This assignment is simply creating a thoughtful and articulate synthesis and response to another students discussion board post. Here is the students original post that you are responding too:
Interest: Transfer Pricing Method
Three primary objectives for transfer prices are to be a motivation of high level efforts on parts of business unit managers, achieve goal congruency between imperative decisions that are made by managers of business, and the goals of top management, and lastly to reward business unit managers equally for the effort and skill type put in for the effectiveness of the decisions that are made daily. Going into transfer prices and the techniques used for the methods to run smoothly there are four specifics that will be discussed for determination (Blocher, Stout & Smith, 2019).
Full Cost, Negotiated Price, Variable Cost, & Market Price
Full cost method: this method sets the transfer price to become equal to the variable cost of the selling unit on top of having a share that is allocated with the fixed cost of the selling unit with or without a markup for profit.
A key advantage of this approach is that it is well understood, and the information provided for determining the transfer price is available off hand.
A key disadvantage is that it so happens to include fixed cost, which can cause decision making to become improper.
Negotiated price method: involves a process of negotiation and can sometimes arbitrate in between units to finalize the transfer price. This method is mostly wanted when the units hold prior history of conflict that is significant and the negotiation resulting in a price that is agreeable.
Variable cost method: sets the transfer price to become even to the selling units variable cost, with or without a markup plan. Variable costs can be labeled as standard or actual costs. The variable cost method is most lingered towards the selling unit and how it provides unlimited capacity, and how the selling units variable costs provides much less than the outside price of purchase (Blocher, Stout & Smith, 2019).
Market price method: sets the transfer price as the current price of the product in the external market.
A key advantage of this method is objectivity, it best makes cheerful measurements criteria wanted for both tax purposes and management.
A key disadvantage of this method is that the market prices are not always vacant for intermediate products (Blocher, Stout & Smith, 2019).
With transfer pricing methods comes a practical distinction behind it intertwined with intercompany transfer pricing and intracompany transfer pricing. The pricing regulations given out by the United States Treasury Department gives permission to a company to select from a given number of TPM’s amongst other many other methods, permissibly selecting different methods of choice under different circumstances (Hoboken &Wiley, 2004).
Interest: Relevant Cost Analysis
Relevant costs are cost in the future that hold a difference between and above decisions routes. A cost that has already happened in the past or has already been submissive for the future is most certainly not relevant; it then transitions to develop into a sunk cost because it will result in the same option that is chosen. In order for a cost to become relevant, it must be a cost that is incurred for the future and will differentiate between and among the decision makers options (Blocher, Stout & Smith, 2019).
Hospitals being a mere focus, price competitions are becoming more difficult, hospital are wanting more information on accounting and the refined accounting systems; knowing that this very need takes more accurate estimates of cost in their decisions of pricing. The end results of the relation between unit allocated capacity cost and prices of service entail that hospitals are to mirror the relevance of unit allocated cost to pricing and to shift the estimation mistake of unit allocated cost (Sylvia &Ranjani, 2011).
Blocher, E., Stout, D., Juras, P., & Smith, S. (2019). Cost management: A strategic emphasis (8th ed.). Boston, MA: McGraw-Hill.
Hoboken, N.J.:: J Wiley. (2004). Transfer pricing methods an applications guide.
Sylvia Hsingwen Hsu, & Ranjani Krishnan. (2011). Cost Information and Pricing: empirical
evidence/discussion of “cost information and pricing: empirical
evidence.” Contemporary Accounting Research: A journal of the canadian academic
accounting association = recherche comptable contemporaine : la revue de
l’association canadienne des professeurs de comptabilité., 28(2).