contribution of the revised Principles “to the resilience and sustainability of our economies”. The revised G20/OECD Principles will be submitted to G20 Finance Ministers and Central Bank Governors for endorsement at their meeting on 17-18 July.
The Principles were revised in light of recent evolutions in capital markets and corporate governance policies and practices, and to ensure their continued standing as the leading international standard for corporate governance.
An exercise whose objective is to enable auditors to express an opinion on whether the financial statements give a true and fair view (or equivalent) of the entity’s affairs at the period end and of its profit or loss (or income and expenditure) for the period then ended and have been properly prepared in
accordance with the applicable reporting framework (e.g. relevant legislation and applicable accounting standards) or where statutory or other specific requirements prescribe the term, whether the financial statements “present fairly”.
In this ppt i have given Introduction International Accounting which covers approaches in international accounting, importance of ia, introduction international accounting.
Subscribe to Vision Academy for Video assistance https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
IT CONTAINS BASICS OF AUDIT AND AUDITOR
MEANING OF AUDIT, DEFINITION, ORIGIN AND DEVELOPMENT, TYPES OF AUDIT, DIFFERENCE BETWEEN ACCOUNT AND AUDIT, AUDITOR
IT WILL HELP THE STUDENTS TO UNDERSTAND THE BASIC OF AUDIT.
Breakeven Analysis- A decision-making aid that enables a manager to determine whether a particular volume of sales will result in losses or profits.
Made up of four basic concepts
Fixed costs- costs that do not change
Variable costs- costs that rise in propitiation to sales
Revenue- the total income received
Profit- the money you have after subtracting fixed and variable cost from revenue
OECD Ministers adopted the revised G20/OECD Principles of Corporate Governance at the annual OECD Ministerial Council Meeting on 7-8 June 2023. In their ministerial statement adopting the Principles, Ministers recognised the contribution of the revised Principles “to the resilience and sustainability of our economies”. The revised G20/OECD Principles will be submitted to G20 Finance Ministers and Central Bank Governors for endorsement at their meeting on 17-18 July.
The Principles were revised in light of recent evolutions in capital markets and corporate governance policies and practices, and to ensure their continued standing as the leading international standard for corporate governance.
An exercise whose objective is to enable auditors to express an opinion on whether the financial statements give a true and fair view (or equivalent) of the entity’s affairs at the period end and of its profit or loss (or income and expenditure) for the period then ended and have been properly prepared in
accordance with the applicable reporting framework (e.g. relevant legislation and applicable accounting standards) or where statutory or other specific requirements prescribe the term, whether the financial statements “present fairly”.
In this ppt i have given Introduction International Accounting which covers approaches in international accounting, importance of ia, introduction international accounting.
Subscribe to Vision Academy for Video assistance https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
IT CONTAINS BASICS OF AUDIT AND AUDITOR
MEANING OF AUDIT, DEFINITION, ORIGIN AND DEVELOPMENT, TYPES OF AUDIT, DIFFERENCE BETWEEN ACCOUNT AND AUDIT, AUDITOR
IT WILL HELP THE STUDENTS TO UNDERSTAND THE BASIC OF AUDIT.
Breakeven Analysis- A decision-making aid that enables a manager to determine whether a particular volume of sales will result in losses or profits.
Made up of four basic concepts
Fixed costs- costs that do not change
Variable costs- costs that rise in propitiation to sales
Revenue- the total income received
Profit- the money you have after subtracting fixed and variable cost from revenue
the document is on Cost volume profit analysis.
(Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income.)
2024.06.01 Introducing a competency framework for languag learning materials ...Sandy Millin
http://sandymillin.wordpress.com/iateflwebinar2024
Published classroom materials form the basis of syllabuses, drive teacher professional development, and have a potentially huge influence on learners, teachers and education systems. All teachers also create their own materials, whether a few sentences on a blackboard, a highly-structured fully-realised online course, or anything in between. Despite this, the knowledge and skills needed to create effective language learning materials are rarely part of teacher training, and are mostly learnt by trial and error.
