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Transfer Pricing: (Document Subtitle)
Transfer Pricing: (Document Subtitle)
Transfer Pricing: (Document Subtitle)
[Company address]
TRANSFER PRICING
[Document subtitle]
Contents
Transfer pricing............................................................................................................. 2
Measures for Performance Evaluation..............................................................................3
Different Methods of Transfer Pricing:............................................................................... 3
Behavioral implication that arose from the negotiation of transfer pricing and their positive and
negative aspects:........................................................................................................... 5
Behavioral problems arising from Absorption manufacturing costs........................................6
Behavioral problems due to revised transfer pricing policy...................................................6
Divisional managers behaviors of selling and buying:.........................................................7
a. Method of cost plus mark up of standard full manufacturing:..........................................7
b. Per unit product market selling price that should be transferred:.....................................7
c. Opportunity cost and out of pocket cost that incur at the time of transferring:....................7
Suggestion of transfer price to the managers of Division Y and Z..........................................7
Suggest the price range within which the transfer price for Dangos would satisfy both divisions
i.e. Division A and B....................................................................................................... 8
Bibliography............................................................................................................. 10
Transfer pricing
Transfer Price is characterized as the price charged by one department of an
organization to another department for the products or services manufactured one
department to another department. The concept of Transfer pricing is most normal in
firms that are vertically incorporated, for example organizations are occupied with a few
diverse worth making operations for an item. Transfer pricing is utilized by Investment
Centers and Profit Centers so as to figure out the product and services cost got from
administration offices and incomes when "offering" an item to another office when that
item has an outside business sector. The cost at which the exchange happens
influences the income reported by every division when exchange of products or
administrations are produced using one benefit focus to another benefit focus inside of
the same organization, a segment of the income of one of the divisions is a segment of
the expense of the other division (Accountingtools, 2015).
Across the globe, the failure of governments is making sure that fiscal policies are
keeping pace with the growing cross-border trade and this is very important factor which
has contributed in increased significance of transfer pricing. Taxation of profits
emanating from global trade by MNEs is still determined by legal structure within
national boundaries. The essential aim behind arms length principle is to figure out
those transactions among the self-governing enterprises also known as "comparable
uncontrolled transactions (OECD.Org, 2013).
The different entities should not be regarded as inseparable parts of one single unified
business; the MNE should instead be regarded as separate entities. With this approach,
the focus becomes the transaction in itself and the nature of that transaction. This
approach will then make it easier to determine whether a transaction, and its conditions,
within an MNE differ from that of a comparable uncontrolled transaction. This type of an
analysis is the core of the arms length principle and the OECD refers to is as a
"comparability analysis".
As stated in the OECD Article 9 that the basis for an arms length principle and the
comparability analysis by showing a need for two different aspects. The first being a
comparison between the conditions laid down for associated enterprises and for
independent enterprises. This comparison is done to assess whether the accounts, for
tax liability, are to be re-calculated or if they are not in as per the Article 9 of the OECD
model. The second aspect aims towards the determination of the accrued profits that
would have occurred if the transaction were at arms length. This part is important as to
the determination of the amount of any re-calculation and re-writing of the tax accounts
(Investopedia, n.d.).
considered to be the best transfer price for the performance measurement and for
profitability. The arm's lengths transaction is satisfied by taxing authorities. Moreover the
management of the buying department is satisfied that they are getting the product at
the right price while on the other hand the management of the selling department is also
satisfied that they are selling the product at the fair price (Transferpricing, 2014).
2. Variable Cost of Production plus opportunity cost:
In this method of transfer pricing, profit margin is also include along with the variable
production cost as profit margin is established by selling the products internally in the
organization more willingly than externally. (TP, n.d.)
3. Variable Cost of Production:
This method of transfer pricing functions admirably when sales department has
abundance limit and when the principle goal of the exchange cost is basically to fulfill
the inner products demand. This strategy utilizes the sales departments variable costs
just and because of this it is not proper if the vender is a benefit or speculation focus, as
it will diminish the gainfulness (Elizabeth Hughes, 2010).
4. Full Cost:
This method can also be recognized as the Absorption Costing as this comprises over
the full cost such as overhead, labor and material cost. As goods and services are
transferred at cost, so this method is mainly recommended for external reporting, in
addition to this, there is no need exclude the internal margin of profit of the organization
in consolidation account of inventories. The cost is calculated by taking all the expanses
which incurred on the project (Accounting plus, n.d.).
