Page 125 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes Self Assessment

Multiple Choice Questions:
6. Which method of transfer pricing is similar to arm’s length pricing in which intra-company
and external customers transfers are priced the same?

(a) Market based pricing method (b) Cost based pricing method
(c) Negotiating pricing method (d) None of the above
7. In .................................. buying and selling business units freely negotiate a mutually
acceptable transfer price.
(a) Cost based pricing method (b) Arm’s length pricing method
(c) Market based pricing method (d) Negotiating pricing method

8. What is the transfer price called if it is the difference between further processing costs,
profits markup, and the selling price of the product?
(a) Resale price method (b) Market price method

(c) Cost method (d) Profit method
9. Transfer Price is the:
(a) Amount used in accounting for any transfer of goods and services between
responsibility centres.
(b) Value place on transfer of goods or services in transactions in which at least one of
the two parties involved is a profit centre.

(c) Price that would be charged if the product were sold to outside customers or procured
internally.
(d) Both (a) and (b)

5.4 Administration of Transfer Prices

Implementing transfer price involves long negotiation among the heads of various units, the
classification of products and arbitration and conflict resolution in case of conflict.

5.4.1 Negotiation

Business units negotiate among themselves before taking decisions relating to transfer pricing.
The headquarters does not involve itself and leaves it to line managers to negotiate and come to
decisions because of the following reasons:
First, the line managers of the business units may feel powerless if they are denied any say in the
transfer prices and this may affect their motivation. Secondly, if the profits of the business units
are poor then the unit managers may argue that it is due to arbitrariness in setting transfer prices
from the headquarters.

5.4.2 Arbitration and Conflict Resolution

There may be times when business units are not able to reach an agreement on transfer pricing.
In such situations, business units should follow a set of procedures for arbitrating disputes
relating to transfer price. The responsibility rests with the parent company. The job may be

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