This assignment is simply creating a thoughtful and articulate synthesis and
response to another students discussion board post. Here is the students
original post that you are responding too:
Interest: Transfer Pricing Method
Three primary objectives for transfer prices are to be a motivation of high
level efforts on parts of business unit managers, achieve goal
congruency between imperative decisions that are made by managers of
business, and the goals of top management, and lastly to reward business
unit managers equally for the effort and skill type put in for the effectiveness
of the decisions that are made daily. Going into transfer prices and the
techniques used for the methods to run smoothly there are four specifics that
will be discussed for determination (Blocher, Stout & Smith, 2019).
Full Cost, Negotiated Price, Variable Cost, & Market Price
Full cost method: this method sets the transfer price to become equal to the
variable cost of the selling unit on top of having a share that is allocated with
the fixed cost of the selling unit with or without a markup for profit.
A key advantage of this approach is that it is well understood, and the
information provided for determining the transfer price is available off hand.
A key disadvantage is that it so happens to include fixed cost, which can
cause decision making to become improper.
Negotiated price method: involves a process of negotiation and can
sometimes arbitrate in between units to finalize the transfer price. This
method is mostly wanted when the units hold prior history of conflict that is
significant and the negotiation resulting in a price that is agreeable.
Variable cost method: sets the transfer price to become even to the selling
units variable cost, with or without a markup plan. Variable costs can be
labeled as standard or actual costs. The variable cost method is most lingered
towards the selling unit and how it provides unlimited capacity, and how the
selling units variable costs provides much less than the outside price of
purchase (Blocher, Stout & Smith, 2019).
Market price method: sets the transfer price as the current price of the
product in the external market.
A key advantage of this method is objectivity, it best makes cheerful
measurements criteria wanted for both tax purposes and management.
A key disadvantage of this method is that the market prices are not always
vacant for intermediate products (Blocher, Stout & Smith, 2019).
With transfer pricing methods comes a practical distinction behind it
intertwined with intercompany transfer pricing and intracompany transfer
pricing. The pricing regulations given out by the United States Treasury
Department gives permission to a company to select from a given number of
TPM’s amongst other many other methods, permissibly selecting different
methods of choice under different circumstances (Hoboken &Wiley, 2004).
Interest: Relevant Cost Analysis
Relevant costs are cost in the future that hold a difference between and above
decisions routes. A cost that has already happened in the past or has already
been submissive for the future is most certainly not relevant; it then transitions
to develop into a sunk cost because it will result in the same option that is
chosen. In order for a cost to become relevant, it must be a cost that is
incurred for the future and will differentiate between and among the decision
makers options (Blocher, Stout & Smith, 2019).
Hospitals being a mere focus, price competitions are becoming more difficult,
hospital are wanting more information on accounting and the refined
accounting systems; knowing that this very need takes more accurate
estimates of cost in their decisions of pricing. The end results of the relation
between unit allocated capacity cost and prices of service entail that hospitals
are to mirror the relevance of unit allocated cost to pricing and to shift the
estimation mistake of unit allocated cost (Sylvia &Ranjani, 2011).
Reference
Blocher, E., Stout, D., Juras, P., & Smith, S. (2019). Cost management: A
strategic emphasis (8th ed.). Boston, MA: McGraw-Hill.
Hoboken, N.J.:: J Wiley. (2004). Transfer pricing methods an applications
guide.
Sylvia Hsingwen Hsu, & Ranjani Krishnan. (2011). Cost Information and
Pricing: empirical
evidence/discussion of “cost information and pricing: empirical
evidence.” Contemporary Accounting Research: A journal of the canadian
academic
accounting association = recherche comptable contemporaine : la revue de
l’association canadienne des professeurs de comptabilité., 28(2).
OUTLINE FOR DISCUSSION BOARD REPLY, PRICE AND COST MANAGEMENT
The attached discussion board reply entails the following components;
Transfer pricing
o Primary objectives for transfer prices
o Definition of a transfer price
Transfer pricing methods
o Full Cost
o Negotiated Price
o Variable Cost
o Market Price
Future cost analysis
o Definition
o Example
References
o A list of sources used
Running head: DISCUSSION BOARD REPLY, PRICE AND COST MANAGEMENT 1
DISCUSSION BOARD REPLY, PRICE AND COST MANAGEMENT
Name:
Institution affiliation:
Date:
DISCUSSION BOARD REPLY, PRICE AND COST MANAGEMENT 2
DISCUSSION BOARD REPLY, PRICE AND COST MANAGEMENT
Transfer pricing
I agree with the student about the three essential objectives for transfer prices. It is true that
transfer pricing motivates unit manager efforts, ensures goal congruency, and promotes equality
in manager rewards. However, the student has not defined transfer pricing. He/she should have
started by defining it because a layperson may not know its meaning. Johnson (2013) points out
that transfer pricing entails assigning a specific cost to transactions for products (goods and
services) between related parties.
Transfer pricing methods
Considering the full cost method, the author has accurately defined the technique and has
provided the advantage and disadvantage. It is straightforward, but it includes fixed cost; hence,
decision making may be inappropriate. I concur with the post that the negotiation price method
entails negotiation between parties to arrive at an agreed price. However, the author has not pointed
out the merits and demerits. For instance, negotiation may consume a lot of time, but the advantage
is that both parties get satisfied. Likewise, the merits and demerits of the variable cost method are
not availed. Last, but not least, it is true that the market price method sets the transfer price as the
current price of a good or service in the market place. The advantage and disadvantage are also
evident. It is appropriate for managerial and tax purposes. In conclusion, it is prudent for
companies to select an appropriate transfer pricing method to avoid conveniences and facilitate
perpetual execution of duties (Challoumis, 2018).
Relevant Cost analysis
As the author postulates, a relevant cost entails a future cost that comes along with a
particular decision making (Wouters, 2014). However, the example of the relevant cost provided
DISCUSSION BOARD REPLY, PRICE AND COST MANAGEMENT 3
is complicated. A more straightforward example should be provided. For instance, if a company
decides to construct a manufacturing factory for products it uses, it will incur costs. Therefore, it
is prudent to consider the cost of manufacturing and that of buying.
DISCUSSION BOARD REPLY, PRICE AND COST MANAGEMENT 4
References
Challoumis, C., (2018). Transfer Pricing Methods for Services. SSRN Electronic Journal. doi:
10.2139/ssrn.3148733
Johnson, N., (2013). Discussion of "Specific Investment and Negotiated Transfer Pricing in an
International Transfer Pricing Model." Schmalenbach Business Review, 65(1), 51-53. doi:
10.1007/bf03396849
Wouters, M., (2014). Relevant cost information for order acceptance decisions. Production
Planning & Control, 8(1), 2-9. doi: 10.1080/095372897235497
