ONE

 Any type of transfer pricing policy can lead to a dysfunctional behavior.

 Whatever transfer pricing policy the management utilized it has a tendency or risk to cause a
dysfunctional behavior.
 What is a dysfunctional behavior?
 Dysfunctional behavior is any action taken in conflict with organization goals.
 Any action in contrary with the entity’s goal is considered as a dysfunctional behavior.
 Now we move on to a transfer pricing policy with a greater risk of causing a dysfunctional
behavior.

TWO

 Full-cost based transfer price - leads to view fixed cost as a variable cost
 It leads to view fixed cost as a variable cost
 In what way
 Fixed cost is an irrelevant cost because it would be incurred regardless of any circumstance
 This idea is related to the concept of relevant cost.
 To recall
 A relevant cost is a cost that only relates to a specific management decision and which will
change in the future as a result of that decision.
 Yon lang yung magmamatter sa specifid decision na dinededeal naten and has an impact to
our decision.
 It is helpful to eliminate information that is irrelevant in the decision-making process.
 Why is it important to eliminate irrelevant cost.
 Because we are preventing the management to consider irrelevant cost that may incorrectly
affect the decision.
 To better understand let’s have an example

THREE

Before we start answering let’s have a recall.

FOUR

 if you can still remember the two costing methods from our previous lessons
 First is the full costing otherwise known as absorption costing wherein cost is charged whether
variable or fixed
 Second is the variable costing or direct costing wherein we only charged variable cost.
FIVE

 Perspective of the selling division

 We will compute based on the full cost transfer price.
 Both variable and fixed cost are charged

SIX

 Sabi kanina, full costing have a greater risk of a dysfunctional behavior.

 Nakita naman natin yung comparison when we use full cost rather than variable costing.
 The manager would tend to reject the special offer even though accepting it would benefit the
company as a whole at the amount of P2 .

SEVEN

BASA

EIGHT

 The transfer Price when we acquire internally ay hindi dapat mas Malaki sa price when we
acquire externally. We are looking at the buying divisions perspective. Kung mabibili naman
natin siya in a much cheaper price outside syempre hindi na tayo mag-tatransfer internally.
 Example
 If we can acquire specific goods internally for 10 pesos per unit and we can acquire it outside the
organization for only P8
 We are to know if there should be a transfer internally.
 The answer to the question is no transfer because there is a net advantage of P2 if we acquire
outside the organization.
 In this case, it doesn’t adhere to the general rule so there should not be a transfer. Dahil nga
mas Malaki yung transfer price sa lowest market price.

NINE

 Buyer’s Perspective
 Minimum price should not be less than the sum of the incremental cost + opportunity cost.
Which is the formula in getting the transfer price.
 Recall muna natin yung formula:
 Transfer Price = Incremental Cost or outlay cost which is our variable cost + opportunity cost if
the selling division have no excess capacity.
 We have an example:
 If we have a selling price of 10 pesos and variable cost of 4 pesos.
 And we are to know what is the minimum price transfer price.
 In order to arrive at our answer we need to add our incremental cost of 4 pesos to the
opportunity cost of 6 which is the contribution margin. Pano yun kunin, simply deduct the
 variable cost per unit of 4 pesos to out our selling price of 10 pesos. And we will get the sum of
10 pesos. What have we notice, the minimum price of 10 pesos is equal to our selling price.
 The second general rule is related to the formula we are utilizing in getting the transfer price.

TEN

 Maximum Price should be greater than the minimum price

 In Maximum price, we are considering the buying division perspective. Cinoconsider natin yung
lowest price na pwedeng maacquire yung particular na goods.
 Minimum Price naman we are considering the selling division. On what price hindi magiincur ng
loss yung selling division.
 So the third, general rule which is the maximum price must be greater than the minimum price,
both the selling and buying division are being considered so they are able to meet halfway.
 If these two rules are being considered the transfer price is considered appropriate.
 So there should be a transfer.

ELEVEN

 In multinational companies.
 The transfer pricing practice extends to cross-border transactions. The transfer happens
between dIvisions of the same organization of different countries with different tax rate.
 However, companies at times can misuse this practice by altering their taxable income reducing
their overall taxes.
 What happen is they..
 charged a higher price to divisions in high-tax countries reducing the profit
 charged a lower price to divisions in low-tax countries increasing the profit
 Selling Division is situated in a country sa taxation tinatax yung income on where is earned with
a high tax rate in the Philippines for example with a 30% tax rate. Now, the company in order to
reduce tax burden transfer goods at a lower price so that the taxable income would be reduced.
 Buying Division located at a country with low tax rate let’s say 5%. Dahil tinransfer ni selling
division yung specific goods at a lower price the income of buying division would increase.
 In that way, the entity will avoid the 25% difference na tax rate.
 Dahil ditto,
 Tax authorities have implemented strict rules regarding transfer pricing to attempt to prevent
companies from using transfer pricing to avoid taxes. Entitys discretion.