transfer prices

transfer prices
The prices at which goods and services are bought and sold between divisions or subsidiaries within a group of companies. The transfer price is a cost to the receiving division and revenue to the supplying division: therefore the transfer price will affect the profitability of each division. In a complex organization there may be several buying and selling divisions in a group. Transfer prices can also apply between cost centresManagers need to consider a complex range of issues when setting a transfer price. This is because transfer pricing can be used for several quite different purposes:
• to provide information that motivates managers to make good economic decisions;
• to provide information for evaluating the managerial and economic performance of divisions;
• to maintain divisional autonomy;
• to move profits between divisions, which may involve moving profits from one country to another to minimize tax on profits. (In the UK the scope for doing this has been greatly reduced by legislation passed in 2002. ) As a result, those setting transfer prices may find that they face a conflict of objectives. For example, senior managers of a group may want to maximize profitability even though this will means reducing the autonomy of divisional managers. This may result in short-term increases in profitability but at the expense of the motivation of divisional managers in the long run. There are six main transfer-pricing methods: see cost-plus transfer prices; dual-rate transfer prices; full-cost transfer prices; marginal-cost transfer prices; market-based transfer prices; negotiated transfer prices

Big dictionary of business and management. 2014.

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  • transfer prices — The prices at which goods and services are bought and sold between divisions or subsidiaries within a group of companies. The transfer price is a cost to the receiving division and revenue to the supplying division: therefore the transfer price… …   Accounting dictionary

  • market-based transfer prices — Transfer prices that are based on market prices. When there is a perfectly competitive market for the goods and services that are bought and sold between divisions of an organization, the transfer price should be the market price. The transfer… …   Accounting dictionary

  • market-based transfer prices — Transfer prices that are based on market prices. When there is a perfectly competitive market for the goods and services that are bought and sold between divisions of an organization, the transfer price should be the market price. The transfer… …   Big dictionary of business and management

  • maginal-cost transfer prices — Transfer prices set by marginal cost pricing. When there is no market for the goods and services that are bought and sold between the divisions of an organization, the transfer price should be the marginal cost, which is normally assumed to be… …   Accounting dictionary

  • marginal-cost transfer prices — Transfer prices set by marginal cost pricing When there is no market for the goods and services that are bought and sold between the divisions of an organization, the transfer price should be the marginal cost, which is normally assumed to be… …   Big dictionary of business and management

  • cost-plus transfer prices — Transfer prices set by cost plus pricing, which include a mark up to provide a profit for the supplying division. When variable costs rather than full costs are used in this calculation, the mark up will need to be higher to cover both the fixed… …   Accounting dictionary

  • negotiated transfer prices — Transfer prices set by negotiation between the supplying and receiving divisions of an organization. Negotiated transfer prices are appropriate when there is an imperfect market for the goods and services that are bought and sold between… …   Accounting dictionary

  • cost-plus transfer prices — Transfer prices set by cost plus pricing, which include a mark up to provide a profit for the supplying division. When variable costs rather than full costs are used in this calculation, the mark up will need to be higher to cover both the fixed… …   Big dictionary of business and management

  • negotiated transfer prices — Transfer prices set by negotiation between the supplying and receiving divisions of an organization. Negotiated transfer prices are appropriate when there is an imperfect market for the goods and services that are bought and sold between… …   Big dictionary of business and management

  • dual-rate transfer prices — Transfer prices that are set at different levels for the supplying and receiving divisions of an organization. The dual prices method charges a low price, say a price based on the marginal cost, to the buying division, while at the same time… …   Accounting dictionary

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