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Transfer Pricing
Chapter 15
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
LO
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Transfer Pricing
LO 15-1
Transfer Price
The value or amount recorded in a firms accounting re
when one business unit sells (transfers) a good or serv
another business unit. The accounting records in the t
(responsibility centers) treat this transaction in exactly
same way as a sale to an outside customer.
Because the exchange takes place within the
organization, however, the firm has considerable
discretion in setting this transfer price.
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15-1
Transfer Pricing
Because the managers of both the selling division
and the buying division are evaluated on division
profit, not company profit, they consider the
effect of all sales, both internal and external, on
their division, not company, profit.
The optimal transfer price is the price that leads
both division managers, each acting in his or her
own self-interest, to make decisions that are in
the firms best interest.
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15-2
Determination of
Optimal Transfer Price
Given the market prices and the costs in the firm,
does firm profit increase?
Given the transfer price, the intermediate market
prices, and the divisional costs, does the selling
division profit increase?
Given the transfer price, the final market prices,
and the divisional costs, does the buying division
profit increase?
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15-3
Centrally Established
Transfer Price Policies
Market Price-Based
Sets the transfer price at the market price or
at a small discount from the market price
Cost-Based
Outlay cost to selling division plus forgone
contribution to company projects
Negotiated Transfer
Managers of the buying and selling
divisions agree on a price
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LO
15-3
Standard
Standard Costs
Costs or
or Actual
Actual Costs
Costs
If
If actual
actual costs
costs are
are used
used as
as the
the basis
basis for
for the
the transfer,
transfer, any
any variances
variances or
or
inefficiencies
inefficiencies in
in the
the selling
selling division
division are
are passed
passed to
to the
the buying
buying division.
division.
The
The problem
problem of
of isolating
isolating the
the variances
variances that
that have
have been
been transferred
transferred to
to
the
the subsequent
subsequent buying
buying divisions
divisions becomes
becomes extremely
extremely complex.
complex. To
To
promote
promote responsibility
responsibility in
in the
the selling
selling division
division and
and to
to isolate
isolate variances
variances
within
within divisions,
divisions, standard
standard costs
costs are
are generally
generally used
used as
as aa basis
basis for
for
transfer
transfer pricing
pricing in
in cost-based
cost-based systems.
systems.
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15-3
Motivational Problems of
Transfer Pricing
A
A supplier
supplier whose
whose transfers
transfers are
are almost
almost all
all internal
internal is
is usually
usually organized
organized
as
as aa cost
cost center.
center. The
The center
center manager
manager is
is normally
normally held
held responsible
responsible for
for
costs,
costs, not
not revenues.
revenues. Hence,
Hence, the
the transfer
transfer price
price does
does not
not affect
affect the
the
managers
managers performance
performance measures.
measures.
In
In companies
companies in
in which
which such
such aa supplier
supplier is
is aa profit
profit center,
center, the
the artificial
artificial
nature
nature of
of the
the transfer
transfer price
price should
should be
be considered
considered when
when evaluating
evaluating the
the
results
results of
of that
that centers
centers operations.
operations.
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15-5
Segment Reporting
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15-5
Segment Reporting
The following are the principal items that must be
disclosed about each segment:
Segment revenue, from both internal and external
customers.
Interest revenue and expense.
Segment operating profit or loss.
Identifiable segment assets.
Depreciation and amortization.
Capital expenditures.
Certain specialized items.
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End of Chapter 15
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