1 / 13

Transfer Pricing & Utilizing Assets Employed

Transfer Pricing & Utilizing Assets Employed. Chapters 5 & 6, Management Control Systems, 12th Ed., Anthony and Govindarajan. Transfer Pricing. The pricing system for the transfer of goods or services between two profit centers within the same organization.

mungia
Download Presentation

Transfer Pricing & Utilizing Assets Employed

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Transfer Pricing & Utilizing Assets Employed Chapters 5 & 6, Management Control Systems, 12th Ed., Anthony and Govindarajan

  2. Transfer Pricing The pricing system for the transfer of goods or services between two profit centers within the same organization. Can also apply to services provided by corporate staff units.

  3. Objectives of a Transfer Price • Provide relevant info to provide for optimum company profits • Induce goal congruent decisions • Measure economic performance • Simple and easy to understand

  4. Fundamental Principle The fundamental principle is that the transfer price should be similar to the price that would be charged if the product were sold to outside customers or purchased from outside vendors. [Text, p. 202]

  5. Various Situations • Market Price • Constrained • Limited Markets • Excess / Shortage of Industry Capacity • Cost-Based • Cost Basis • Profit Markup

  6. Various Situations • Upstream Fixed Costs and Profits • Agreement (meet periodically and determine) • Two-Step (combine variable & fixed costs) • Profit Sharing • Two Sets of Prices (outside sales price & standard cost)

  7. Corporate Services • Control over Service Provided • Optional Use of that Service • Simplicity of Pricing

  8. Transfer Price Administration Negotiation • Arbitration / Conflict Resolution • Product Classification

  9. Measuring and Controlling Assets Employed • The terms “profit center” and “investment center” are often used interchangeably • Profit center measured on profit in relation to a profit target • Investment center measured on return on the assets used to earn profit

  10. Assets • Current • Cash • Receivables • Inventories • Plant, Property, & Equipment • Leased • Idle • Intangible

  11. Definitions • Return of Investment (ROI) • A Ratio (Income Statement & Balance Sheet) • Income / Assets Employed • Economic Value Added (EVA) • A Dollar Amount • Net Operating Profit – Capital Charge

  12. Why Use EVA? • Profit objectives are consistent • Investments yielding above cost of capital are attractive • Different interest rates may be used for different investments • Causes the creation and growth of added value for the corporation

  13. EVA Calculation • EVA = Net Operating Profit – Capital Charge • Where • Capital Charge = Cost of Capital * Capital Employed • Cost of Capital is Weighted Average OR • EVA = Capital Charge * (ROI – Cost of Capital)

More Related