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Transfer Pricing
Transfer pricing is an accounting practice that involves the pricing of goods and services between divisions of the same company. It can also be used between companies that are under common control.
What is Transfer Pricing?
Transfer pricing is the price charged by one division of a company to another division for goods and services. It's an artificial price that's based on market prices. Transfer pricing can help companies reduce their tax burden
How is transfer pricing used?
Companies may charge higher prices to divisions in countries with higher taxes. Companies may charge lower prices to divisions in countries with lower taxes. Accountants record transfer prices as revenue for the producing segment and as a cost for the receiving segment. How does transfer pricing apply to CMAs?
CMAs can learn how to determine transfer pricing in CMA Part-One Mini Lessons. CMAs can build a career in transfer pricing if they have knowledge and expertise in the field. Segments are generally evaluated based on some measure of profitability. The transfer price is important because it affects the profitability of the buying and selling segments. The higher the transfer price, the better for the seller. The lower the transfer price, the better for the buyer. Ideally, a transfer price provides incentives for segment managers to make decisions not only in their best interests but also in the interests of the entire company. In practice, companies mostly base transfer prices on (1) the market price of the product, (2) the cost of the product, or (3) some amount negotiated by the buying and selling segment managers. Transfer Pricing and Taxes
RESPONSIBILITY CENTRE:-
Responsibility Centre is a division or sub part of an organisation which is headed by a divisional manager who is responsible for either revenue or Cost Control or both. Sometimes a divisional manager may be responsible for investments needs of the division. TYPES OF RESPONSIBILITY CENTRES:-
- Cost Centre- Cost Minimisation
- Profit Centre- Profit Minimisation
- Investment Centre- Profit Maximisation ROI maximisation(Return on Investment) RI minimisation (Residual Income) Goal Congruence Goal Congruence ensures that all the division of an organisation seek to attain their individual Objectives but attaining organisational level objectives is paramount.
RULE #1- COST PLUS RETURN ON
INVESTMENT
TP= Transfer Price VCpu= Variable Cost Per Unit FCpu=Fixed Cost Per Unit Desired Profit pu= Desired Profit/Budgeted quantity
RULE #2 :-Market Price as Transfer Price
If there is a ready market for goods/services produced by the transferor division, TP should be at market price or NRV (Net Realisable value), if selling costs are given.
RULE#3 :- Range of TRANSFER PRICE
Starting Point: Cost of product bought from outside market+Carriage Inward* End Point- NRV Example- Division A: SP in outside market :- 200$ pu Carriage Inward:- ( 20$ pu) NRV : 180$ pu
TP= VCpu+FCpu+Desired Profit
pu
