Transfer Pricing (1)

Question 1

What is the transfer price?

Answer 1

The price at which goods or services are transferred from one department to another, or from one member of a group to another

Question 2

What does transfer pricing policy have?

Answer 2

A significant impact on responsibility accounting and performance measurement

Question 3

What is vital for transfer pricing?

Answer 3

That the transfer price is carefully selected to ensure all parties act in best interest of the company

Question 4

Goals of a transfer pricing system (congruence)

Answer 4

Goal congruence

Question 5

Goals of a transfer pricing system (equitable)

Answer 5

Equitable performance measurement

Question 6

Goals of a transfer pricing system (retained)

Answer 6

Retained divisional autonomy

Question 7

Goals of a transfer pricing system (motivated)

Answer 7

Motivated divisional managers

Question 8

Goals of a transfer pricing system (optimum)

Answer 8

Optimum resource allocation

Question 9

Inputs and outputs for division supply?

Answer 9

Input: Costs incurred by supply

Output: External sale of intermediate product by supply. Division receive

Question 10

Inputs and outputs for division receive?

Answer 10

Input: Transfer, Alternative suppliers to receive

Input & Output: Revenue earned by receive

Question 11

Why do problems arise with the use of cost-based transfer prices?

Answer 11

As one party or the other is liable to perceive them as unfair

Question 12

Cost-based approaches to transfer prices are used in practice because (market)

Answer 12

No external market for product that is being transferred

Question 13

Cost-based approaches to transfer prices are used in practice because (imperfect)

Answer 13

An imperfect one because market price is affected by factors such as amount the company setting the transfer supplies to it, because there is only a limtied external demand

Question 14

What is meant by an intermediate product?

Answer 14

One used as component in another product

Question 15

What are transfer prices based on full cost?

Answer 15

The full cost incurred by supplying division in making “intermediate” product is charged to the receiving division

Question 16

Disadvantage of transfer prices based on full cost?

Answer 16

Division supplying the product makes no profit on its work so is not motivated to supply internally

Question 17

If a full-cost approach is used?

Answer 17

A profit margin also included in this transfer price

Question 18

Supplying division if full-cost approach is used?

Answer 18

Gain some profit at the expense of the buying division

Question 19

What are transfer prices based at variable cost?

Answer 19

Entails charging the variable cost that has been incurred by the supplying division to the receiving division

Question 20

Problems with transfer prices based at variable cost?

Answer 20

Supplying division does not conver its fixed costs with a transfer price at marginal cost

Question 21

Optimum approach to setting transfer prices?

Answer 21

Opportunity cost apporaach. Lower of minimum transfer price and maximum transfer price

Question 22

What is a minimum transfer price?

Answer 22

Variable cost + Opportunity cost

Question 23

What is a maximum transfer price?

Answer 23

External market price or divisional new revenue

Question 24

Where the supplying division has spare capacity?

Answer 24

Opportunity cost of transferring units internally is nil as there is no external market for additional units

Question 25

Where the supplying division has full capacity?

Answer 25

Opportunity cost will be the lost contribution from the other sales

Question 26

What should opportunity cost based approach always result in?

Answer 26

Goal congruent behaviour with both buyer and seller when it’s group’s best interest to transfer