We saw in Chapter 12 that a decentralized firm delegates decision-making authority to subordinates. With this delegation of authority comes the risk of managers making decisions based on their individual goals that can be sub-optimal for the organization as a whole. One example of dysfunctional decision-making occurs when business units or divisions within the organization buy goods and services from one another and each unit or division manager is evaluated on reported profits. In this chapter we address this potential problem. | Transfer Pricing Chapter 15 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin We saw in Chapter 12 that a decentralized firm delegates decision-making authority to subordinates. With this delegation of authority comes the risk of managers making decisions based on their individual goals that can be sub-optimal for the organization as a whole. One example of dysfunctional decision-making occurs when business units or divisions within the organization buy goods and services from one another and each unit or division manager is evaluated on reported profits. In this chapter we address this potential problem. Transfer Pricing . 1 Explain the basic issues associated with transfer pricing. Transfer price: The value assigned to the goods or services sold or rented (transferred) from one unit of an organization to another. Treatment is the same as a sale to an outside customer. – Revenue to the selling unit – Cost to the buying unit 15 - When business units or divisions within the organization buy goods and services from one another, the value or amount recorded in a firm’s accounting records as revenue to the selling unit and cost to the buying unit is called the transfer price. Although this is recorded as revenue to one unit and cost to another unit, both units are part of the organization and the transfer has no impact on the firm. Because the exchange takes place within the organization, the firm has considerable discretion in setting the transfer price. And, of course, the question is: What price is optimal? The Setting . 2 Explain the general transfer pricing rules and understand the underlying basis for them. Padre Papers Wood Division Paper Division Trees Paper Wood for making paper 15 - Let’s use Padre Papers to study transfer-pricing rules. Suppose Padre Papers has two divisions, the Wood Division that processes trees and sells wood and the Paper Division that buys wood for manufacturing paper. . | Transfer Pricing Chapter 15 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin We saw in Chapter 12 that a decentralized firm delegates decision-making authority to subordinates. With this delegation of authority comes the risk of managers making decisions based on their individual goals that can be sub-optimal for the organization as a whole. One example of dysfunctional decision-making occurs when business units or divisions within the organization buy goods and services from one another and each unit or division manager is evaluated on reported profits. In this chapter we address this potential problem. Transfer Pricing . 1 Explain the basic issues associated with transfer pricing. Transfer price: The value assigned to the goods or services sold or rented (transferred) from one unit of an organization to another. Treatment is the same as a sale to an outside customer. – Revenue to the selling unit – Cost to the buying unit 15 - .
