Management > Research Paper > BMANREV – MANAGEMENT ACCOUNTING REVIEW TRANSFER PRICING, PRICING DECISIONS AND SERVICE DEPARTMENT (All)

BMANREV – MANAGEMENT ACCOUNTING REVIEW TRANSFER PRICING, PRICING DECISIONS AND SERVICE DEPARTMENT COST ALLOCATIONS

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BMANREV – MANAGEMENT ACCOUNTING REVIEW TRANSFER PRICING, PRICING DECISIONS AND SERVICE DEPARTMENT COST ALLOCATIONS TRANSFER PRICING A TRANSFER PRICE is the price charged when one segment of a compa ... ny provides goods or services to another segment of the company. These are levied on goods produced by one division and transferred to another in which affects the revenues of the transferring division and the costs of the receiving division. It is also known as Intersegment Price. Objective The fundamental objectives in setting transfer prices is to motivate managers to act in the best interests of the overall company and to evaluate performance by virtually transforming costs into profit centers so that performance of the manager of the mainly cost centers can be measured reliably in terms of both revenues and expenses. The Transfer Pricing System should satisfy the following specific objectives:  Accurate performance evaluation  Goal congruence  Preservation of divisional autonomy Secondary objective is to save on costs involved in producing or buying a product by in-sourcing rather than outsourcing. Setting Transfer Prices Transfer Pricing System follows Opportunity Cost Approach in which it identifies:  Minimum price that a selling division would be willing to accept; and  Maximum price that the buying division would be willing to pay Minimum and maximum prices correspond to the opportunity costs of transferring internally and define a bargaining range  Minimum transfer price: Leaves the selling division no worse off if the good is sold to an internal division  Maximum transfer price: Leaves the buying division no worse off if an input is purchased from an internal division 3 Primary Approaches in Setting Transfer Prices 1. Negotiated transfer prices; 2. Transfers at the cost to the selling division; and 3. Transfers at market price. NEGOTIATED TRANSFER PRICES This results from discussion between the selling and buying divisions Advantages: 1. They preserve the autonomy of the divisions, which is consistent with the spirit of decentralization. 2. The managers negotiating the transfer price are likely to have much better information about the potential costs and benefits of the transfer than others in the company. 3. Compliance with goal congruence, autonomy, and accurate performance evaluation Disadvantages: 1. One divisional manager with private information may take advantage of another divisional manager 2. Performance measures may be distorted by the negotiating skills of managers 3. Negotiation can consume considerable time and resources Range of Acceptable Transfer Prices [Show More]

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