Question

why transfer price should be used by management accountants comment and elaborate

Answer 1

Managerial accounting, the transfer price indicates that the price at which one subsidiary of a company, sales goods and services to other subsidiary of the same company.

Here,goods and services includes labour components raw materials in any other items.

Fair transfer prices :- transfer prices effects 3 managerial accounting areas, first, transfer pricing determines cost and revenue among the transaction divisions, affecting the performance evaluation of the divisions. Second, transfer prices affect the divisional manager incentives to sell goods either internal or external, transfer pricing is very low compared to the price prevailing in the market then the subsidiary refused to accept intercompany transfers. Finally, transpiration very important when the goods are transferred especially in cases of across international borders.transfer prices affect the companies tax liabilities and deferred tax assets and deferred tax liabilities.

transfer prices can be measured under cost based, market based and negotiation method. Under market based method transfer price is determined by comparing the market price of the similar goods. undercast base method the transfer price is determined by cost plus markup if the subsidiary sold the goods to the customer in outside market rather than intra company transfer. Under negotiation method both the divisional managers of subsidiaries will negotiate the transfer price for the inter company transfer.

Transfer pricing determines the cost and revenue of the transferring division. Is the transfer price is too low then the subsidiary which is transferring the goods will get lower profit and the subsidiary which is getting the goods from other subsidiary it will get the goods for less cost. this will leads to affect the incentives to the divisional manager of the transferring subsidiary, due to this the divisional manager of transferring subsidiary will maintain the transfer price equivalent to the price of goods sold to external customer.

Transfer pricing and tax liabilities :-

transfer prices play a large role while determining the over all companies tax liabilities. If the receiving subsidiary located in the higher tax jurisdiction, there is an incentive to the organisation to make the transfer price as higher as possible, this results to overall lower profit for the receiving subsidiary.

However, there is a limit to what extent a multinational companies can engage in overpricing their goods and services for internal sales purposes. A host of complicated tax laws in different countries limit the ability to manipulate the transfer pricing.

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