Knowledge and skills frameworks, generally called competency frameworks, for ELT teachers, trainers and managers have existed for a few years now. However, until I created one for my MA dissertation, there wasn’t one drawing together what we need to know and do to be able to effectively produce language learning materials.
This webinar will introduce you to my framework, highlighting the key competencies I identified from my research. It will also show how anybody involved in language teaching (any language, not just English!), teacher training, managing schools or developing language learning materials can benefit from using the framework.
Palestine last event orientationfvgnh .pptxRaedMohamed3
An EFL lesson about the current events in Palestine. It is intended to be for intermediate students who wish to increase their listening skills through a short lesson in power point.
Operation “Blue Star” is the only event in the history of Independent India where the state went into war with its own people. Even after about 40 years it is not clear if it was culmination of states anger over people of the region, a political game of power or start of dictatorial chapter in the democratic setup.
The people of Punjab felt alienated from main stream due to denial of their just demands during a long democratic struggle since independence. As it happen all over the word, it led to militant struggle with great loss of lives of military, police and civilian personnel. Killing of Indira Gandhi and massacre of innocent Sikhs in Delhi and other India cities was also associated with this movement.
How to Make a Field invisible in Odoo 17Celine George
It is possible to hide or invisible some fields in odoo. Commonly using “invisible” attribute in the field definition to invisible the fields. This slide will show how to make a field invisible in odoo 17.
Honest Reviews of Tim Han LMA Course Program.pptxtimhan337
Personal development courses are widely available today, with each one promising life-changing outcomes. Tim Han’s Life Mastery Achievers (LMA) Course has drawn a lot of interest. In addition to offering my frank assessment of Success Insider’s LMA Course, this piece examines the course’s effects via a variety of Tim Han LMA course reviews and Success Insider comments.
Instructions for Submissions thorugh G- Classroom.pptxJheel Barad
This presentation provides a briefing on how to upload submissions and documents in Google Classroom. It was prepared as part of an orientation for new Sainik School in-service teacher trainees. As a training officer, my goal is to ensure that you are comfortable and proficient with this essential tool for managing assignments and fostering student engagement.
Acetabularia Information For Class 9 .docxvaibhavrinwa19
Acetabularia acetabulum is a single-celled green alga that in its vegetative state is morphologically differentiated into a basal rhizoid and an axially elongated stalk, which bears whorls of branching hairs. The single diploid nucleus resides in the rhizoid.
June 3, 2024 Anti-Semitism Letter Sent to MIT President Kornbluth and MIT Cor...Levi Shapiro
Letter from the Congress of the United States regarding Anti-Semitism sent June 3rd to MIT President Sally Kornbluth, MIT Corp Chair, Mark Gorenberg
Dear Dr. Kornbluth and Mr. Gorenberg,
The US House of Representatives is deeply concerned by ongoing and pervasive acts of antisemitic
harassment and intimidation at the Massachusetts Institute of Technology (MIT). Failing to act decisively to ensure a safe learning environment for all students would be a grave dereliction of your responsibilities as President of MIT and Chair of the MIT Corporation.
This Congress will not stand idly by and allow an environment hostile to Jewish students to persist. The House believes that your institution is in violation of Title VI of the Civil Rights Act, and the inability or
unwillingness to rectify this violation through action requires accountability.
Postsecondary education is a unique opportunity for students to learn and have their ideas and beliefs challenged. However, universities receiving hundreds of millions of federal funds annually have denied
students that opportunity and have been hijacked to become venues for the promotion of terrorism, antisemitic harassment and intimidation, unlawful encampments, and in some cases, assaults and riots.
The House of Representatives will not countenance the use of federal funds to indoctrinate students into hateful, antisemitic, anti-American supporters of terrorism. Investigations into campus antisemitism by the Committee on Education and the Workforce and the Committee on Ways and Means have been expanded into a Congress-wide probe across all relevant jurisdictions to address this national crisis. The undersigned Committees will conduct oversight into the use of federal funds at MIT and its learning environment under authorities granted to each Committee.
