Global Transfer Pricing Management Accounting

Question: Discuss about the Global Transfer Pricing for Management Accounting. Answer: Introduction: The term transfer pricing is the method of selling the product from one department or from one subsidiary to another within the same company. It has an affect over the behaviour of the purchase of the subsidiaries (Accounting tools, 2016). When it comes to the setting of the minimum price to be charged from the other department of the same entity, it is always better to consider the same form the point of view of the department that is selling the product. The minimum price that should be charged is the following: Marginal cost + opportunity cost. The opportunity cost is the value of the value of the next best alternative that is left out when a particular course of action has been undertaken. Suppose if the division cleaning and scrapping was to sell its product Cruden in the outside market, then it would have earned the profit of $ 65 (95-18-12-30 (40*75%) -5) but it is selling Cruden to the processing division at $77 which may not be profitable for the entity when the entire profits are being combined. But in case, processing department purchases Cruden from outside market, then the company in total would earn the profit of $70. The following are the workings for the same: If sold within the company In case, Cleaning and scrapping sells in the outside market If sold at cost Particulars Cleaning and scrapping division Processing division Cleaning and scrapping division Processing division Cleaning and scrapping division Processing division Transfer pricing from Cleaning and scrapping 77.00 95.00 60.00 Direct material 18.00 5.00 18.00 5.00 18.00 5.00 Direct labour 12.00 10.00 12.00 10.00 12.00 10.00 Manufacturing overhead 30.00 15.00 30.00 15.00 30.00 15.00 Selling 5.00 Total costs 60.00 107.00 65.00 125.00 60.00 90.00 Selling price 77.00 160.00 95.00 160.00 60.00 160.00 Profit from the department 17.00 53.00 30.00 35.00 - 70.00 Profit of the company (combined) 70.00 65.00 70.00 Less: fixed costs 10 10 10 Profit of the company (combined) 60.00 55.00 60.00 Though the profit amount under the case 1 and 3 comes out to be the same, but the most reasonable way of exchanging the products within the departments is the selling them at cost plus mark up since the department is foregoing some value if it is selling the product to the other department within the same company (Acca global, 2016). Plus, the transfer price is calculated at the variable cost that has been incurred by the department since the fixed cost is fixed in nature and they would be incurred no matter what. This fixed cost portion would now become the variable cost for the other department (Processing division in the given case) since the profits derived from each of the department would be combined. Since, the fixed cost of one division becomes the variable cost of the other, the division performance based on the transfer price is not right. References: Accountingtools.com. (2016).Transfer Pricing - AccountingTools. [online] Available at: https://www.accountingtools.com/transfer-pricing [Accessed 14 Sep. 2016]. https://www.accaglobal.com, A. (2016).Transfer pricing | F5 Performance Management | ACCA Qualification | Students | ACCA Global | ACCA Global. [online] Accaglobal.com. Available at: https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/trans-pricing.html [Accessed 14 Sep. 2016].