Characteristics of Dual Transfer Pricing

Characteristics of Dual Transfer Pricing

1.    Seller not Willing to Sell

In dual transfer pricing selling division are not willing to sell the goods at price offered by buying department. Selling department is interested at higher price than offered price by the purchasing department.

2.    Buyer is not willing to Buy

In dual transfer pricing, buyer is not willing to buy, because the price charged by the seller is regarded is too high. Buyer is interested at lower price than offered price. No transfer can take place due to this conflict.

3.    Head Quarter Buy & Sell

In dual transfer pricing, selling department transfer the goods at desired price to the head office, and head office then transfer the good to purchasing department at willing price (acceptable price to buyer). It means two different prices are used for transfer.

4.    Head office take disadvantage

In dual transfer pricing, head office treat the selling department profit as head office expenses. It means the buying department and selling department performance is not affected.

5.    Autonomy is at stake

In dual transfer pricing the autonomy of decision making department is at stake. Autonomy of decision making at divisional level is one of the fundamental objective of transfer pricing, which is at stake under this method.

6.    Complicated Accounting

Dual pricing complicate the accounting process and a cost are charged to the head office against profit of selling department is difficult to explain. Expense in head office account creates a lot of confusion.

Transfer Pricing Concept

Transfer Pricing Concept

Transfer pricing is a concept related to internal sales i.e. sales is made by one department to another department. The prices at which these transfer are made are known as transfer price. Transfer price does not affect the overall profit, because profit on division is cost of another division.

Transfer Pricing Objective

1.    Full autonomy

Transfer pricing is source of full autonomy of decision making to the divisional manager. It means divisional manager enjoys full authority of decision making and therefore is total responsible for investment center performance.

2.    Fair Performance Valuation

Transfer pricing ensures fair performance evaluations. Transfer pricing allows selling department to charge a fair price for its goods. Thus performance of selling department would not be negatively affected by such transfer.

Types of Transfer Price

Transfer can be made on cost and above cost (adding some profit) and market price.

1.    Transfer at Cost

Selling department may transfer the goods to purchasing department either on marginal cost or full cost. It means that transfer cost may be categorized into full cost and marginal cost method.

2.    Transfer at Cost Plus

Selling department may charge some profit to the purchasing department. Management will decide about the profit margin on the transfer.

3.    Transfer at Market Price

Selling department may transfer the goods to purchasing department at market price. This method can only be used where external market for good exists.