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34 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What does transfer pricing mean?
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The prices of goods transferred between organizational departments.
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prices
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Transfer prices are determined by one of three methods. What are the methods?
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Market Price
Cost-based Price Negotiated Price |
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What is Suboptimization?
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When departmental managers seek to optimize their individual best interest rather than the interest of the organization as a whole.
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When dept managers seek
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What is Goal Incongruence?
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When actions encouraged by the reward structure of the dept conflict with the goals of other depts or the organization as a whole.
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When actions encouraged
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What is Goal Congruence?
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When the department and division managers make decisions that are consistent with the goals and objectives of the organization as a whole.
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When departments
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What helps to ensure goal congruence?
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The Transfer Pricing Rule
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What is the transfer pricing rule (formula)?
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Transfer Price =
Add'l Outlay Cost per unit + Opp Cost per unit |
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What are additional outlay costs?
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VARIABLE Prod'n Costs + Add'l Costs to sell incurred by the selling unit
* Variable Prod'n costs - DM, DL, Var FO * Other costs - storage, transportation, S&A |
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In reference to transfer pricing, define opportunity costs.
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The benefit foregone due to selling internally.
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In transfer pricing, opportunity cost only exists when...
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The selling unit is producing and selling at full capacity.
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full
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What is full capacity?
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Producing AND Selling at full capacity
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What is the Opportunity Cost per Unit (OCU) formula =?
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OCU = SPU - AOU
SPU = Selling Price per unit AOU = Add'l Outlay Cost per unit |
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What is another definition of opportunity cost?
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Sales given up less the add'l outlay cost to produce it
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When the selling unit is operating at full capacity and can sell all that it produces, what should the transfer price be?
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Market Price
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What is the theoretical transfer price?
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Market Price
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What should the transfer price be when the selling unit has EXCESS production capacity?
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Additional Outlay Cost per Unit.
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There is no opportunity cost in this case.
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When negotiating transfer prices among divisions, the buying division's maximum price is?
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The min price on the open market.
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When negotiating transfer prices among divisions, the selling division's minimum price will be?
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1) Its direct costs if it has excess capacity or 2) Its market price if no excess capacity
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What are transfer prices based on when using cost-based pricing?
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Production Costs
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What are the three variations of cost-based pricing when determining transfer prices?
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Variable Cost Pricing
Full Cost Pricing (asorption) Cost-Plus Pricing |
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How is the transfer price determined when using the variable cost pricing method?
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The price is the cost to produced and seel the item to the purchasing division.
DM, DL, VFO, FS&A |
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Under the variable cost pricing method for determining transfer prices, should standarad or actual costs be used?
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Standard
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Using standard costs provides an incentive for the purchasing or selling division?
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Purchasing
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How are transfer prices determined when using the full cost pricing method?
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By allocating an amt of fixed cost from the selling division to the variable cost of production.
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Why is the full cost method for determining transfer prices problematic for the organization as a whole?
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Because the fixed costs become variable costs to the purchasing division and will understate profitability when these costs are used in earnings analyses.
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How are transfer prices determined when using the cost plus pricing method?
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Transfer prices are based on the selling divisions add'l costs per unit plus a fixed dollar amt or percentage of the cost.
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Under transfer pricing, cost plus pricing have the same advantages and disadvantages as what other cost based method?
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Full Cost Pricing
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Under transfer pricing, what does dual pricing mean?
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Gives both the buying and selling division the price that "works best" for them.
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Under dual pricing, what is the transfer price based on for the selling and purchasing division?
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Selling Div - Transfers out at Market Price
Purchasing Div - Transfers in at Std Variable Costs |
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What happens when both the buying and selling divisions receive prices that enhance both their profitability?
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The value of pricing as an incentive for divisions to control cost is lost
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Transfer pricing is a useful tool in promoting what?
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Goal Congruence
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How is transfer pricing useful in the international environment?
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It can reduce tax liability.
Relating to taxes and import duties when bring products across state or international lines. |
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Why is transfer pricing problematic in decentralized organizations?
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Managers of the buying and selling division tend to seek to maximize their own departmental revenues and minimize their own departmental costs.
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Maximize own
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When can the selling unit use cost based pricing?
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When the selling unit has excess capacity
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