Vital And Essential Information Regarding Transfer Pricing That You Must Know About
Speaking of transfer pricing, this is a term that is commonly used by experts to refer to the price at which goods or even services are transferred from one department or process to another or from one group member to another. In addition to that, there goes the fact as well that transfer pricing pertains to prices that are being charged by divisions of an organization to other divisions for the goods or the 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.
The first concern that we have here in our list has something to do with divisional autonomy. What professionals usually say about transfer price is that they are particularly proper and appropriate for profit centers since if a certain profit center does work well alongside another profit center, the size of the transfer price will not only affect the costs of one profit center, but it will also affect the revenue of another. But the problem with this is that a profit center manager may make a decision for its best interest but that decision may not be of the best interest of other profit centers and possibly, for the entire organization itself.
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.
We cited not too long ago about how these problems come with the best possible solution and that is what we will be discussing below. 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. Another ideal solution that we have here is that transfer prices must be set at a level in which profit center performances are allowed to be measured commercially. This only goes to show how important transfer prices to be set as a fitting commercial price.