Methods of Transfer Pricing

The assignment explores the concept of transfer pricing in strategic management accounting, focusing on two primary methods: market-based transfer pricing and cost-plus markup transfer pricing. The first method takes into account the prevailing market rate to determine resource transfer rates between departments, while the second adds a profit margin to the cost of resources transferred. The advantages and disadvantages of each approach are discussed, including their impact on profitability and business operations.

STRATEGIC MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
Q4....................................................................................................................................................1
REFERENCE..................................................................................................................................3

Q4
In large size firms there are varied separate entities that are developing varied products
and same are responsible for their profitability and cost incurred during production process. All
these entities are associated to each other in terms of resource requirements. Hence, these
departments transfer products to each other at specific rate so that profit canbe gained on same
and increasing profit in business. There are number of approaches that are used for transfer
pricing and same is explained below.
Market based transfer pricing: Under this strategy simply rate that is prevailed in the market is
taken in to account in order to determine the rate at which resources will be transferred between
departments. This pricing strategy is used when there is developed market of product and it is
easy to obtain relevant facts from market (Boyd, 2017). Rate at which specific resource is trading
in the market are taken in to account in order to determine the rate at which transfer will happen
between varied departments.
Advantages of market based pricing method
 Major advantage of market based pricing method is that it is objective in nature.
 If market is perfectly competititve then in that case it become very easy to make relevant
decisions in respect to rate at which resources must be transferred to other department.
Disadvantages of market based pricing method
 Major disadvantage is that sometimes product does not traded in market on large level.
Hence, imperfect price can be determined to transfer product to other department.
Cost plus mark up transfer price: Under this pricing method on cost margin is added and in this
rate of transfer is determined. Thus, unit that sale resources to other one earn huge amount of
profit. However, in this approach market rate is not taken in to account that already cover profit
margin and additonally on it profit margin is added (Agarwal., 2017). Department that is selling
goods to other department earn huge profit on transfer. Advantages and diadvantage of cost plus
mark up transfer price are given below.
Advantage of cost plus mark up transfer price
 One of major advantage of using cost plus mark up transfer price is that it eliminate weak
point of actual full cost method where no ground of discussion is available between buyer
and seller in respect to raw material transfer pricing.
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Disadvantage of cost plus mark up transfer price
One of major disadvantage of using cost plus mark up pricing is that entity that make purchase of
item from other department have to pay a very high price for purchase. This is because on
product cost additionaly margin is added. Cost included all sort of expenses whether same are
direct or indirect in nature. Additon of margin on it make deal profitable for entity that is making
sale of item to other entity.
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REFERENCE
Books and journals
Agarwal ,R., 2017. [Online]. Methods of Transfer Pricing (4 Methods). Available through:<
http://www.yourarticlelibrary.com/accounting/methods-of-transfer-pricing-4-methods/
52954>.
Boyd, K., 2017. [Online]. Market-based and cost-based pricing in cost accounting. Available
through:<http://www.dummies.com/business/accounting/market-based-and-cost-based-
pricing-in-cost-accounting/>.
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