ACCA P5考試：TRANSFER PRICE（二）

THE ECONOMIC TRANSFER PRICE RULE

The economic transfer price rule is as follows:

Minimum (fixed by transferring division)

Transfer price ≥ marginal cost of transfer out division

And

Maximum (fixed by receiving division)

Transfer price ≤ net marginal revenue of transfer in division

As well as permitting interdivisional trade to happen at all, this rule will also give the correct economic decision because if the final selling price is too low for the group to make a positive contribution, no operative transfer price is available.

VARIATIONS ON VARIABLE COST

There are two approaches to transfer pricing which try to preserve the economic information inherent in variable costs while permitting the transferring division to make profits, and allowing better performance valuation. However, both methods are somewhat complicated.

Variable cost plus lump sum. In this approach, transfers are made at variable cost. Then, periodically, a transfer is made between the two divisions (Credit Division A, Debit Division B) to account for fixed costs and profit. It is argued that Division B has the correct cumulative variable cost data to make good decisions, yet the lump sum transfers allow the divisions ultimately to be treated fairly with respect to performance measurement. The size of the periodic transfer would be linked to the quantity or value of goods transferred.

Dual pricing. In this approach, Division A transfers out at cost plus a mark up (perhaps market price), and Division B transfers in at variable cost. Therefore, Division A can make a motivating profit, while Division B has good economic data about cumulative group variable costs. Obviously, the divisional current accounts won’t agree, and some period-end adjustments will be needed to reconcile those and to eliminate fictitious interdivisional profits.

ECONOMIC TRANSFER PRICE RULE

Minimum (fixed by transferring division)

Transfer price ≥ marginal cost of transfer-out division + any lost contribution

And

Maximum (fixed by receiving division)

Transfer price ≤ the lower of net marginal revenue of transfer-in division and the external purchase price

CONCLUSION

You might have thought that transfer prices were matters of little importance: debits in one division, matching credits in another, but with no overall effect on group profitability. Mathematically this might be the case, but only at the most elementary level. Transfer prices are vitally important when motivation, decision making, performance measurement, and investment decisions are taken into account – and these are the factors which so often separate successful from unsuccessful businesses.

Ken Garrett is a freelance writer and lecturer