Strategic Management Accounting: Evaluating Transfer Pricing Methods

This report critically examines full cost and marginal/variable cost transfer pricing methods, highlighting their advantages and disadvantages within strategic management accounting. It discusses how full cost transfer prices ensure transparency and guaranteed returns but may lack flexibility and competitive awareness. The report also covers market-based transfer pricing, noting its unbiased nature but potential for price fluctuations. Marginal/variable cost transfer pricing is presented as useful for decision-making and competition but may complicate tax calculations. The analysis includes examples and numerical assumptions to illustrate the impact of transfer prices on divisional performance and overall profitability, emphasizing the importance of strategic pricing for maintaining growth and sustainability. Desklib provides this report and other solved assignments to assist students in their studies.

STRATEGIC
MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Full cost transfer prices..........................................................................................................3
Market based transfer pricing.................................................................................................5
Marginal/variable cost transfer prices....................................................................................6
CONCLUSION...............................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
The report prepared highlights advantages and disadvantages of full cost transfer prices
and marginal/variable cost transfer prices. It helps to understand uses and limitations of such
methods in working of an organisation. This report also reflects benefits/advantages of cash flow
statements. It also explains which methods must be adopted for improving cash-flow and profits
in a business. It includes what are the merits and demerits of using cost transfer pricing method
in a company and how it will contribute in working of company. It also highlights limitations
and uses of marginal costing and full cost transfer price as well. The report is useful for
managers to understand the area they must work upon for improving company's performance and
maintain sustainability in market (ter Bogt and Scapens 2018).
TASK
Full cost transfer prices
Full cost transfer prices can be explained as the summation of variable and fixed cost per
unit. Transfer price includes direct labour, material and factory overheads. It helps Cadbury
company to know which activity is responsible for what costs. Transfer prices can be said to
assess performances on the basis of divisional work carried out in the company. There are many
advantages and disadvantages in Full cost transfer prices described below:
Advantages of Full cost transfer price in Cadbury company
1. Full cost transfer price method helps to provide high rate of transparency in work. It also
helps Cadbury to provide access to goods to customers in nearby areas.
2. It is considered as a simple and easy to understand approach for calculating prices and
costs for Cadbury company.
3. It gives guaranteed returns to suppliers of the Cadbury company.
4. It is recognised as the easiest method for protecting the rights of the firm in uncertain
conditions by Cadbury company.
5. It helps to serve as a shield for businesspersons linked with Cadbury to protect them from
price wars in the environment (Chand, 2019).
Disadvantages
1. Drawbacks in such cases can be explained such as difficulty in finding difference in cost
levels at different product level in Cadbury.

2. It also doesn't include competition in assessment which results as a drawback for the
Cadbury company.
3. It neglects competition in the market and this is the reason it is unaware of the prices
charged by competitor's and results as a difficult situation to tackle by Cadbury.
4. A major drawback noticed in this method is that it doesn't give much attention to
flexibility and elasticity in Cadbury's operational work.
5. More costs and expenses are required for carrying out operations of the Cadbury
company and prepare accounting system.
Pricing strategy used by Cadbury
There are many pricing strategies used in market by different companies such as Premium
pricing, economy pricing, price skimming, market penetration pricing. Price skimming is
considered best by Cadbury company (ten Rouwelaar, Schaepkens and Widener 2021). It helps
the company to attract more customers from market and segment the customer's as well.
Example of transfer pricing
Transfer pricing can be explained as prices related to goods offered and services rendered
provided by different companies under common control. It is used by large companies for the
distribution of profits among various departments. Transfer pricing policies have many benefits
related with itself such as production of goods in base countries in comparatively lower tax rates.
It can be explained as value which is linked with product and services exchanged between
companies.
Considering a hypothetical situation of company XYZ a U.S. based cloth company producing
cloth at a cost of 12% each in the U.S. XYZ co.'s subsidiary sells clothes to its customer's at 12$
per piece and invests 5% on marketing and distribution. The total profit is amounted as 85% per
piece.
XYZ co. will apply transfer price of 15% and 85% per piece to its linked subsidiaries. In
non-applicability of transfer price regulation ABC co. would be able to determine which area has
lower tax rates and which area seeks to generate more revenue in respected country. Therefore if
U.S. rates gets higher than any other country organisations would like to shift to lowest transfer
price for sale of cloth pieces.
Skimming pricing strategy : It can be explained as a pricing policy which undertakes
implementing a higher price in the market for its products before any other competitor's does. It