• The Committee on Education and the Workforce has been investigating your institution since December 7, 2023. The Committee has broad jurisdiction over postsecondary education, including its compliance with Title VI of the Civil Rights Act, campus safety concerns over disruptions to the learning environment, and the awarding of federal student aid under the Higher Education Act.
• The Committee on Oversight and Accountability is investigating the sources of funding and other support flowing to groups espousing pro-Hamas propaganda and engaged in antisemitic harassment and intimidation of students. The Committee on Oversight and Accountability is the principal oversight committee of the US House of Representatives and has broad authority to investigate “any matter” at “any time” under House Rule X.
• The Committee on Ways and Means has been investigating several universities since November 15, 2023, when the Committee held a hearing entitled From Ivory Towers to Dark Corners: Investigating the Nexus Between Antisemitism, Tax-Exempt Universities, and Terror Financing. The Committee followed the hearing with letters to those institutions on January 10, 202
Introduction to AI for Nonprofits with Tapp NetworkTechSoup
Dive into the world of AI! Experts Jon Hill and Tareq Monaur will guide you through AI's role in enhancing nonprofit websites and basic marketing strategies, making it easy to understand and apply.
Macroeconomics- Movie Location
This will be used as part of your Personal Professional Portfolio once graded.
Objective:
Prepare a presentation or a paper using research, basic comparative analysis, data organization and application of economic information. You will make an informed assessment of an economic climate outside of the United States to accomplish an entertainment industry objective.
Embracing GenAI - A Strategic ImperativePeter Windle
Artificial Intelligence (AI) technologies such as Generative AI, Image Generators and Large Language Models have had a dramatic impact on teaching, learning and assessment over the past 18 months. The most immediate threat AI posed was to Academic Integrity with Higher Education Institutes (HEIs) focusing their efforts on combating the use of GenAI in assessment. Guidelines were developed for staff and students, policies put in place too. Innovative educators have forged paths in the use of Generative AI for teaching, learning and assessments leading to pockets of transformation springing up across HEIs, often with little or no top-down guidance, support or direction.
This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
2. Transfer Pricing
Transfer Pricing:
Transfer Pricing refers to the pricing of contributions (assets, tangibl
e and intangible, services, and funds) transferred within an organizat
ion. i.e. From one department to another.
Transfer Price:
Transfer price is a notional value at which goods and services are tra
nsferred between divisions in a decentralized organization.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-2
3. Features:
Since the prices are set within an organization (i.e. controlled), the t
ypical market mechanisms that establish prices for such transaction
s between third parties may not apply.
The choice of the transfer price will affect the allocation of the total
profit among the parts of the company.
Transfer Pricing
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-3
4. Objectives of Transfer Pricing
If two or more profit centers are responsible for product development,
manufacturing and marketing, each center is entitled to share revenue
when product is sold.
TP is mechanism to distribute this revenue among various profit cente
rs.
TP should be designed to accomplish following objectives:
1. Trade off b/w Cost & Revenue
It should provide each business unit with relevant information it needs
to determine optimum trade off between cost and revenue.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-4
5. Objectives of Transfer Pricing
2. Goal Congruence
The system should be designed so that improving business profits will
also lead to improving Company’s profit.
3.Measuring Economic Performance
It should help measuring the economic performance of individual busi
ness units.
4. Simple & Easy
The system should be simple to understand and easy to administer.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-5
6. Objectives of Transfer Pricing
5. Divisional Autonomy:
Each divisional manager should be free to satisfy the requirements of
profit center from external or internal sources.
There should be no interference in the process by other divisions like
buying centers and selling centers.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-6
7. Fixing Right Transfer Price
Fundamental Principle:
When profit centers of company buy products from or sell to, one an
other, following two decisions must be made periodically for each pr
oduct:
1. Sourcing Decision :
Should the company produce the product inside the company or purc
hase it from outside vendor.
