Basic Summary of Transfer Prices

Objectives of Transfer Prices

-For lettuce centers to share in the revenue find when intersection is sold

-Transfer expense is the mechanism for distributing this revenue

-Goals

oShould provide unit with pertinent information to determine trade off of costs and revenues

oInduce death congruent decisions (improve comp whatsoever and unit profits)

oMeasure economic performance of the unit

oSimple to understand, effortless to administer

Transfer pricing methods

-Traditional: amount used in accounting for any transfer of goods and work between responsibility centers

-Book: Value position on a transfer of good or services in transactions in which at least iodin of the two parties involved is a profit center

Fundamental Principle

-The transfer price should be similar to the price that would be charged if the product were sold to outside customers or purchased from outside vendors

oIssues with pricing - should it be so that MC = MP etc?

Profit centers have two decisions when purchasing

-Sourcing conclusiveness - should the company issue the product inside the company or purchase it from an outside vendor?

-Transfer Price Decision - If produce inside, at what price should the product be transferred between profit centers?

The Ideal Situation

A mart price based transfer price will induce goal congruence if every the sideline conditions exist:

-Competent people - mangers interested in LT and ST

-Good atmosphere - managers discern that the transfer price is just

-Market price - price based on well-established, normal market price for identical product (adjust market price downward for savings incurred)

-Freedom to source - managers choose their go around place to purchase it/sell it

-Full information - managers know of all information of other choices

-Negotiation - smooth mechanism for negotiating

Constraints...

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