Premium Essay

Cost Based Transfer Pricing

In: Business and Management

Submitted By rupagurung
Words 948
Pages 4
Miliken Inc. is a manufacturer of heart diagnostic equipment. The TA24 machine is manufactured at the company’s plant in
Vancouver and distributed across North America. Miliken sells 3,000 TA24 machines in a typical year. Parts for the machine are either outsourced or manufactured at the company’s Winnipeg division plant. The pump is one such component. The Winnipeg division receives input material for the pumps from various sources across Canada.
Winnipeg Division: The Winnipeg division receives inputs at an accumulated cost of $140 per pump. The additional cost of manufacturing the pump is $70 variable cost and $90 fixed cost per pump. The goods are then shipped to the Vancouver plant at a cost of $5 per pump.
Vancouver Division : The received pumps are assembled along with other parts. The other parts have a combined cost of $450 per pump variable cost, and $900 fixed cost. The assembled TA24 machine is then sold for a price of $2,500 per pump. The Vancouver division also knows that a Toronto-based company is willing to sell heart pumps to Miliken at a price of $425 per pump. Following are the three methods for transfer prices that can be considered in this scenario:
1. Market-based — Vancouver can buy the pumps at an outside price of $425. file:///F|/Courses/2009-10/CGALU/MA2/06course/01mod/m06t02.htm file:///F|/Courses/2009-10/CGALU/MA2/06course/01mod/m06t02.htm (1 of 3) [05/06/2009 12:18:57 PM] file:///F|/Courses/2009-10/CGALU/MA2/06course/01mod/m06t02.htm 2. Cost-based — The company's senior management considers a cost-based transfer price should be at 125% of full absorption cost. The cost of production is $140 + $70 + 90 = $300 x 1.25 = $375
3. Negotiated — This is negotiated between cost ($375) and market ($425). Assume management splits the difference at $400.
Using market-based transfer prices generally leads to the most optimal pricing…...

Similar Documents

Premium Essay

Transfer Pricing

...the planning and control of a company’s responsibility centers—such as decentralized departments and divisions. These parts, or segments are referred to as responsibility centers that include: a) Revenue centers b) Cost centers c) Profit centers d) Investment centers This approach allows responsibility to be assigned to the segment managers that have the greatest amount of influence over the key elements to be managed. Responsibility accounting usually involves the preparation of annual and monthly budgets for each responsibility center. Then the company’s actual transactions are classified by responsibility center and a monthly report is prepared. The reports will present the actual amounts for each budget line item and the variance between the budget and actual amounts. Responsibility accounting allows the company and each manager of a responsibility center to receive monthly feedback on the manager’s performance. • A profit center A profit center is a part of a corporation that directly adds to its profit. A profit center is a section of a company treated as a separate business. Thus profits or losses for a profit center are calculated separately. A profit center manager is held accountable for both revenues, and costs (expenses), and therefore, profits. Profit center management is equivalent to running an independent business because a profit center business unit or department is treated as a distinct entity enabling revenues and......

Words: 1522 - Pages: 7

Free Essay

Transfer Pricing

... * An MNE using the CUP method to determine its transfer price must first identify all the differences between its product and that of the independent manufacturer. The MNE must then determine whether these differences have a material effect on the price, and adjust the price of products sold by the independent manufacturer to reflect these differences, to arrive at an arm’s length price. A comparability analysis under the CUP method should consider amongst others the following: * Product characteristics such as physical features and quality. * If the product is in the form of services, the nature and extent of such services provided. * Whether the goods sold are compared at the same points in the production chain. * Product differentiation in the form of patented features such as trademarks, design, etc. * Volume of sales if it has an effect on price. * Timing of sale if it is affected by seasonal fluctuations or other changes in market conditions. * Whether costs of transport, packaging, marketing, advertising, and warranty are included in the deal. * Whether the products are sold in places where theeconomic conditions are the same. Example 1 Taxpayer A, an MNE sells 70% of its product to an overseas associated company B, at a price of RM100 per unit. At the same time, the remaining 30% of that product is sold to a local independent enterprise C at RM150 per unit. B Transfer price 100 A C Arm’s length price ...

