Vital And Essential Information Regarding Transfer Pricing That You Must Know About
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. Not only that, it has been said as well that transfer pricing is used when the division of an organization will charge other divisions of the organization for the services or the goods they are providing them.
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. Most of the time, there are profit center managers out there who have the tendency of placing their own profit performance above everything 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. If possible, setting transfer price should be done in a manner 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. The next solution that we have here in our list has something to do with transfer prices being set at a level in which, profit center performances are allowed to be measured commercially. What we are trying to say here is that transfer prices must be a suitable commercial price.