Transfer Pricing

Transfer Pricing
• Transfer Price,
▫ is a price assigned to products (goods/services) that
are transferred among the profits centres, or at least
involved one profit centre
• Transfer price—the price one subunit charges for a
product or service supplied to another subunit of the
same organization.
• Management control systems use transfer prices to
coordinate the actions of subunits and to evaluate their
performance.
 Transfer Pricing
• The transfer price creates revenues for the
selling subunit and purchase costs for the buying
subunit affecting each subunit’s operating
income.
• Intermediate product—the product or service
transferred between subunits of an organization.
 Contoh Mekanisme Transfer Price

Jaringan Jaringan Jaringan

Media Umum Media Khusus
Percetakan Penerbit Toko Buku

Radio Kompas Gramedia Pranala Luar

Group

Jaringan
Media Elektronik Event Organizer Industri Pendidikan
Hotel
 Contoh Mekanisme Transfer Price
Kompas Gramedia
Group

Harga Cetak Harga Jual Harga Jual

@ Rp 6.000,- @ Rp 25.000 @ Rp 31.500

Media Umum Percetakan Penerbit Toko Buku

PT Gramedia Elex Media Pelanggan
Harian Kompas Printing Group Komputindo Gramedia

Mencetak 1000 eks Menerbitkan 1000 Menjual 700 Eks Buku

Biaya-Biaya: Eks Buku Biaya-Biaya:
Bahan, Tenaga Biaya-Biaya: Harga Pokok Pembelian Rp 17.500.000
Kerja, Overhead Biaya Cetak Biaya Marketing Rp 1.500.000
Rp 5.000.000,- Royalty, Marketing, Biaya Adm. & Umum
Margin 20% (Rp 1jt) Adm. & Umum Rp 2.000.000,-
Harga Cetak: Rp 20.000.000,- Markup 15% (3.150.000)
Rp 6.000.000,- Markup 25% (Rp 5jt) Harga Jual/Buku:
Harga Jual/Buku: @ Rp 31.500,-
@ Rp 25.000,-

Laba/Unit Laba/Unit Laba/Unit

Rp 1000,- Rp 5.000,- Rp 3.150,-
 The Objectives of Transfer Pricing
▫ It should provide each business unit with the relevant
information it needs to determine the optimum trade-off
between company costs and revenues.
▫ It should induce goal congruent decisions-that is, the
system should be designed so that decisions that improve
business unit profits will also improve company profits.
▫ It should help measure the economic performance of the
individual business units.
▫ The system should be simple to understand and easy to
administer.
 Fundamental Principle
• The transfer price should be similar to the price
that would be charged if the product were sold to
outside customers or purchased from outside
vendors.
• Decisions associated to transfer price:
1. Sourcing decision,
 Should the company produce the product
inside the company or purchase it from an
outside vendors.
2. Transfer price decision,
 If produced inside, at what price should the
product be transferred between profit centres.
 8

Transfer-Pricing Methods

Market-based transfer prices

Cost-based transfer prices

Negotiated transfer prices

 Market-Based Transfer Prices
• Top management chooses to use the price of
similar product or service that is publicly
available. Sources of prices include trade
associations, competitors, and so on.
 Constraints on Market-based
1. Limited markets
▫ the existence of internal capacity might limit the
development of external sales.
▫ if a company is the sole (one and only) producer of a
differentiated product, no outside source exists.
▫ if a company has invested significantly in facilities, it is
unlikely to use outside sources

2. Excess or Shortage of Industry Capacity

 Cost-Based Transfer Prices
• Top management chooses a transfer price based
on the costs of producing the intermediate
product. Examples include:
▫ Variable production costs
▫ Variable and fixed production costs
▫ Full costs (including life-cycle costs)
▫ One of the above, plus some markup
• Useful when market prices are unavailable,
inappropriate, or too costly to obtain
 Cost-Based Transfer Price
• is transfer price that based on “cost plus”
pricing.
Decisions involved:
1. how to define costs
2. how to calculate the profit mark-up (plus)
• Cost Define
▫ Standard cost versus actual cost?
• The Profit Mark-up
▫ what the profit mark-up is based on?
▫ what the level of profit allowed?
 Negotiated Transfer Prices
• Occasionally, subunits of a firm are free to
negotiate the transfer price between themselves
and then to decide whether to buy and sell
internally or deal with external parties.
• May or may not bear any resemblance to cost or
market data.
• Often used when market prices are volatile.
• Represent the outcome of a bargaining process
between the selling and buying subunits.
 Upstream Fixed Costs and Profits
• Solutions:
1.Agreement among Business Units
2.Two-Step Pricing
▫ First, for each unit sold, a charge is made that is
equal to the standard variable cost of production.
▫ second, a periodic (usually monthly) charge is made
that is equal to the fixed costs associated with the
facilities reserved for the buying unit.
3.Profit Sharing
4.Two Sets of Prices
▫ the manufacturing unit’s revenue is credited at
outside sales price and the buying unit is charged
the total standard costs.
 Two-Step Pricing

• Business Unit “X” transfers product to Business Unit “Y”

▫ Expected monthly sales to “Y” 5,000 units
▫ Variable costs per unit $5
▫ Monthly fixed costs assigned to product $ 20,000
▫ Investment in working capital & facilities $ 1,200,000
▫ Competitive return on investment per year 10%
At what price the product transferred to “Y”?
▫ Step One, assigned variable costs
▫ Step Two, assigned fixed costs and profits
Comparison of Transfer-Pricing Methods