5. Cost Plus:
This method of transfer pricing add up the percentage of costs or fixed amount to the
production cost for forecasting a average markup profit which could be departments or
companys policy. It can be used if there is no market price available or the market price
keeps fluctuating frequently. It either uses standard or actual costs. Standard cost is that
cost which the management of the company set at the start of the project and then cost
is calculated on the basis of that standard. In cost plus method, the cost of the project
is also calculated on actual basis which mean that when the management of company
start any new project than all the expenses incurred on the project are calculated at the
time when they incur and at their exact amount (Transferpricing, 2014).
6. Negotiated Price:
This method is used when the two i.e. buying and selling division are in disagreement
but for resolution, negotiation can bring about.
In addition to this, so as to be
Behavioral implication that arose from the negotiation of transfer pricing and
their positive and negative aspects:
After employing the negotiated transfer pricing when goods are exchanged between the
divisions some positive and negative transfer pricing implications arise
Positive aspects:
Some of the positive aspects for negotiating the transfer price are as follows:
Negotiation will be made on the product price between both the divisions and
there will be a agreed price which will be considered the best deal possible
During negotiation the independence of the divisions will be affected.
Negative aspects:
Some of the negative aspects for negotiating the transfer price are as follows:
When transfer pricing has been set after negotiation that pricing will not be
optimal for the whole organization.
Due to this process harsh feelings and the conflicts could arise (Chegg, 2013).
Suggest the price range within which the transfer price for Dangos would satisfy
both divisions i.e. Division A and B.
Division B of Thomson company is making profit by selling its product outside and if
division B provide its product Dangos to Division A then it have to stop its other second
product Tangos and by stopping the production of Tangos division B will loss revenue of
OMR 300 (OMR 6 * 50 units) and this will be opportunity cost for the company. Division
B is workingon 100% capacity so after closing the manufacturing of Tangos Division B
will focus only on Dangos in order to meet the needs of Division A and other market
parties. So if division A buy product Dangos from division B then this opportunity cost
will become part of the cost of Dangos and it will be added to the cost of the Dangos
Division B will charge variable cost of 10.8 OMR to division A for the Dangos product
per unit and opportunity cost per unit would be OMR 2 (OMR 300 / 150 Units) so total
price would be 12.8 OMR and less 0.5 OMR of advertising and transportation charges
that would be save by transferring products from division B. When division A was
buying product Dantgos from the market so it have to pay the marketing and
transportation cost which is 0.5 OMR per unit so by buying goods from in-house
Division A will also save this 0.5 OMR marketing and transportation cost per unit.
Division B will cover its fixed cost by selling the Dangos to outside party and will charge
only variable cost to the division A in order to reduce the transfer so both companies can
took advantage of it.
So the price of Dangos per unit is OMR 12.3 that would satisfy both divisions.
Bibliography
Accounting plus, n.d.. Full Cost Plus Pricing. [Online]
Available at: http://www.accountingtools.com/full-cost-plus-pricing
[Accessed 20 march 2016].
Accountingtools, 2015. Transfer Pricing. [Online]
Available at: http://www.accountingtools.com/transfer-pricing
[Accessed 22 Mar 2016].
Chegg, 2013. Transfer-pricing. [Online]
Available at: http://www.chegg.com/homework-help/transfer-pricing-methods-lynsarcorporation-started-single-p-chapter-19-problem-54-solution-9780077386344-exc
[Accessed 24 mar 2016].
Elizabeth Hughes, W. N., 2010. The different methods of TP: pros and cons. [Online]
Available at: http://transferpricing.co.il/transferpricing.asp?lang=en&pageid=19
[Accessed 22 Mar 2016].
Investopedia, n.d.. Transfer Pricing. [Online]
Available at: http://www.investopedia.com/terms/t/transferprice.asp
[Accessed 24 Mar 2016].
lafayette, L., 2009. Topic Nine: Performance Measurement Considerations. [Online]
Available at: http://www.levlafayette.com/node/61
[Accessed 23 Mar 2016].
OECD.Org, 2013. Transfer pricing. [Online]
Available at: http://www.oecd.org/ctp/transfer-pricing/
[Accessed 22 Mar 2016].
Ross, R. R. a. S. A., 1995. The Arbitrage Pricing Theory Approach to Strategic
Portfolio Planning. Financial Analysts Journal, pp. 122 - 131.
TP, n.d.. Transfer Pricing Methods:. [Online]
Available at: http://www.transferpricingindia.com/Methods_for_global_transactions.htm
[Accessed 14 March 2016].
Transferpricing, 2014. Transfer Pricing Methods:. [Online]
Available at: http://www.transferpricingindia.com/Methods_for_global_transactions.htm
[Accessed 23 Mar 2016].