Lecture 22 0501 - ORIE 350 May 1 2007 Transfer Pricing...

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ORIE 350 May 1, 2007 Transfer Pricing
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Notes Sign up for a make up final exam if you want to take it then May 9 and May 11
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Transfer Prices When goods or services are transferred within a company from one division to another, the transaction is recorded in the accounting records. The value assigned to the transaction is the transfer price.
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Setting Transfer Prices Management must consider congruence with organizational goals when setting transfer prices. Methods of setting transfer prices include: 1. Top management intervenes to set prices 2. Top management establishes policies for setting transfer prices 3. Division managers negotiate their own transfer prices
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Top Management Sets Prices Management may become swamped with pricing disputes. Division managers lose flexibility and autonomy. Reduces benefits of decentralization. Probably OK for a firm with a small number of transfers.
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Established Policies for Transfers A transfer pricing policy should allow divisional autonomy. It should encourage division managers to pursue goals consistent with corporate goals.
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Economic Transfer Pricing Rule Transfer at the differential outlay to the selling division (typically variable cost) plus any opportunity cost.
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