transfer pricing

CMA/JKBS/April'15 1

CMA/JKBS/April'15 2

Cost and ManagementAccounting

Submitted To : Prof. Supriya Sehgal

CMA/JKBS/April'15 3

TOPIC :

Transfer Pricing

Submitted By : Gunjan Singh Prashant Sahoo Jaya Chaddha Monika Sharma Kapil Jain

CMA/JKBS/April'15 4

Shall Cover :

Definition

Criteria

Objectives

Purpose

Methods

CMA/JKBS/April'15 5

Cont…Use

Factors Affecting

Advantages

Disadvantages

CMA/JKBS/April'15 6

Definition :

Transfer pricing is the setting of the price for

goods and services sold between controlled (or

related) legal entities within an enterprise.

Example :- If a subsidiary company sells goods to a

parent company, the cost of those goods is the

transfer price.

CMA/JKBS/April'15 7

Criteria :• Tax regimes

• Local Market conditions

• Market Imperfections

• Joint-venture partner

CMA/JKBS/April'15 8

Objectives :Goal congruence

Performance appraisal

Divisional autonomy

Simple and easy

It should provide each segment with the relevant

information required to determine the optimum

trade-off between company costs and revenues

CMA/JKBS/April'15 9

Purpose :

Multinational companies use transfer pricing to

minimize their worldwide taxes, duties, and tariffs.

CMA/JKBS/April'15 10

METHODS:-

MARKET

BASED COSTBASED

NEGOTIATED


Market-based Transfer Price

It is best if :

Perfectly Competitive Market

Interdependence of Subunit is Minima.

No additional Cost-benefits to company.


Drawbacks :The major drawback to market-based

prices is that market prices are not always

available for items transferred internally.


Cost-based Transfer Price :About more then half of the major companies in the

world transfer items at cost.


Cost Factors :

• Full cost

• Variable cost

• Dual pricing


Negotiated Transfer Pricing :

Companies heavily committed to segment

autonomy often allow managers to

negotiate transfer prices.


Use of Transfer Pricing :• Price setting for services performed by business unit.

• A mean of evaluating financial performance of

business unit.

• Determining the contribution to net profit by centres

in organisation.


Cont….Reduce in corporate taxes paid.

Reduce in VAT, excise, Tariffs.


Factors Affecting :Performance measurement.

Capability of accounting system

Custom duties

VAT

Taxes on profit


Advantages :Over results.

Decisions are better and more timely because of the

manager’s proximity to local conditions.

Top managers are not distracted by routine, local decision

problems.

Managers’ motivation increases because they have more

control


Disadvantages : Lack of goal congruence among managers in di erent ff

parts of the organization.

Insu cient information available to top management.ffi

increased costs of obtaining detailed information.

Lack of coordination among managers in di erent ff

parts of the organization.

transfer pricing

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