AC2105 20S2 Lesson 8 Slides.pdf - AC2105 - Accounting for...

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aLesson 8AC2105 - Accounting forDecision Making andControl
Objectives of Transfer PricingPolicies
Learning Objectives1. Explain the impact of transfer pricing on organisations.3
Transfer pricing is the determination of an exchangeprice forintra-organisational transfersof goods or services.Example:Transfer PricingBattery DivisionAuto DivisionBatteries.
Products can be final products sold to outside customers(e.g., batteries for automobiles) or intermediate productsprovided to other internal units (e.g., components orsubassemblies).Transfer prices are needed forperformance evaluationpurposes, regardless of whether business units of anorganisation are considered profit centers or investmentcenters.Transfer Pricing (cont.)
The transfer priceaffects the profit measure for both theselling division and the buying division.The selling division wants the transfer price to be as high aspossible to increase the unit’s net income and ROI.The buying division wants the transfer price to be as low aspossible to increase the unit’s net income and ROI.Transfer price hasno impact on the entire company’s P/Las it is like moving money from one pocket to another.6Transfer Pricing (cont.)
The objectives of transfer pricing are the same as those forevaluating the performance of profit and investmentcenters:TomotivatemanagersTo provide anincentivefor managers to make decisionsconsistent with the firm’s goalsTo provide abasisfor fairly rewarding managersObjectives of Transfer Pricing
Transfer Pricing Techniques andBehavioural Implications
Learning Objectives1. Compute transfer prices using the various transfer pricingmethods.2. Explain the behavioural implications of transfer pricing.9
Variable cost transfer pricesFull cost transfer pricesMarket-based transfer pricesNegotiated transfer pricesFour Transfer Pricing Methods
Top management chooses a transfer price based on the variable costsof producing the intermediate product. Examples include:Variable production costsVariable production cost plus some markupIt is desirable when selling unit hasexcess capacity.

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Term
Spring
Professor
Chung Li Hong
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