2. Transfer Pricing Decision:
If goods are produced inside the company, at what price should the pr
oduct be transferred between profit centers.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-7
8. Fixing Right Transfer Price
Ground Rules:
The right transfer price should be fixed between the maximum and m
inimum limit.
Minimum Limit
The minimum transfer price is the sum of selling division’s marginal
cost plus opportunity cost of the resources used.
Maximum Limit
The Maximum limit is the lowest market price at which the buying di
vision could acquire goods/services externally.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-8
9. Methods of Transfer Pricing
Market Price Method.
Cost Based Method.
Marginal Cost.
Full Cost.
Dual Price Method.
Negotiated Price Method.
Alternative Methods
Two-Step Pricing
Profit Sharing
Two set of Prices
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-9
10. Market Price
It is the intermediate price that prevails in market between independe
nt buyers and sellers.
The price becomes operational when there is competitive external m
arket for transferred products i.e. huge external market exists.
It is also called Comparable Uncontrolled Price (CUP). Ranbaxy and
Cipla follow the cup method
Assumptions:
If the goods cannot be bought from a division with in the company, s
ame will have to be purchased from the open market at the prevailin
g price.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-10
11. Market Price
Advantages:
Divisional profit will represent its real economic contribution to total
company’s profit.
Comparison across companies.
Helps maintain product quality.
Less costly.
No role of senior management.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-11
12. Cost Based Methods
Marginal Cost :
Here the transfer price is equal to short term variable cost and opport
unity cost of capacity to make the product.
This price includes:
Direct material cost.
Direct labour cost.
Factory overheads.
This price is feasible when selling division is operating below full ca
pacity.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-12
13. Cost Based Methods
Advantages:
Encourages maximum profits in the long run as all the pricing decisi
ons will be based on cost-volume-profit relationship.
Limitations:
Long run costs include all costs.
Difficulty in ascertaining long run price.
Selling division has to bear fixed costs and operating expenses.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-13
14. Negotiated Market Based Price
Price set through a process of negotiation between selling and buying
division.
This reflects a true spirit of autonomy as managers of both divisions
mutually decide the price without any interference from head office.
Under Negotiated price the buyer division may:
• Accept the deal.
• Bargain to obtain lower price.
• Obtain outside bids & negotiate with external suppliers.
• Reject the bid, either buy from outside or not to purchase at all.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-14
15. Negotiated Market Based Price
Negotiated Price Succeeds Under Following Conditions:
• External market should exist.
• Market information is shared among negotiators.
• Both divisions can sell / buy the goods externally.
• Support from top management.
• External bidders are willing to supply market information.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-15
16. Negotiated Market Based Price
Negotiated Price Suffers Following Limitations:
• Negotiation process is costly.
• Conflict among divisions.
• Result depends upon the negotiating skills of managers.
• If top management interferes: against the principle of decentralizati
on
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-16
17. Variable Cost
per Unit $10
Market Price
per Unit $20
Full Cost
per Unit $13
Negotiated Price
Commonly Used Transfer Prices
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-17
18. Transfer Pricing—Negotiated Price Approach
1.Division M produces a product with a variable
cost of $10 per unit. Division M has unused ca
pacity.
2.Division N purchases 20,000 units of the same
product at $20 per unit from an outside source.
Assumptions
If the division managers agree on a price of $
15 per unit, how much will each division’s in
come increase under cost, market based and n
egotiated transfer pricing?
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-18
19. Statement of Income
Particulars Cost Based Market Base
d
Negotiated
Divisions M N M N M N
Market price ---------- 400000 ---------- 400000 ----------- 400000
Transfer price 200000 200000 400000 400000 300000 300000
Income Nil 200000 200000 Nil 100000 100000
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-19
20. Cost Based Methods
Full Cost :
In this method transfer price is based on full cost of the product.
