Did you know that trading of products and services happen in a company? The trading or transaction’s price is then referred as transaction price.
The transaction price is attained when one department, such as the sales, finance, human resource, or marketing department, sells an item or labor to another department. Transfer price is used when an individual division of a larger firm are treated and measured as separate from one another.
To make it simple, transfer pricing is the “price” given for transaction of departments within a company. There are three common issues regarding this such as.Author is an expert of transferta cenas, go here for more interesting information
• Divisional Autonomy – At most times, a transfer price is good but usually, it is only good for the interest of one party. Let’s say in one company when transfer price is applied, instead of acting as one, they will divide themselves into a different self-interested segment and acts against the interest of other segments.
• Divisional Performance Measurement – Since they are measured with their performance or the profit they get from such transactions, they tend to put the result of their transaction above everything else. No division would like to work with another division without having paid, thus, it affects the behavior and decision making of each division manager.
• Corporate Profit Maximization – With this kind of transaction, disagreements are likely to occur. a transfer price may help the organization to maximize its profit as a whole but, since each division will maximize its own profit as well, there will be intercompany disagreements since they will “compete” with each other.
Though generally, it is beneficial as a whole company, it is possible to set conflicts within each division, therefore, there are suggested ideal solution such as:
- The price should enable the “selling department’s” price to be calculated “commercially.” Meaning, it should be profitable or sellable.
- The price should encourage “selling department” in aiming to maximize the company profit as a whole, not only as an individual.