Transfer Pricing (TP) is the process and practice of pricing exchanges of goods and services amongst divisions of large multi-divisional organizations.
USAGE AND MANIPULATION OF TRANSFER PRICES.
Transfer prices can be used and also be misused for a number of reasons.:
- TP should be used in an attempt to allocate profits and losses for each division in such a way that the corporate strategy of the overall organization is supported in the optimal way.
- Sometimes transfer pricing can be a contentious political issue in organization and expecially among senior level executives. This is because the level at which transfer prices are set may negatively influence their division profits and as a result cause lower bonuses to accrue to the managers.
- Transfer Pricing can also be manipulated fo taxation reasons: by charging low transfer prices from a unit based in high-tax country that is selling to a unit in a low-tax country, a firm can record a low profit in the first country and high profit in second. For example the january 2013 issue of not paying an accurate tax in the UK.
According Gox in an article (Gox, R.F, "Strategic Transfer Pricing, Absorption Costing and Observability". Management Accounting Research, 2000, vol. 11, p 327-348).
- In the first case it is better to charge a price above the marginal cost of the intermediate products. In this way managers of the firm are committed to act as a softer competitor of the final product market, because both firms intend to increase their prices strategically, there does an equilibrum price above the marginal costs of the intermediate product. Transfer pricing is a profitable choice in this case since this will be higher than profits attainable under marginal-cost based transfer pricing.
- However when tranfer pricing are not Observable there will not be an equilibrum with strategic transfer pricing used in the observable case. In the unobservable case it is optimal to use a transfer price equal to the marginal costs of the intermediate product. In this case neither of the two divisionalized companies is able to manipulate the strategic equilibrum of the othe company`s managers and as a result deviating from marginal costs as the transfer price will only cause suboptimum price setting by the manager him/herself.
<iframe src="http://rcm-eu.amazon-adsystem.com/e/cm?t=murphyojo1-21&o=2&p=9&l=bn1&mode=kitchen-uk&browse=11052681&fc1=000000<1=_blank&lc1=3366FF&bg1=FFFFFF&f=ifr" marginwidth="0" marginheight="0" width="180" height="150" border="0" frameborder="0" style="border:none;" scrolling="no"></iframe>
No comments:
Post a Comment