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Alternative Transfer Methods 19377wq99q9q

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25 views1 page

Alternative Transfer Methods 19377wq99q9q

Uploaded by

Rebecca Conyers
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Alternative transfer-pricing methods

There are three general methods for determining transfer prices:

1 Market-based transfer prices. Upper management may choose to use the price of a similar

product or service publicly listed in, say, a trade association website. Also, upper management

may select, for the internal price, the external price that a subunit charges to outside customers.

2 Cost-based transfer prices. Upper management may choose a transfer price based on the costs of

producing the product in question. Examples include variable manufacturing costs, manufacturing

(absorption) costs and full product costs. ‘Full product costs’ include all production costs as

well as costs from other business functions (R&D, design, marketing, distribution and customer

service). The costs used in cost-based transfer prices can be actual costs or budgeted costs.

3 Negotiated transfer prices. In some cases, the subunits of a company are free to negotiate the

transfer price between themselves and then to decide whether to buy and sell internally or deal

with outside parties. Subunits may use information about costs and market prices in these

negotiations, but there is no requirement that the chosen transfer price bear any specific

relationship to either cost or market-price data. Negotiated transfer prices are often employed

when market prices are volatile and change occurs constantly. The negotiated transfer price is

the outcome of a bargaining process between the selling and the buying subunits.

Ideally, the chosen transfer-pricing method should lead each subunit manager to make optimal

decisions for the organisation as a whole. As in all management control systems, transfer pricing

should help achieve an organisation’s strategies and goals, and fit its structure. In particular,

it should promote goal congruence and a sustained high level of management efort. Sellers

should be motivated to hold down costs of supplying a product or service, and buyers should be

motivated to acquire and use inputs efciently. If top management favours a high degree of

decentralisation, transfer pricing should also promote a high level of subunit autonomy in

decision making. Autonomy is the degree of freedom to make decisions.

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