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MCS Ch. 6
n/a
21
Accounting
Graduate
03/14/2011

Additional Accounting Flashcards

 


 

Cards

Term
Transfer price
Definition
value placed on a transfer of goods or services in transactions in which one of the two parties involved is a profit center
Term
6 Objectives of transfer pricing
Definition
1. Provide each business unit w/relevant information it needs to determine optimum trade-off between costs and revenues.
2. Induce goal congruent decisions
3. Help measure economic performance of the individual business units
4. Should be simple to understand and easy to administer
5. want the system to maintain management prerogatives (autonomy)
6. Try to minimize overall taxes and tariffs.
Term
Why profit centers sell to one another (2 decisions).
Definition
1. Sourcing: produce product or purchase outside?
2. Transfer price: if produced inside, at which price should it be transferred?
Term
Ideal situation
Definition
Transfer price = market price
Term
A market price-based transfer price will induce goal congruence if (6 suggestions)
Definition
1. Competent people
2. Good atmosphere
3. A market price
4. Freedom to source
5. Full information
6. Negotiation
Term
Competitive price
Definition
Measures how well the profit center may be performing against its competitors
Term
How to find competitive price (4)
Definition
1. Published market prices
2. Market prices may be set by bids
3. If the buying profit center sells similar products to outside markets
4. If the buying profit center purchased similar products in the outside market
Term
Cost-based transfer price (2 decisions)
Definition
1. How to define cost
2. How to calculate the profit markup
Term
Why use standard costs vs actual costs
Definition
Don't want to pass along inefficiencies
Term
Profit markup (2 decisions)
Definition
1. What the profit markup is based on
2. The level of profit allowed
Term
Two-step pricing
Definition
1. Standard variable cost of one unit
2. Monthly fixed cost for facilities (lump sum)
Term
Points to consider about the 2 step method (5)
Definition
1. Monthly charge should be periodically negotiated
2. Questions may be raised about accuracy
3. Mfg profit is not affected by sales volume
4. Could be a conflict of interest
5. Similar to 'take or pay'
Term
Profit sharing problems (3)
Definition
1. Can be arguments over dividing profit
2. Does not give valid profit info
3. Mfg's contribution depends on ability of product to be sold
Term
Two sets of prices
Definition
"mickey mouse" poor methodology

1. Mfg revenue is credited at outside prices
2. Buying unit is charged total std costs

Difference is charged to HQ and eliminated during consolidation
Term
Disadvantages of 2 sets of transfer prices (5)
Definition
1. BU profit > Overall profit
2. Illusive feeling that they are making money when they are not.
3. Concentrate more on internal transfers because they are assured good markup
4. Additional bookkeeping involved
5. Lessened conflicts between BU's can be viewed as a weakness
Term
3 Schools of thought on cost allocation of company services
Definition
1. Standard variable cost
2. SVC + share of SFC (full cost)
3. Market price
Term
Why set up an arbitration committee? (3)
Definition
1. Setting transfer [price disputes)
2. Reviewing sourcing changes
3. Changing the transfer price rules when appropriate
Term
If there are too many disputes being sent to the AC (3)
Definition
1. Rules are not specific enough
2. Rules are difficult to apply
3. Business unit organization is illogical
Term
What determines how much you invest into transfer pricing rules
Definition
1. How many transfers actually take place and their $ value
2. Potential availability of market price
Term
2 classes of products
Definition
Class I: senior mgmt controls sourcing. High-volume, no outside source exists.
Class II: can be produced outside teh company without any disruption to operations. Low-volume.
Term
3 types of transfer pricing models
Definition
1. Economic models
2. Linear programming
3. Shapley value
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