Transfer Pricing
7 Transfer Pricing
LEARNING OBJECTIVES :
After studying this chapter students will understand. * Purpose of transfer pricing * Responsibility of a division as responsibility centre * Conflicts between the divisions * Setting of transfer price where the profit of the organisation can be higher.
7.1 Introduction
The whole organisation can be divided into a number of divisions, the performance of each division can be measured in terms of both the income earned and the costs which are incurred. In profit centred divisional approach the manager of each division is responsible for cost, income and profit of his division. Further he is given freedom to make all decisions affecting his division. In such a decentralised organisation there may be transfer of goods from one division to another division. The price charged for transfer of goods of one division to another division is the cost to receiving division and income of supplying division. It means that the transfer price fix will affect the profitability of both divisions.
7.1.2. Definition : Transfer price can be defined as the price charged for products exchanged in internal transactions between sellers (or transferors) and buyers (or transferees) who belong to the same organisation usually a decentralised organisation.
7.2 Objectives of Transfer Pricing System
The main-objectives of intra-company transfer pricing are as below: * i) This motivates manager of a division to maximize profit of the division and inturn the profit of the company as a whole. * ii) To utilise capacity of the plant and other resources as maximum as possible. * iii) To optimise allocation of financial resources.
7.3 Methods of Transfer Pricing
The methods of pricing usually employed in industry when goods or services are transferred from one unit to the other can be broadly classified under the following three categories:
i) At cost or variants of cost e.g. actual manufacturing
LEARNING OBJECTIVES :
After studying this chapter students will understand. * Purpose of transfer pricing * Responsibility of a division as responsibility centre * Conflicts between the divisions * Setting of transfer price where the profit of the organisation can be higher.
7.1 Introduction
The whole organisation can be divided into a number of divisions, the performance of each division can be measured in terms of both the income earned and the costs which are incurred. In profit centred divisional approach the manager of each division is responsible for cost, income and profit of his division. Further he is given freedom to make all decisions affecting his division. In such a decentralised organisation there may be transfer of goods from one division to another division. The price charged for transfer of goods of one division to another division is the cost to receiving division and income of supplying division. It means that the transfer price fix will affect the profitability of both divisions.
7.1.2. Definition : Transfer price can be defined as the price charged for products exchanged in internal transactions between sellers (or transferors) and buyers (or transferees) who belong to the same organisation usually a decentralised organisation.
7.2 Objectives of Transfer Pricing System
The main-objectives of intra-company transfer pricing are as below: * i) This motivates manager of a division to maximize profit of the division and inturn the profit of the company as a whole. * ii) To utilise capacity of the plant and other resources as maximum as possible. * iii) To optimise allocation of financial resources.
7.3 Methods of Transfer Pricing
The methods of pricing usually employed in industry when goods or services are transferred from one unit to the other can be broadly classified under the following three categories:
i) At cost or variants of cost e.g. actual manufacturing