Question

Why an organization should opt for transfer pricing and why . Why full cost plus mark up transfer pricing preferred over market price method.

Answer 1

Any organisation having transactions involving tangibles or intangibles with its associate have to make such transactions at transfer price. The reason is that:

• It increases efficiency across the company: Every manager gets his fair share of income over costs for making the sale to an associate jus the way he would had he made the sale to an outsider. Sometime incentives are fixed on margins used between transfer price and th costs incurred .
• It is necessary for financial reporting purposes.
• Governement will get their fair share of taxes on monies actually earned within their national boundaries.
• Helps in managerial cost accounting purposes. Evaluating performances of associates is easy when price fixed is greater than costs.

Cost plus markup is method is used when the transferor accumulates all the costs viz direct as well as indirect associated with his supply and fixes a percentage of cost as margin. This margin is computed after considering all risks and rewards associated with the supply. It is simple and less costly too. On the other hand, fixing Market price as the transfer price involves complications and it may be costly to collect the data. Moreoever it may leave very less for the transferee to make profit on. Thus they may find it indifferent to buy from an outsider rather than from the tranferor.