FINACIAL PLANNING AND CONTROL SYSTEMS

NAME: ARCHANA B. YENDARKAR STD : MFM 2ND YEAR

2011 -2012

SYLLAYBUS
FINANCIAL GOAL SETTING
ORGANISATIONAL GROWTH MECHANICS OF DETERMINING PROFIT OBJECTIVES OF PROFIT CENTRES

CONTROL IN SPECIAL SECTORS

FIANCIAL REPORTING TO MANAGEMENT

TRANSFER OF PRICING
INTRODUCTION :
In companies that have divisions with profit and investment centers, one often finds goods being transferred from one division to another. Since each division is a profit centre the transfer takes place at a value that may not necessarily be at cost. Instead goods are transferred at values that are profitable to the transferring division while taking care of the interest of the division to which goods are transferred.

Transfer price is a notational value at which goods and services are transferred between divisions in a decentralized organization.
The prices are set for intermediate products which are goods and services that are supplied by the selling division to the buying division. The goods that are received by the buying division may be processed further and before being sold to outside world as final products. One can also say that transfer price represents the amount used in accounting for any transfer of goods and services between responsibility centers.

 It represents a set of rules an organization uses to assign prices to products transferred between internal responsibility centers. It is observed that two or more profit centers undertake the joint responsibility for product development, manufacturing and marketing. In such cases the revenue earned from the sale of the concerned product is shared by the profit centres.

Two Most IMP features of Transfer Pricing 1. It should be simple to calculate and to implement 2. It should be robust i.e. it should not require frequent adjustment Objectives Of Transfer Pricing 1. It provides relevant information to determine optimum trade off between company costs and revenues 2. It induces goal congruency in decisions that potentially improve the divisional profits as also company profits 3. It helps in measuring the economic performance of individual profit centre's. 4. It facilitates allocation of the organizations jointly earned revenues to individual profit centre, in case the product is developed manufactured and distributed jointly.

Methods of Transfer Pricing

a) Market Price Method Market Price is the price that prevails in an intermediate market between independent buyers and sellers. This price becomes operational when there is competitive external market for the transferred product. It is based on the assumption that if goods cannot be bough from a division within the company, the same will have to be pruchased from the open market at the prevailing price. As such there is not distnction made between purchased from within and outside the company. The byuing and selling divisiona are indefferent to the choice of trading with each other or with outsiders.

b) Marginal Cost Method Under this method the transfer price is equal to the short run short term variable cost and the opportunity cost of the capacity used to make the product. The price thus includes cost of direct material, direct labour and factory overheads. This price is used when the selling division is operating below full capacity

c)

Full Cost MethodUnder this method the transfer price is based on the total product cost. The capacity related costs are divided by number of units to get capacityrelated cost per unit. This unit rate is then used to allocate capacity related costs to current production. This method is useful where external market price for the product does not exits Full Cost Pricing id further divided into 1. Variable cost 2. Actual Full cost 3. Full cost plus profit 4. Standard Costs 5. Opportunity cost

d)

Dual Rate MethodUnder this method the dual pricing strategy was introduced to overcome the problems caused by marginal cost, such as low morale in the selling division and lack of motivation by the buying division to maximize the organizational profit. Under dual pricing The selling division is credited with a price based on the total cost plus mark up & The buying division is debited with marginal cost.

This means that the selling division is allowed to make profit and the buying division has the correct information that enables it to make the correct selling decision that will maximize the organizational profits.

e) Negotiated market Based Price Method Transfer price could also be set through a process of negotiation between the selling & buying divisions. This method reflects the true spirit of autonomy as both the divisional managers mutually decide the price without any interference from the head office Under this buying division may Accept the deal Bargain to obtain a lower price/better conditions Obtain outside bids and negotiate with external suppliers Reject the bid or either buy from outside or not purchase at all. Same way purchasing division may make in offer to selling division and negotiate.