What Are The Things That You Need To Learn Regarding Transfer Pricing?
One very important thing regarding transfer pricing that you should be aware of is the fact that it pertains to the price by which the goods or the services are being transferred from one process or department to another or from one group member to another. And also, we want you to know that transfer pricing has something to do with the price that is being charged by divisions of an organization to other divisions for all the goods or services they are providing them with.
The next thing about transfer pricing that we want you to know of is the fact that it has its own sets of problem to deal with, similar to other process and what these processes have in common as well is that they possess solutions that can solve them in an effective manner. If you are wondering why we are telling you these things, well, that is because we want you to know about the things that are happening in the said process and also, this is a way for you to better understand their corresponding solutions.
Divisional autonomy is considered as one of the problems that one may face with transfer pricing. According to experts, transfer prices are good for profit centers because if a particular center does work well with another profit center, the size of the transfer process will greatly influence the costs of one profit center as well as the revenue of another. However, there is a high chance that the decisions being taken by profit center managers are not for the best of interest for other profit centers or even for the whole organization, but only for the best interest of his own part of the business.
Apart from that, we want you to know that there are other problems that come with transfer pricing like the what we call as divisional performance measurement. More often than not, you will see how profit center managers tend to place the profit performance they have above anything else. You may not know about it but the performance of profit centers are measured according to the profit they earn and because of this, no profit center will want to extend a helping hand for free.
However, you should not feel any concern regarding these problems as we stated earlier on in this article about how they come alongside ideal solutions. Preferably, it would be best for transfer prices to be set at a level that will overcome all these problems. It is very important for the transfer price to be able to provide a selling price that is artificial so that the transferring division will be able to earn for their efforts. And as for the receiving division, they will be able to incur a cost for benefits received. Aside from that, you have to know as well that it is very important for transfer prices to be set at a level by which, profit center performances can be measured in a commercial manner. What we are trying to say here is that transfer prices must be a suitable commercial price.