What Are The Things That You Need To Learn Regarding Transfer Pricing?
Speaking of transfer pricing, this is a term that is commonly used by experts to refer to the price at which goods or even services are transferred from one department or process to another or from one group member to another. In addition to that, there goes the fact as well that transfer pricing pertains to prices that are being charged by divisions of an organization to other divisions for the goods or the services they are providing them with.
There are other things that we want you to know of regarding transfer pricing such as the fact that just like any other process, it also has its own sets of problem to deal with but the good thing is that there are now solutions that can solve these problems. If you are wondering why we are telling you these things, well, that is because we want you to know about the things that are happening in the said process and also, this is a way for you to better understand their corresponding solutions.
The first concern that we have here in our list has something to do with divisional autonomy. It has been said that transfer prices are particularly appropriate for profit centers since if a single profit center does work with another profit center, the size of the transfer price will greatly affect the costs of a single profit center and the revenue of another profit center. But the problem with this is that a profit center manager may make a decision for its best interest but that decision may not be of the best interest of other profit centers and possibly, for the entire organization itself.
Apart from that, we want you to know that there are other problems that come with transfer pricing like the what we call as divisional performance measurement. More often than not, you will see how profit center managers tend to place the profit performance they have above anything else. And since the performance of these profit centers is measured in accordance with the profit they earn, there is no one who would want to do work for other profit centers without getting paid for it.
But there is nothing for you to be worried about this because as what we mentioned above, there are ideal solutions for these problems. If anything, when setting transfer prices, it should be at a level where these problems will be overcome. It is vital and essential for transfer prices to be able to provide a selling price that is artificial as this way, transferring divisions will be able to earn a return of its efforts. When it comes to the receiving division, they will be able to incur costs for all the benefits they receive. The next solution that we have here in our list has something to do with transfer prices being set at a level in which, profit center performances are allowed to be measured commercially. In other words, it is significant for transfer prices to be set as a fitting commercial price.