Case study questions: Zumwald AG: Transfer pricing *Discuss the concept of the Transfer pricing *Explain the benefits and drawbacks of Transfer pricing. Advice the company’s managing director Mr Rolf...

Transfer Pricing
Zumwald AG - Transfer Pricing
Transfer Pricing
Introduction to the concept of transfer pricing
Pricing refers to money charged by the company for the product or services for the value
provided to the consumers and benefits derived from using the product. Pricing for the product
will be based on three factors i.e. market share and competition in the market; product image;
speed of entry in the market; time needed to recover the investment; competition faced by with
the similar product. As well as the pricing a
iving at pricing decision involves following certain
guidelines like:
 Establish pricing
 Examine competitors pricing
 Selecting a pricing method
Transfer pricing refers to the method of pricing goods when they are transfe
ed from one
department to another or one function to another within an organization where in each of the
functional departments is considered to be a profit centre and a cost centre. In case of transfer
pricing, the department consuming the raw material becomes the consumer.
It can help a company as it helps improve efficiency as well as the competitiveness of a
company. In this way it is possible that each of the cost units can also be made a profit unit. In
this way it is possible that a lot of control can be exercised and it is possible to ensure that each
of the units operates with certain levels of efficiency. In this way intercompany transactions
which are essential as raw materials for the next process can be acquired at the required quantity
and time from within the organization itself (D’Arista, J. 2009).
Transfer pricing, as the name suggests refers to the pricing method used while
transfe
ing of material from one department to another within the organization. The method of
transfer pricing is largely based on the concept of EVA (Economic value added). Economic
Value Added (EVA) differs from residual income as economic value added refers to the firm’s
economic profit and the firm’s financial performance based on residual income. It refers to the
usage of economic benefits made for improving financial performance.
Benefits and drawbacks of transfer pricing
Transfer Pricing
Transfer pricing helps a firm in several ways. It helps them locate cost centers and profit
centers which help ensure effective analysis and data for management accounting which can then
help in improving the efficiency and effectiveness of a cost center which usually is the
production center also. Moreover transfer pricing is of great help in accounting since it helps in
settlement of accounts and also their adjustment when considering the transfer of goods that have
taken place among departments within the organization.
Transfer pricing helps in the process of creating effective production systems as they help
in the process of reflection of resource allocation in the accounting of the firm. This helps
understand the efficiency of several departments and hence
ings in appropriate levels of focus
on the creation of systems where in raw material is received at appropriate prices from within the
organization for the purpose of production. Transfer pricing helps in the process of ensuring that
there be detection of inefficiencies in any of the departments and the extremes are fixed by using
udgets and control.
Generally financial and accounting consultants would advise a firm to use direct
intervention to set transfer prices when the EVA is higher than the residual income. Transfer
pricing refers to the method of pricing goods when they are transfe
ed from one department to
another or one function to another within an organization where in each of the functional
departments is considered to be a profit centre and a cost centre. It can help a company as it helps
improve efficiency as well as the competitiveness of a company. The disadvantages of such a
practice are hat they lead to inconsistencies in performance measurement. Moreover it leads to a...