Week 8: Transfer Pricing and International Issues This week focuses on the context, impact, aims and problems with transfer pricing. We will use market-based, cost-based and negotiated methods of transfer pricing, and dual transfer pricing. We will also consider international issues and multinational transfers. Objectives: . Describe the role of transfer pricing in the decentralised firm · Evaluate divisional performance when transfer pricing is involved . Define and differentiate the three methods of transfer pricing · Calculate possible transfer prices in specific situations · Incorporate international issues such as foreign exchange and country-specific taxes on transfer price and performance evaluation. 8.2 Transfer Pricing and International Issues 'The basis of a responsibility accounting system is the designation of each unit of the organisation as a particular type of responsibility centre' (p. 575). It also considers the various methods that are used to price goods and services that are transferred between responsibility centres. These are called transfer prices. Since the transfer price impacts the profit of both the buying and selling units, it affects the reported performance of the responsibility centres. What is an integrated report? Transfer prices are effectively internal selling prices used within a decentralised organisation. (Langfield-Smith p. 586) Transfer pricing and its effects on business as a whole: Transfer prices impact on: · divisional performance measures · managerial performance incentives · firm-wide profits · business unit autonomy. · Read- Week 8 Notes · Complete Illustrative Example Questions · Self-Check 6- Transfer Pricing Essential Readings: · Chapter 12: Managing and reporting performance pg. 570-586 From 'Introduction' to the end of 'Team-based structures' · Chapter 12: Transfer Pricing pg. 586-595 This chapter reviews the principles of responsibility accounting and considers the financial performance reports used in various types of responsibility centres. It also considers the various methods that are used to price goods and services that are transferred between responsibility centres (i.e. transfer prices). Since the transfer price impacts the profit of both the buying and selling units, it affects the reported performance of the responsibility centres. · Complete review questions pg. 602- 12.3 & 12.18
Complete the following self-study questions and case analysis: Chapter 12: Managing and Reporting Performance (pg. 570-621) · Review questions: 12.16, 12.20 · Exercises: 12.29, 12.30. · Problems: 12.36, 12.37, 12.39, 12.44 · Self-Study problems 1 and 2 pp. 598-601 Exam preparation Transfer pricing M&M Corporation has two divisions involved in the internal transfer of products. The Mining Division refines a material called Minimine which is then transferred to the Metal Division. Minimine is then processed into Metaloid by the Metals Division. Metaloid is sold to customers for $150 per unit. The Mining Division is currently required by M&M to transfer all of its annual output of 400,000 units of Minimine to the Metals Division at total actual manufacturing cost plus 10%. Unlimited quantities of Minimine can be purchased and sold on the open market at $90 per unit. While the Mining Division could sell all of the Minimine it produces at $90 per unit on