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Learning Objectives:
1. Define and explain the basic concept of transfer pricing and its importance to segment reporting.
2. Identify the various transfer prices and explain their importance to segment evaluation.
3. Define and explain the different Quality Measures both in the form of financial and nonfinancial
performance evaluation that are important in effective management.
TRANSFER PRICES
Transfer price is our artificial price used to record inter-divisional transactions of goods and services and
properly evaluate divisional performance in line with the objective of goal congruence.
Goal Congruence is a situation in which people in multiple levels of an organization share the same goal.
A well-thought-out organizational design causes goal congruence and results in an organization being
able to work together to accomplish a strategy. Therefore, managers should make untiring efforts to
ensure the existence of goal congruence within the organization.
b. Cost-based Price
Cost-based transfer pricing is a method of setting prices when goods are sold to divisions
within the same company. Cost may either be standard or actual cost. Standard cost has the
advantage of isolating variances. Actual costs give the selling division a little incentive to control
costs.
c. Negotiated Price
Negotiated Transfer price may occur when segments are free to determine the prices at
which they buy and sell internally. It is especially appropriate when market prices are subject to
rapid fluctuations.
d. Arbitrary Price
Arbitrary transfer pricing is set by the management in the corporate headquarters.
e. Dual Pricing
Dual pricing is used when the selling and buying divisions use different prices in recording
their intercompany transfers. For example, the selling division records the transfer at market
prices as if the sale is made to outside customers, while the buying division records the purchases
at variable cost of production.
Transfer pricing policy is normally set by top management. The segment’s goal is also relevant, but the
overall goal of the organization is paramount.
Required: Determine the profit for Marga Enterprises, Cassie Corporation, and Kadenang Ginto Holdings,
Inc., if an inter-divisional transfer of goods occurred under each of the following transfer prices.
1. Market price of P80.
2. Variable production cost of P66.
3. Negotiated price of P73.
4. Dual pricing.
Quality Measurements
Additional readings:
• Chapter 8 Management Services, Franklin Agamata
• https://www.investopedia.com/terms/t/transfer-pricing.asp
• https://www.yourarticlelibrary.com/accounting/methods-of-transfer-pricing-4-methods/52954
•
For better understanding of the topic on hand, it will be beneficial to watch the following discussion
video:
• https://www.youtube.com/watch?v=W2viHN8xSHo&ab_channel=RyanRoque