Exam (elaborations)
MN30469: Advanced management accounting: transfer pricing essay
- Institution
- University Of Bath (UoB)
MN30469: Advanced management accounting
[Show more]
Content preview
Question 4Lecture discussion question
With reference to published research discussed in the lectures, critically appraise
following statement:
The use of transfer pricing can exaggerate the achievement of corporate objectives
at the expense of maintaining divisional autonomy and this is likely to result in
behavioural implications.
ANSWER
Transfer prices (TP) was emerged due to the decentralisation of decision making.
EY (2017) defines TP as the price set between companies in the same group when
exchanging goods and services or sharing resources. TP represents an
intracompany market mechanism.
Main purposes of TP include ensuring all resources are allocated in an optimal
manner; providing useful information for managerial decision making and
performance evaluation; moving profits between divisions; and ensuring that
divisional autonomy is not undermined. Schuster and Clarke (2010) allocated the
primary functions of TP into profit allocation function and coordination function.
A good TP should preserve divisional autonomy (Hiromoto, 1983). Goal congruence
can be encouraged through the performance measurement system. TP can
encourage divisions to make decisions to achieve corporate objectives but there
must be an agreement of individuals with the goals (Parker, 2000). With increasing
decentralisation, there has to be a greater focus on achieving goal congruence.
Negotiated TPs work best for goal congruence while market-based TPs work best for
maintaining autonomy (Anderson, 1992).
Generally, companies can determine TP 3 different ways: market-based TP, cost-
based TP, and negotiated TP.
Market-based TPs is used when the market price is known by both divisions and
adjusted by negotiation. It simulates market conditions within the company. The main
advantage is that market-based TPs support and implement corporate strategy and
allow performance measurement using market-oriented data (Schuster and Clarke,
2010). It is objective, unbiased and difficult to manipulate. However, market-based
TP is ideal in a perfectly competitive external market, which is unlikely in practice,
otherwise, dysfunctional decisions may result. Schuster and Clarke (2010) found that
market-based TPs perform the profit-allocation function except when synergies and
interdependencies exist.
Cost-based TP system is considered when there is no external market information. 3
types of cost-based TP are full cost TP, marginal cost TP and full cost plus mark-up
TP. They cover all costs of selling division and full cost plus mark-up may equate to
market price. Marginal or variable cost based TPs are ideal when the selling division
has excess capacity. However, decisions made by managers could be sub-optimal.
Schuster and Clarke (2010) proved that because the TPs do not give the selling
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller charlottewang98. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £5.39. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
67096 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now