The capacity related cost are divided by no. of units to get capacity c
osts per unit.
This unit cost is used to relate capacity related cost to current produc
tion.
It is useful where external market price does not exist.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-20
21. Cost Based Methods
Limitations:
Varying price as cost per unit changes as capacity use varies.
Mixes short run and long run costs.
Concept is based on the equation:
Variable cost + arbitrary mark up to cover capacity cost.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-21
22. Cost Based Methods
Types of Full Cost Transfer Pricing:
Variable Cost.
Actual Full Cost (Product + Period) .
Full Cost Plus Profit.
Standard Costs.
Opportunity cost.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-22
23. Cost Based Methods
Opportunity Cost:
Opportunity cost of transferring the goods internally.
It is the minimum price which selling department is ready to accept an
d maximum price which buying division is willing to pay.
This method is used when the external market is imperfect.
Opportunity Cost for Selling Division:
External sales value of transferred product.
Differential production cost of transferred product.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-23
24. Cost Based Methods
Opportunity Cost for Buying Division:
Price which would be required to purchase from the outside market.
The profit that would be lost from producing the final product if the g
oods could not be obtained at economic price.
Transfer of goods are encouraged:
The price of selling division is greater than the opportunity co
st of selling division.
The price of selling division is lesser than the opportunity co
st of buying division.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-24
25. Dual Rate Methods
Under dual rate pricing:
The selling division is credited with a price based on total c
ost + mark up.
The buying division is debited with marginal cost.
This strategy was introduced to overcome the problems associated wi
th marginal cost method i.e.:
Low morale in selling division.
Lack of motivation for buying division towards maximizing
organizational profits.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-25
26. Dual Rate Methods
Advantages:
Selling division is allowed to make profits.
Buying division has correct information for final pricing.
This technique will lead to some difference between two prices.
This difference is debited to common account i.e. Transfer Price Adj
ustment Account.
This amount is adjusted against the profits of both division at the end
of the year.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-26
27. Dual Rate Methods
Limitations:
Becomes complicated when large variety of goods are transferred
between divisions.
Transfer Price Adjustment Account has to be maintained at head o
ffice level.
Lower incentive for both divisions to deal in external market.
Protect selling division when external market is not doing well.
Does not encourage divisions to monitor performance of each othe
r.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-27
28. Evaluation of Methods of Transf
er Pricing
Method Goal Congruence Performance Eval
uation
Autonomy Administration co
st
Market Price Good Very Strong Very Strong Low if available
Actual Full Cost Poor Poor Poor Very Low
Full Cost Plus Poor Average Average Low
Variable Cost Strong Very Poor Poor Often Low
Negotiated Price Strong Strong Strong to Poor Low
Dual Price Strong
(Variable Cost)
Strong
(Market Price)
Poor High
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-28
29. Alternative Methods
Integrated Companies:
Transfer pricing can create significant problems in integrated compan
ies.
The profit center that sells may not be aware of upstream fixed costs
and profit included in internal purchase price.
Even if they are aware they might not reduce their profit to optimize
company’s profit.
To solve this problem , companies establish a formal mechanism whe
reby representative of buying and selling units meet periodically to
decide on outside selling price and sharing of profits for products w
ith significant upstream fixed cost and profits. (dual pricing)
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-29
30. Example: A petroleum company has three divisions; crude oil division, refinery di
vision and sales division. The crude oil division extracts the crude oil and sells it to
the refinery division. Refinery division refines the crude through a process of fracti
onal distillation. The output of refinery is then sold in the market by sales division.
In this situation sales division may underestimate the cost incurred during extractin
g and processing. So it might sell final product at a price which is not high enough t
o recover fixed costs. Due to this sales division may earn revenues but company as
a whole may incur losses.
In order to prevent these kind of problems, such companies adopt some other meth
od of calculating transfer price like:
Two Step Method, Profit Sharing and Two set of Process Methods
Alternative Methods
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-30
31. Two – Step Pricing
It includes fixed cost component and variable cost component.