Words: 1266 - Pages: 6

Premium Essay

Differences Between Value-Based Pricing and Cost-Based Pricing

...Explain the differences between value-based pricing and cost-based pricing. Businesses have methods by which to price their products and services. Value-based pricing and cost-based pricing are two common strategies companies use to promote goods and services. Setting the right prices is the key to effective marketing as well as to long-term profitability. Both of these approaches have strengths and weaknesses relative to the other. When a company uses cost-based pricing, the company sets a price at a percentage above the cost it incurs to manufacture the product or to provide the service. Value-based pricing takes a different approach, considering the potential value the product or service will bring to its customers. Value-Based Pricing A value-based pricing company considers the value of its product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or values its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Companies or individuals that produce medications, chemicals and computer programs and software and artwork often use this pricing strategy. Cost-Based Pricing Cost-based pricing uses manufacturing or production costs as its basis for pricing. The cost-based pricing company uses its costs to find a price floor and a price ceiling. The floor and the ceiling are the minimum and maximum......

Words: 540 - Pages: 3

Premium Essay

Differences Between Value-Based Pricing and Cost-Based Pricing

...Differences Between Value-Based Pricing and Cost-Based Pricing Businesses have methods by which to price their products and services. Value-based pricing and cost-based pricing are two common strategies companies use to promote goods and services. Setting the right prices is the key to effective marketing as well as to long-term profitability. Both of these approaches have strengths and weaknesses relative to the other. When a company uses cost-based pricing, the company sets a price at a percentage above the cost it incurs to manufacture the product or to provide the service. Value-based pricing takes a different approach, considering the potential value the product or service will bring to its customers. Value-Based Pricing A value-based pricing company considers the value of its product or service, as opposed to the cost the company incurred to create and produce it. To do this, the company determines how much money or values its product or service will generate for the customer. This value could originate from factors such as increased efficiency, happiness or stability. Companies or individuals that produce medications, chemicals and computer programs and software and artwork often use this pricing strategy. Cost-Based Pricing Cost-based pricing uses manufacturing or production costs as its basis for pricing. The cost-based pricing company uses its costs to find a price floor and a price ceiling. The floor and the ceiling are the minimum and maximum prices for a......

Words: 326 - Pages: 2

Premium Essay

When Cost-Based Transfer Pricing Is Used Between Sub-Units of a Large Organisation, Describe How to Avoid Making Sub-Optimal Decisions

...Generally speaking, cost-based transfer pricing is top management chooses a transfer price based on the costs of producing the intermediate product. For instance, variable production costs, variable and fixed production costs, full costs (including life-cycling costs) as well as some markup. It is useful when market prices are unavailable or too costly to obtain. When a large organisation transfers product across international borders, transfer prices are relevant in the calculation of income taxes, and are sometimes relevant in connection with other international trade and regulatory issues (Horngren, Datar, Foster, Rajan, Lttner, 2009). When transfer prices are based on full cost plus a markup, it may probaly lead to sub-optimal decisions. Since it causes the buying division to regard the fixed costs and the markup of the selling division as a variable cost. Indeed, the buying division may then purchase products from an external supplier expecting savings in costs that will not exist (Horngren, et al, 2009). In a large company, the transfer price is a major factor between manufacturing and distribution divisions. In order to achieve company profit maximization when decentralized segments of a company interact, a transfer pricing system should be established that treats supplying segments as variable cost recovery centers and setup costs are treated as a variable function of run size. This induces optimal run sizing decisions by the producing and purchasing divisions.......

Words: 600 - Pages: 3

Free Essay

Transfer Pricing

...Internationale Besteuerung Seminararbeit Transfer Pricing in multinationalen Unternehmen Eine integrierte Management- und steuerliche Sicht Sommersemester 2013, 2. Fachsemester Seminarleiter: Prof. Dr. Wolfram F. Richter Betreuer: Dr. Lars Kunze Eingereicht von: Xu, Chen Matrikel-Nr.: 161276 Anschrift: Bunsenstrasse 17, 45145 Essen Telefonnummer: 0176 64736605 E-Mail: chen.xu@tu-dortmund.de Inhaltsverzeichnis 1 Einleitung ................................................................................................................. 2 1.1 Problemstellung und Zielsetzung ....................................................................... 2 1.2 Aufbau der Arbeit .............................................................................................. 2 2 Grundlagen des Verrechnungspreises ................................................................... 2 2.1 Wesentliche Grundbegriffe zur Analyse des Verrechnungspreises ................... 2 2.2 Funktion und Ziele des Verrechnungspreises .................................................... 3 2.2.1 Funktion aus der Management-Accounting-Sicht ................................ 3 2.2.2 Funktion aus steuerlicher Sicht ............................................................ 4 2.3 „One Set or two Sets of Books“ ......................................................................... 4 3 Methoden zur Ermittlung angemessener Verrechnungspreise ........................

