Transfer Pricing Methods

Transfer pricing methods are concerned with the alternative means by which a transfer price can be set and its impact on organizations gauged. Emmanuel and Otley bring together a number of views of transfer pricing methods in practice. Essentially, they report that there are three categories of transfer price: cost based, market based and negotiated. Within the surveys reported, in terms of very rough approximations, about 20% of companies used negotiated prices; about 30% of companies used market values and about half used cost based prices. For each category, a good degree of discretion existed to develop alternative bases at a detailed level. For market based prices, for instance, competitors' prices, list prices, most recent bid and values adjusted by a discount provided alternative bases. The description which follows does not go to such a level of detail but concentrates on four main approaches: absorption cost bases, variable cost bases, market value bases and negotiated value bases. A final section describes the use of linear programming.