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MAFHH An Institution: What challenges may face by small conglomerate org...:   Query:  What challenges may face by small conglomerate organisations during an up-gradation of an existing information system? Solution: T...

Importance of Transfer Pricing within the organisation

 

Query no.1

What is transfer pricing in order to assess the performance of the divisions under decentralized structure of the organisation?

Solution:

Transfer pricing is a price where selling division charge price to the buying  division against goods or services delivered within the organizations.

 

Query no.2:

What discrepancy can arise on charging transfer price within the organization?

Solution:

If actual cost is charged by selling division then buying division can claim that, selling division has charged poor cost control within the transfer price. In that situation, discrepancies can be arisen in order to settle transfer price.

Query no.3:

How to assess whether transfer price is within the best of interest of the organization as a whole?

Solution:

Although there are some problems with transfer price but if following five goals are met then it can be said that transfer price is in the best of interest of the organization as a whole such as below:

1. Goal congruence
2. Equitable performance measurement
3. Retained divisional autonomy
4. Motivated divisional managers
5. Optimum resource allocation

Query no.4:

What are the problems with transfer pricing?

Solution:

Maintaining the right level of divisional autonomy:

Self-interest is one of the important element which is difficult to maintain within the organization because people have different level of wishes and their interests. It might possible that divisional managers take their decision in their best of interest rather than organization as a whole.

Ensuring divisional performance is measured fairly:

Transfer price affect behaviour and decisions made by profit centre managers. Because profit centre performance is measured according to the profit they earned. In this situation, no profit centre will want to do work for another without being paid for it. Resultantly, profit centre managers would not be agreed to work for another.

Ensuring organization profits are maximized:

If selling division is capable to sell goods in the external market at higher price as compare to internally transfer at a lower price then selling division would not be willing to transfer goods inside.

Query No.5:

What are the solutions of transfer pricing?

Solutions:

Transfer price should provide an arbitrary selling price that enable transferring division to earn a return for its efforts and receiving division to incur a cost for benefits received.

Additionally, the transfer price should be set at a level that enables profit centre performance to be measured commercially which means transfer price should be a fair commercial price.

Similarly, if it is possible transfer price should encourage profit centre managers to agree on the amount of goods and services to be transferred which will also be at a level that is consistent with the aims of the organization as a whole such as maximizing company profits.