helps to have them first mover advantage over others, it also helps to engage and attract clients
from the market which would help in expansion and growth Impact of a Transfer Priceof
company in market and afterwards it starts reducing the prices to engage more customers from
each level in the market.
Impact of a Transfer Price
Transfer price have positive as well as negative impacts too which helps to understand
accounting of transactions of similar firms. It helps to calculate costs or revenue earned. It also
guides how a reporting of transactions is possible among company's and how it can serve as a
helping hand in elimination of dual nature taxation.
Merits of Skimming pricing strategy:
1. Skimming pricing strategy helped transfer price optimal to earn higher return on
investments made in company.
2. This strategy helps to cover expenses, costs incurred in the process of research and
development activities.
3. It helps to differentiate customer base with the help of various marketing policies at each
pricing level.
Demerits of Skimming pricing strategy:
1. It can prove to be unsuccessful when it doesn't seem appealing to customer's linked with
it.
2. It is not easy for a company to modify its rates in initial stages of a project.
Market based transfer pricing
It can be explained as a form of pricing which helps to calculate the rate which would be
paid among areas of the similar operations possessed by organisation. It applies normal rate from
the market which would be used if products are purchased from an open market.
Advantages of Market based transfer prices:
1. It is of unbiased measure and managers might notice fluctuations the reason being
changing market situations over a period of time.
2. It is very difficult to make manipulation in such prices.
Disadvantages of Market based transfer prices:
1. The market price is observed to be of fluctuating nature.

2. There is no base pricing available at times which would help to enable division of prices
among operations.
Marginal/variable cost transfer prices
Transfer prices is needed when the operations of company are bifurcated in more than
one area. Marginal cost in Cadbury company can be explained as additional cost incurred on
increase of production level of each unit of goods or services. It can further be explained as
change in cost recorded with fluctuation in production quantity (Birnberg and Shields, 2020).
There is a significant difference noticed in case of Marginal cost with reference to one price
strategy. One price can be defined as strategy which states diversified price for same amount of
product to already engaged customers. Variable price can be explained as similar quantity to
existing buyers. Variable prices are fixed after a lot of discussion and bargaining on the end of
buyer as well as seller. There are many merits and demerits linked with this method which can
be explained as:
Advantages of Marginal costing in Cadbury company
1. It provide reliable data to managers of Cadbury company which helps them in decision
making keeping future uncertainties in mind.
2. Marginal costing helps Cadbury company to provide a clear picture and its effect on
revenue generation in context to sales made.
3. It helps to ascertain which variable is responsible for which costs and what role it has
played in Cadbury company's working.
4. This method is helpful for organisations to sustain and fight prevailing competition. The
reason behind export prices are set on the basis of marginal cost is due to high
competition rate.
Disadvantages of Marginal cost transfer prices in Cadbury
1. It also results as a demerit in calculation of overheads the reason being not all costs are
included in this method.
2. It is not helpful in the long run because no cost remain constant and it becomes difficult
to manage cost on a large scale in a company such as Cadbury company.
3. It is difficult in evaluating tax amount because it does not present the true value of the
products and service, thus tax collectors find it a complex process for calculating tax
amount of Cadbury company (Matějka, Merchant and O'Grady 2021).

4. It is a difficult procedure to understand the scale of variability and calculating semi-
variable expenses related to Cadbury company in long run.
Particulars Division A ($) Division B ($)
Transfer in price - 20
Own costs : Variable
Fixed
10
30
20
40
Divisional profit/mark-up 20 10
Transfer out/Final sales 60 90
The numerical assumption that has been taken in account for calculating transfer prices
includes variables such as variable costs, fixed costs, divisional profit which helps to calculate
Final sales. It helps to know cost recorded for different divisions for a certain period of time.
CONCLUSION
From the above prepared report, it can be concluded that how useful full cost transfer
price is, what are the advantages and disadvantages of marginal cost transfer prices. It also helps
to understand how cash flow statement would be useful to find out the liquidity and positioning
of company in market. It works as a helping hand for companies to maintain growth and
sustainability in the market. It also guides managers to take preventive measures which would
help company to manage risk and maximize profit margin.

REFERENCES
Books and Journals
Birnberg, J.G. and Shields, M.D., 2020. Journal of Management Accounting Research at 30
years: reflections on its context, creation, challenges, and contributions. Journal of
Management Accounting Research. 32(1). pp.1-10.
Chand, M., 2019. Management Accounting Practices in Tour Operation Industry: An Empirical
Analysis. International Journal of Hospitality and Tourism Systems. 12(2). p.51.
Feichter, C., Grabner, I. and Moers, F., 2018. Target setting in multi-divisional firms: State of
the art and avenues for future research. Journal of Management Accounting
Research. 30(3). pp.29-54.
Janka, M. and Guenther, T.W., 2018. Management control of new product development and
perceived environmental uncertainty: Exploring heterogeneity using a finite mixture
approach. Journal of Management Accounting Research. 30(2). pp.131-161.
Kryscynski, D., Coff, R. and Campbell, B., 2021. Charting a path between firm‐specific
incentives and human capital‐based competitive advantage. Strategic Management
Journal. 42(2). pp.386-412.
Matějka, M., Merchant, K.A. and O'Grady, W., 2021. An empirical investigation of beyond
budgeting practices. Journal of Management Accounting Research. 33(2). pp.167-189.
ten Rouwelaar, H., Schaepkens, F. and Widener, S.K., 2021. Skills, Influence, and Effectiveness
of Management Accountants. Journal of Management Accounting Research. 33(2).
pp.211-235.
ter Bogt, H.J. and Scapens, R.W., 2018. Institutions, Situated Rationality and Agency in
Management Accounting: Extending the Burns and Scapens Framework. Available at
SSRN 3167885.