| The prices of transfers inside a company must be fixed in order to be fair for all parts of the company. A price must not advantage or disadvantage one section of the company rather than another.
There are 2 ways of fixing these prices:
- according to the costs. The full cost is tricky because it transfers the good or bad performances from a center to another. For example, you are the manager of the fabrication center of a company and you buy some of your elements of production to the purchasing center of the same company. If their performance was very bad and they charge you their full cost, you will pay an expensive price for what you buy, and your performance will automatically be affected by this high cost. Considering this, firms use more often the standard cost.
- according to the prices. The market price push towards efficiency, but is not convenient because it doesn’t always exist and when it exists it may not be stable. The medium-run market price is therefore preferable. Generally, we use the medium-run market price less a commission, because the market price comprises a commission, and inside the same firm it is normal not to charge a commission.
The problems are completely different when the transfer prices concern firms that are legally distinct. Then the fiscal optimization becomes often the most important consideration. If one makes a lot of profit and the other not, the first should accept high transfer prices from the second. However, the consolidation principles of accounting make that all taxes should be calculated for the whole group of firms. Then the internal transfer prices should have no consequences.
Cash management >>
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Corporate finance
The subject: corporate finance
PART ONE: CAPITAL EXPENDITURE
The present value
Investment
decisions
Practical
problems in capital budgeting
Firms evaluation
PART TWO. BASICS OF FINANCE
The financial
markets
Options
The market
efficiency
Risk
Mergers,
Acquisitions, and Corporate Control
International
Financial Management
PART THREE FINANCING DECISIONS
Corporate
financing
Dividend policy
and capital structure
PART FOUR FINANCIAL MANAGEMENT
Financial
planning
Short-term
financial management
Courses created and updated by Dr David Chelly, PhD in Management sciences from the University of Tours.
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