Term
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Definition
| value placed on a transfer of goods or services in transactions in which one of the two parties involved is a profit center |
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Term
| 6 Objectives of transfer pricing |
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Definition
1. Provide each business unit w/relevant information it needs to determine optimum trade-off between costs and revenues.
2. Induce goal congruent decisions
3. Help measure economic performance of the individual business units
4. Should be simple to understand and easy to administer
5. want the system to maintain management prerogatives (autonomy)
6. Try to minimize overall taxes and tariffs. |
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Term
| Why profit centers sell to one another (2 decisions). |
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Definition
1. Sourcing: produce product or purchase outside?
2. Transfer price: if produced inside, at which price should it be transferred? |
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Term
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Definition
| Transfer price = market price |
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Term
| A market price-based transfer price will induce goal congruence if (6 suggestions) |
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Definition
1. Competent people
2. Good atmosphere
3. A market price
4. Freedom to source
5. Full information
6. Negotiation |
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Term
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Definition
| Measures how well the profit center may be performing against its competitors |
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Term
| How to find competitive price (4) |
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Definition
1. Published market prices
2. Market prices may be set by bids
3. If the buying profit center sells similar products to outside markets
4. If the buying profit center purchased similar products in the outside market |
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Term
| Cost-based transfer price (2 decisions) |
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Definition
1. How to define cost
2. How to calculate the profit markup |
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Term
| Why use standard costs vs actual costs |
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Definition
| Don't want to pass along inefficiencies |
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Term
| Profit markup (2 decisions) |
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Definition
1. What the profit markup is based on
2. The level of profit allowed |
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Term
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Definition
1. Standard variable cost of one unit
2. Monthly fixed cost for facilities (lump sum) |
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Term
| Points to consider about the 2 step method (5) |
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Definition
1. Monthly charge should be periodically negotiated
2. Questions may be raised about accuracy
3. Mfg profit is not affected by sales volume
4. Could be a conflict of interest
5. Similar to 'take or pay' |
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Term
| Profit sharing problems (3) |
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Definition
1. Can be arguments over dividing profit
2. Does not give valid profit info
3. Mfg's contribution depends on ability of product to be sold |
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Term
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Definition
"mickey mouse" poor methodology
1. Mfg revenue is credited at outside prices
2. Buying unit is charged total std costs
Difference is charged to HQ and eliminated during consolidation |
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Term
| Disadvantages of 2 sets of transfer prices (5) |
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Definition
1. BU profit > Overall profit
2. Illusive feeling that they are making money when they are not.
3. Concentrate more on internal transfers because they are assured good markup
4. Additional bookkeeping involved
5. Lessened conflicts between BU's can be viewed as a weakness |
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Term
| 3 Schools of thought on cost allocation of company services |
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Definition
1. Standard variable cost
2. SVC + share of SFC (full cost)
3. Market price |
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Term
| Why set up an arbitration committee? (3) |
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Definition
1. Setting transfer [price disputes)
2. Reviewing sourcing changes
3. Changing the transfer price rules when appropriate |
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Term
| If there are too many disputes being sent to the AC (3) |
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Definition
1. Rules are not specific enough
2. Rules are difficult to apply
3. Business unit organization is illogical |
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Term
| What determines how much you invest into transfer pricing rules |
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Definition
1. How many transfers actually take place and their $ value
2. Potential availability of market price |
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Term
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Definition
Class I: senior mgmt controls sourcing. High-volume, no outside source exists.
Class II: can be produced outside teh company without any disruption to operations. Low-volume. |
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Term
| 3 types of transfer pricing models |
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Definition
1. Economic models
2. Linear programming
3. Shapley value |
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