Words: 5505 - Pages: 23

Premium Essay

Transfer Pricing

...Transfer Pricing Kim: “I ... don’t understand why it would make sense to pay $450/ton for pulp [to buy internally from Northwestern’s U.S. pulp mills] when I can get it for $330/ton from Chile.” Ewing: “I understand your motivation for wanting to source the pulp from Chile, but it is important [to buy inside] for the corporation to act as an integrated team.” Barrett and Slape (2000: 597) Executive summary The quote above is an excerpt from a phone conversation between Bill Ewing, the Vice President of Northwestern Paper Company 1, and Arthur Kim, the Director of Northwestern’s South Korean subsidiary. This conversation rises questions on the advantages and disadvantages of utilizing internal transfer prices. Such as: given that some subsidiaries are located in lower tax jurisdictions, would it not be logical to set lower internal transfer prices to those subsidiaries? Would it not be logical to allow the Korean subsidiary to purchase from outside suppliers given that internal transfer prices are much higher than market prices in Chile? Allowing subsidiaries to outsource externally would lead to the bankruptcy of the US subsidiaries, which would not have enough demand for their products? What are the advantages and disadvantages of a reward system based on the allocation of internal consumption? Is the allocation process “fair” to each subsidiary? Is it “fair” to the company as a whole? Questions and doubts on transfer pricing probably haunt not only Mr. Ewing and the......

Words: 919 - Pages: 4

Premium Essay

Transfer Pricing

...TRANSFER PRICING Pengertian : A transfer price is what one segment of company charges another segment of the same company for the transfer of good or service. The segment may be subsidiaries, departments, branches, or any other part of the overall multinational organization. Secara umum transfer pricing merupakan jumlah harga atas penyerahan barang atau imbalan atas penyerahan jasa yang telah disepakati oleh kedua belah pihak dalam transakasi bisnis financial maupun transaksi lainnya. Dalam suatu grup perusahaan, transfer pricing (sering disebut dengan istilah intercompany pricing, intercorporate pricing, interdivisional pricing atau internal pricing) Secara komersial terdapat beberapa dasar penentuan harga transfer yaitu : a. Cost basis b. Market basis c. Negosiasi d. Arbitrasi e. Ganda Harga transfer yang mendasarkan pada biaya bisa berupa : • Actual variable cost • Actual fixed cost • Standard variable cost • Standard full cost • Average cost • Full cost plus mark up Sehubungan dengan harga transfer, terdapat beberapa ketentuan dalam UU PPh yang mengatur tentang perlakuan harga (pasal 10 (1), pasal 6 (1) dan pasal 18). Implikasi Pajak Transfer pricing dapat melibatkan baik transaksi domestic maupun global. Dari aspek pajak penghasilan, transfer pricing domestic tidak membawa implikasi yang signifikan karena potensi penghasilan kena pajaknya (walau digeser dari satu ke lain badan) masih berada......

Words: 1590 - Pages: 7

Premium Essay

Transfer Pricing

...3 Effects of Exchange Rates On International Transfer Pricing Decisions Canri Chan (E-mail: canri.chan@miis.edu), Monterey Institute of International Studies Steven P. Landry (E-mail: steve.landry@miis.edu), Monterey Institute of International Studies Terrance Jalbert (E-mail: jalbert@hawaii.edu), University of Hawaii at Hilo Abstract Events leading to the passing of the Sarbanes-Oxley Act have led to increased concern with and scrutiny of potential management manipulation of financial statements. From an agency theory perspective, managers have incentives to manipulate organizational methods and choices in order to produce financial statements that those managers believe will maximize their incentive compensation. Transfer pricing represents one possible choice that managers can manipulate. This paper investigates whether exchange rates affect transfer pricing particularly as it relates to maximizing overall corporate profitability. The effects of taxes and government regulations have been explored in considerable depth in the transfer pricing literature. However, while transfer prices should also be affected by exchange rates in predictable ways, this variable has received comparably little attention in the literature. Inclusion of exchange rates in an analysis of transfer pricing and corporate profitability presents an opportunity to add to the literature. We conducted an experiment to examine how managers set transfer prices. We found that, while individuals were......

