MA: Transfer pricing

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  • Created by: charlie
  • Created on: 29-05-17 18:21
Transfer price definition
selling price for the transfer of goods/ services from one division to another within the same company (valued at 0 for producing div/ at VC for receiving div)
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TP advantages (4)
(1) evaluations (realistic divisional profit) (2) pricing (producer realist profit + receiver realistic costs) (3) autonomy (DM decisions) (4) Goal congruence (good decision making)
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TP difficulties (2)
(1) misleading profits (bad for decentralised company assessing on profits) (2) conflicts between divisions (trade-off between decision making + performance evaluation)
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Practical methods of TP: (1) Market price (features - best when perfect market)
(1) best TP if perfectly competitive market (same selling costs + division acts individually) (2) divisions product has to be same quality as market (3) Market price may be reduced due to savings (packaging/ advertising/ dist./ bad debts)
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Practical methods of TP: (2) Cost plus (features)
(1) producer calc cost plus markup (incl FOH) (2) uses std. costs (avoid inefficiencies/ managers held resp. for own variances) (3) Use of TAC (enables all FixedOH to be recovered)
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Practical methods of TP: (2) Cost plus (optimal output)
SUB-OPITMAL OUTPUT: when TP = std. VC cost plus FC or markup (restricts output for div. to cover higher TP)/ OPTIMAL OUTPUT: when TP = MC
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Practical methods of TP: (3) Two-part NEGOTIATION (features - best when imperfect market)
(1) TP at std. VC (goal congruent optimal output/ cost control/ responsibility accounting/ treated as cost centre) (2) supplying div. later credited with lump sum/ pro-rata (VC ratio split) (3) inter-div. NEGOTIATION (comm./ planning/ coordination)
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Practical methods of TP: (3) Two-part (periodic lump sum/ pro-rata contn)
supplying division credited with amount towards FC + profit/ PERIODIC LUMP SUM: % capacity to B. x FC of A/ PRO-RATA CONTN: total company contn split into std. VC then compensated
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Practical methods of TP: (4) Dual pricing (features)
(1) Supplying division reports at cost plus (guaranteed profit) + Buying at std. VC (lowest price) (2) motivation to both (3) poor cost control (cost-plus) + unrealistic profits (overall company) (4) accounting problems (can't add profits)
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International TP
adjust TP to make sure profits made in country with lowest taxes/ low TP for high importers/ REGULATION: OECD pricing guideline ('arms length transaction')/ ethical standards/ morals
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Other cards in this set

Card 2

Front

TP advantages (4)

Back

(1) evaluations (realistic divisional profit) (2) pricing (producer realist profit + receiver realistic costs) (3) autonomy (DM decisions) (4) Goal congruence (good decision making)

Card 3

Front

TP difficulties (2)

Back

Preview of the front of card 3

Card 4

Front

Practical methods of TP: (1) Market price (features - best when perfect market)

Back

Preview of the front of card 4

Card 5

Front

Practical methods of TP: (2) Cost plus (features)

Back

Preview of the front of card 5
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