In a transaction of transfer of goods between two divisions, the cost o
f production of selling division is Rs. X per unit and fixed cost per m
onth is Rs. Y and margin decided is Rs. Z per month.
If n units of goods are sold, then transfer price of month will be:
( nX + Y+ Z).
Or if the margin is included in variable component sat Rs. A per unit,
then the transfer price will be :
( nX + nA + Y )
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-31
32. Profit Sharing
It is also called the Spilt Method.
Under this all the business units share the operating profit.
In this the product is transferred to marketing unit at standard variabl
e cost.
And after the product is sold, the business units share the contributio
n earned which is selling price minus variable manufacturing and ma
rketing cost.
Limitations:
How to decide about sharing percentage?
In case of disputes, senior management has to intervene.
Costly and time consuming.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-32
33. Two Sets of Prices
Under this revenue is credited to manufacturing unit at the market sal
e price while the buying unit is charged with total standard costs.
The difference between the outside sale price and standard cost is cha
rged to parent firm's or head quarter’s account.
It is then eliminated when business units statements are consolidated.
Disadvantages:
1. Sum of business units profit is greater than overall firm’s profit.
2. Illusion of business units making money whereas overall co may
be loosing money on account of debit to head quarters.
3. Might motivate business units to concentrate on internal transfers
where they are assured of good mark up than outside sales.
4. Additional book-keeping is required.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-33
34. Other Aspects of Transfer Pricing
Behavioral Considerations:
TP affects actions of employees.
Deterring Competitors:
Profits at various stages of production may encourage co
mpetitors to enter in fray as business is profitable
Taxation:
International Transfer pricing, Arm’s Length Price
Repatriation of Funds
From subsidiary to head quarters.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-34
35. Other Aspects of Transfer Pricing
Product Life Cycle:
Introductory Phase: Cost + Mark Up
Growth: Price of Closest substitute.
Decline: Price of identical goods.
Minority Shareholders.
Reduction in amount paid to minority shareholders by d
epressing subsidiary’s profit.
Using Subsidies to spread Risk
Big manufacturer financing the cost of machinery purchased
by small manufacturer & then acquiring at adjusted TP
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-35
36. Administration of Transfer Prices
Articulation and Communication of Transfer Pricing Strategy
Documentation of Transfer Pricing Process and Inter-Organizati
on Agreements
Involvement of Multi-Disciplinary Team
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-36
37. Administration of Transfer Prices
Negotiation:
Business units negotiate price among themselves.
Prices are nit set by central staff group (line management).
It requires degree of subjectivity judgment so managers are better equ
ipped with information on market & cost.
Negotiated price is a result of compromises made by both buyer & sel
ler.
Rules of transfer pricing should be specific to avoid the effect of nego
tiation skills.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-37
38. Administration of Transfer Prices
Arbitration & Conflict Resolution:
In case business units do not agree on price.
Proper procedure should be in place for arbitrating negotiation dispute
s.
Committee should be set up to review:
Settling transfer price disputes.
Reviewing sourcing changes.
changing transfer price rules
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-38
39. Administration of Transfer Prices
Arbitration process:
Submission of cases by both parties and arbitrator reviews.
Large no. of cases subject to arbitration means ground rules for fixing
transfer price are faulty.
Conflict resolution process determine the result of arbitration. Steps:
Forcing
Smoothing
Bargaining
Problem solving
It ranges from conflict avoidance through forcing & smoothing and co
nflict resolution through bargaining & problem solving
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-39
40. Administration of Transfer Prices
Product Classification:
Class I
Includes all products for which senior management wishes to
control sourcing.
Sourcing can be changed by permission of senior management.
Class II
Products that can be produced outside the company.
Sourcing is determined by business units involved.
STRATEGIC COST MANAGEMENT - BA122B - Fall 2007 Slide 1-40