Words: 7869 - Pages: 32

Premium Essay

Transfer Pricing

...burden. One such strategy is discussed in this paper. Transfer pricing allows the company to price the inter-company transactions. Transfer pricing simplifies the accounting of transactions that take place between affiliated or related entities. Companies have freedom in valuing inter-company transactions. But, if strategically implemented, this strategy allows the company to save taxes and retain large amount of profits. Keywords: Transfer mispricing, tax-havens, Double Irish Dutch Arrangement Transfer Pricing Transfer pricing is the methodology used to set the prices for goods sold or services provided between related entities within an enterprise. Related entities are those which are under control of a single corporation and include branches and companies that are wholly or majority owned ultimately by the parent company. Generally, such a transfer price should be equal to the price which the entity would charge to an independent customer, an arm’s length customer. Such a price is termed as an “arm’s length price” (Transfer Pricing, Wikipedia, 2015). Financial accounting does not differentiate between affiliates and treats the corporate group as a single entity. But the federal income tax law treats affiliates as separate economic actors. This allows multinational companies a free rein to determine where their profits should be taxed, or more likely, not taxed (Sheppard, Lee 2010). Transfer Mispricing Transfer prices that deviate from the arm’s length price......

Words: 3264 - Pages: 14

Premium Essay

Transfer Pricing and Financial Reporting

... Transfer Pricing and Financial Reporting: some thoughts Messaoud Mehafdi This essay deals with the perennial transfer pricing (TP) puzzle and calls for the disclosure of TP information as a way of unravelling the puzzle in the new age of corporate governance and financial reporting transparency. Seen as a by-product of "managerial ambiguity by design" in large companies and labelled as a "perennial puzzle" , TP has over the years lived up to this cliché by creating complex management and tax problems with tremendous implications for supply chains and business ethics. TP is an increasingly dominant aspect of international production and exchange of goods and services and, in addition to the continuously changing arm's length regulations, interest in the public disclosure of TP information has been gaining momentum. TP is a multifaceted global business reality that arises from intra-firm trade of tangible and intangible products across the industrial spectrum, usually in large vertically integrated companies. For many transnational companies (TNCs), the inseparable twins of intra-firm trade and TP are a prized business and financial conduit, accounting for around 60% or $1.6 trillion of global trade. Intra-firm transfers are very significant in the global service sector in general and the financial sector in particular where they are the focus of new regulation. TP is therefore a key factor in creating complex supply chains and, in order to engage investor confidence in the...

Words: 3451 - Pages: 14

Free Essay

Transfer Pricing

...SOAL LATIHAN TRANSFER PRICING SOAL 1: PT PARAHYANGAN INDUSTRYmemilikibeberapadivisiusahanyadansalahsatunyaadalahdivisiA yang khususmemproduksiproduk spare part denganmerk ‘PLAZO’ yang selamainidijualkepasareksternal. Padaawaltahun 2008, PT PARAHYANGAN INDUSTRY membentuk 1 divisibarulagiyaitudivisi F untukmemproduksiproduk ‘METAZO’, danuntukmenghasilkanproduk METAZO inijugadiperlukan spare part seperti yang dihasilkanolehdivisi A. Divisi F jugamendapatkanpenawarandaripihakluaruntukmembeliproduk spare part tsb yang samaseperti yang dihasilkanolehdivisi A. Di bawahinibeberapa data produksidan data lainnyadaridivisiA, sbb: * Kapasitasproduksi normal setahununtukproduk PLAZO adalah 250.000 unit, dansampaisaatinidivisi A barudapatmenggunakankapasitasproduksinyasebesar 75% darikapasitas yang ada, danseluruhproduk yang diproduksidapatterjualkepasareksternaldenganharga per unit Rp. 31.000. * Biayaproduksiuntukmembuat spare part PLAZO adalahsbb: * BahanlangsungRp. 1.350.000.000. * UpahlangsungRp. 768.750.000.000. * Variable conversion cost Rp.1.425.000.000. * Manufacturing Overhead cost Rp. 1.856.250.000. * Biaya Variable SGA per unit Rp. 3.200, dari jumlah mana sebanyak 30% dapat dihindarkan apabila terjadi internal sales antar divisi. * Biaya Fixed SGA per tahun sebesar Rp. 824.031.250, dimana 35% merupakan sunk cost. Divisi F bisa membeliprodukspare part tsb dari supplier luardenganhargaRp. 28.500/unit. Pertanyaan : a) Hitunglah di antara......

