Managerial Accounting Review Ch 8 12

(TCO 10) How is a transfer price determined? Describe the cost-based method. Do you think it is better than the market-based method?

Pricing is a pertinent issue in procurement and acquisition in organizations. Consumers buying the commodities of an entity should get clarity on pricing related issues. There is uncertainty in Pro

* Read the article titled, “What Manufacturers Need to Know about Transfer Pricing,” located in Week 5 of the online course shell. You may also view the article at

Discuss the US transfer pricing regulations, including advances pricing agreements, arms length standard, and methods allowed to determine comparable prices. - 60

Module 8: Assignments Collaborative Learning Community: Pricing Decisions 1) Within your CLC, choose a publicly traded company and identify one of its products that the group will analyze. Describe the strategic implications that would need to be considered in setting a price for that product, and determine whether the group would use a market-based pricing approach or a cost-based pricing approach to setting the product price. Explain the rationale behind choosing the pricing approach. Identify the costs that the group thinks would be considered in setting the product price, and come up with a sample cost structure for the product (make it as realistic as possible). Calculate a price for the product, and defend your product price and related cost structure.

to define the transfer pricing policy. Although the transfer pricing of Heidelberg is high, it would be interesting to force the two divisions to discuss and find a compromise on price. A potential way of determining both Heidelberg and later ECD’s transfer prices, would be to use the incremental cost per unit. Each division has excess capacity to spare and would not be forgoing potential sales by selling internally at a lower price. Although the company risks alienating external suppliers, as it stands now the product only represents 5% of total revenue for each division involved. Thus it is not likely to anger potential suppliers initially. The market is competitive enough that if in the future the company needs to outsource, there will still be willing suppliers.

First point for setting up transfer pricing range is the point of benefit for both the division. Here, the organization transferring products should ensure that it does follow the law regarding not selling produce below standard rates in the market (Brigham & Ehrhardt, 2007). Transfer price must be set at a rate than it is not resulting in higher expenditure for the organization over a period of time. For transfer pricing, it is an advantage as this method helps organization to work at a lower cost.

This is, the transfer price will be an income to Hudson Bay, which is the selling division, and it will be a cost for Volkmar construction Instruments, the buying division. It will only affect each division’s profit and the evaluation of its performance. As for General Instrumentation Company, there is no effect because both divisions are under the same umbrella of the company. This is, transfer pricing will show that it is a revenue in one division, and it matches as expenses in another division. As a result, transfer pricing does not show an overall effect on a company’s income. However, the most important thing that we can measure the company’s success is that we should take into account about the all level of management decision making, effective performance measurement, and appropriate investment decisions when we are practicing the transfer pricing

There are five methods of transfer pricing that consists of traditional methods recommended by OECD of the Comparable Uncontrolled Price (CUP), Resale Price, and Cost Plus methods. The profit based methods, no recommended because they are considered insufficient in comparisons, are the Profit-splits and the Profit comparison (TNNM) methods. CUP compares the price charged in a controlled transaction to the price charged in an uncontrolled transaction in comparable circumstances. This method is reliable when the same product is sold between two associated enterprises. The Resale price is used to determine the price paid by the reseller for product from and associated enterprise and resold to an independent enterprise. It includes all costs of selling, operating, customs duties, and arm's length price. This method is usually applied to marketing operations. The Cost plus method is used to

Transfer pricing is one of the key factors of a management control system, which helps a company to achieve its goals, including profit maximization and tax minimization.

The measurement of profit is also compounded by the use of transfer prices and agreeing on its ‘fairness’. Transfer prices are allocated to goods transferred from one unit to another within a firm. The implication of transfer prices is that for the selling unit it will be a source of revenue and for the receiving unit it is an element of cost, and as a result each division may act in its own interests. Transfer pricing therefore has a significant bearing when

Some assets not only store wealth but also create income. For example, an investment in a share of stock stores wealth and also perhaps creates dividend income. A deposit in a savings account stores wealth and creates interest income. Some investors care more about increasing asset value than about income. For example, an investment in a share of corporate stock may produce a dividend, which is a share of the corporation’s profit, or the company may keep all its profit rather than pay dividends to shareholders. Reinvesting that profit in the company may help the company to increase in value. If the company increases in value, the stock increases in value, increasing investors’ wealth.

Cost-based transfer prices can also align managerial incentives with corporate goals, if various factors are properly considered, including the outside market opportunities for both divisions, and possible capacity constraints of the selling division.

Pricing and Contracts- cover areas such as sales agreements, negotiation of contracts, processing of release order

Transfer pricing is a popular topic in management accounting. It is concerned with the price when one department (the selling department) provides goods or services to another department (the buying department). That is, one department generates revenue from the sales of goods or services and the other department incurs expenses from the purchases of goods or services. Transfer pricing is closely related to responsibility accounting in which each department is responsible for its cost, revenue, expense or investment return depending on the type of centre it is. Thus, transfer pricing effectiveness is essential to the success of the overall company. The related key issue is the determination of a transfer