Management Control Systems

Resume Chapter 6
Lecture:
Singgih Wijayana, M.Si, Ph.D

Disiapkan Oleh:
R. Purwedi Darminto (Eksekutif B 27 C)

Transfer Pricing Methods

The amount used in accounting for any transfer of goods and services between responsibility centers.
A Profit Center
The term transfer price to the value placed on a transfer of a goods or services in transactions in which
at least one of the two parties involved.
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.
The sourcing decision : company should produce the product inside the company or purchase it
from an outside vendor.
Transfer price decision : at what price the product should be transferred between profit centers,
if it produce inside.
The ideal situation
- Competent People (interested in the long-run as well as the short-run performance)
- Good Atmosphere (perceive that the transfer prices are just)
- A Market Price (reflecting the same conditions as the product to which the transfer price applies
quantity, delivery time, and quality)
- Freedom to Source (permitted to choose the alternative that is in their own best interests)
- Full Information (know the available alternatives and the relevant costs and revenues of each)
- Negotiation (a smoothly working mechanism for negotiating contracts between business units)
Constraints on Sourcing
Limited Markets (The existence of internal capacity might limit the development of
external sales)
The competitive price is the transfer price that best satisfies the requirements of a profit center
system.
Measure the contribution of each profit center to the total company profits
Measures how well a profit center may be performing against competitors
Excess or Shortage of Industry Capacity
Let buyers and sellers work out their own relationships without central intervention when the
number of intracompany transfers is small or if the situation is temporary.

Allow either the buying or the selling profit center to appeal a sourcing decision to central person
or committee.
Cost-Based Transfer Prices

The Cost Basis the usual basis is standard costs.

The Profit Markup a percentage of costs and the amount of profit