Page 107 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems Neha Tikoo, Lovely Professional University

Notes Unit 5: Transfer Pricing

CONTENTS
Objectives
Introduction

5.1 What is Transfer Pricing?
5.1.1 Objectives of Transfer Pricing
5.2 Market Price as Transfer Price

5.2.1 Pitfalls in Market Prices
5.2.2 Alternatives to Market Prices
5.3 Method for Transfer Pricing
5.4 Administration of Transfer Prices
5.4.1 Negotiation

5.4.2 Arbitration and Conflict Resolution
5.4.3 Product Classification
5.5 Summary

5.6 Keywords
5.7 Review Questions
5.8 Further Readings

Objectives

After studying this unit, you will be able to:

 Discus the meaning of transfer pricing
 Identify the Methods for transfer Pricing
 Explain the administration of transfer prices

Introduction

Today’s organizational thinking is oriented towards decentralization. One of the principal
challenges in operating a decentralized system is to devise a satisfactory method of accounting
for the transfer of goods and services from one profit centre to another in companies that have
a significant number of these transactions. In this unit we will discuss various approaches to
arriving at transfer prices for transactions between profit centres and the system of negotiation
and arbitration that is essential when transfer prices are used.

5.1 What is Transfer Pricing?

In a decentralized profit centre, the monetary value at which the transfer of goods and services
from one profit centre to another profit centre is accounted for, for the evaluation of performance
of profit centre is termed as transfer pricing. The transfer price is the mechanism for distributing

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