Transfer Pricing / Transfer Price
The price at which different divisions of a company transact with each other is called Transfer Price. The transactions between the departments include but not limited to; trade of labour, trade of suppliers...
Transfer pricing is normally used in those organizations which are very large in size and there are where different sub-entities are working under the main entity.
There are different benefits and limitations of transfer pricing. Discussing each and every benefit and limitation is beyond the scope of this report. We will describe few benefits and limitations of transfer pricing.
Benefits of Transfer Pricing
• Organizations can transfer goods at lower transfer price to high-tariff countries which help in lowering the cost of duties as the base will be low for duty calculation.
• Organizations can save non-refundable amount of taxes, packaging, and delivery charges. (Lanewala 2015)
• If the transfer price is not set reasonably then inefficiencies may arise as the departments will have a guaranteed customer.
• If there is too much intervention from the organization in setting the transfer prices then the divisional managers could be demotivated.
Transfer Pricing and Performance Evaluation Measures
Performance evaluation measures are the tools and techniques used to assess and analyze the performance. We can use the performance evaluation measure to analyze the performance of an employee, a group of employee, a division, or a subsidiary unit.
As discussed above, transfer pricing is used to perform transaction between different departments or units... Transfer pricing can affect the performance evaluation measures in both ways. With the help of transfer pricing we can evaluate the performance of different departments and units individually which is necessary for an organization because performance of each unit and division affects the overall organizational performance. With the help of transfer pricing, an organization is able to identify cost and revenues for each division or unit which helps an organizations for allocation of its resources to different departments and units.