Words: 2110 - Pages: 9

Premium Essay

Transfer Pricing Methods

...1. Introduction Transfer Pricing is becoming highly important as soon as a multicorporate enterprise or business is structured across borders. Transfer Pricing deals with structuring international transfer prices within a multicorporate enterprise or business, in particular the evaluation of tangible and intangible assets be-tween business entities within the same multicorporate organisation or, more specifically, the price one segment (subunit, department, division and so on) of one organisation charges for a product or service supplied to an-other segment of the same organisation. Every multicorporate enterprise or business aims at minimising its tax obligations in order to maximise its overall profits. In principal, multicorporate businesses have to pay tax in their respective host countries, based on the share of their profit which arises in (or is allotted to) the respective business in such host country. These host countries can be different in various respects e.g. tax systems, customs duties, currency exchange rates, legislation and so forth. As a result, Transfer Pricing also affects revenue and customs authorities, investors, creditors and alike. The obligation to comply with national and international tax regulations regularly conflicts with the goal of a tax-efficient allocation of profits within a multi-national entities on the one hand and the respective tax legislation which is primarily nationally-focused on the other hand. Thus, an anticipatory business...

Words: 686 - Pages: 3

Premium Essay

Transfer Pricing

...Accounting 1 Session 1, 2011 Tutorial Week 8 - Transfer pricing Tutorial Questions Overall Theme In previous weeks we have focused our attention on the use of management accounting information for costing purposes (e.g. ABC), processes improvement (e.g. ABM, process analysis), and for budget control (standard cost analysis). This week we switch our attention to another aspect of management accounting by exploring the concept of responsibility accounting. We look at how management accounting system can be designed to encourage desirable (goal-congruent) managerial behaviour and to reflect the autonomous nature of contemporary, de-centralised organisations. In particular, we examine two control mechanisms used in conjunction with the responsibility accounting system, namely, transfer pricing. We will consider how managers determine transfer prices, rationales behind these systems, their benefits and limitations. Along the way we will also consider the impact of interdependencies and why variability can play havoc on management accounting systems. Desired Learning Outcomes and Essential Reading Mowen et. al. (2010): • Chapter 10: p368-374 • Chapter 13: p508-513; p523-535. TOPIC 6 TRANSFER PRICING After completing this topic, you should be able to: • • • • Explain the benefits and costs of decentralisation Explain the benefits of transfer pricing systems Understand the differences between the types of responsibility accounting systems Determine transfer prices using various......

Words: 1244 - Pages: 5

Premium Essay

Transfer Pricing

...Corporate Governance – The Evolution Concerned with the mechanisms by which owners have some form of control over managers. The Combined Code was introduced based on the recommendations of the following reports: The Cadbury Report 1992 Recommended a ‘Code of Best Practice’ This was a voluntary code and its main proposals were related to: The composition of company boards The length of directors contracts Disclosure of remuneration packages Auditing matters Greenbury Report 1995 Reinforced the ‘Code of Best Practice’ recommended by Cadbury and made further recommendations regarding matters relating to directors’ remuneration. Hampel Report 1998 ‘Fine tuned’ the above reports. In particular, the points that: The roles of Chairman and Chief Executive should be separate Directors’ contracts should be for one year or less Remuneration committee should be made up of independent non-executive directors Non-executive directors may be paid in company shares although this not recommended A senior non-executive director should be nominated to deal with shareholders’ concerns Directors should be trained The Code proposes principles and code provisions under five headings: Directors Directors’ remuneration Relations with shareholders Accountability and audit Institutional shareholders Further guidance on accountability and audit is contained in the Turnbull Committee Report (1999) ‘Internal Control: Guidance for Directors of Listed Companies......

Words: 995 - Pages: 4