Cost-based transfer pricing |
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Authors: | Thomas Pfeiffer Ulf Schiller Joachim Wagner |
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Institution: | 1.Betriebswirtschaftliches Zentrum (BWZ),University of Vienna,Wien,Austria;2.University of Bern,Bern,Switzerland |
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Abstract: | This paper compares the performance of alternative cost-based transfer pricing methods. We adopt an incomplete contracting
framework with asymmetric information at the trading stage. Transfer pricing guides intra-company trade and provides incentives
for value-enhancing specific investments. We compare actual-cost transfer prices that include a markup over marginal costs
with standard-cost transfer prices that are determined either by the central office ex ante (centralized standard-cost transfer
pricing) or by the supplying division at the trading stage (reported standard-cost transfer pricing). For the actual-cost
methods, we show that markups based on the joint contribution margin (contribution-margin transfer pricing) dominate purely
additive markups (cost-plus transfer pricing). We obtain the following results. (1) Centralized standard-cost transfer pricing
dominates the other methods if the central office and the divisions ex ante face low cost uncertainty. (2) The actual-cost
methods dominate the other methods if the central office and the divisions ex ante face high cost uncertainty and later, at
the trading stage, the buying division receives sufficient cost information. (3) Reported standard-cost transfer pricing dominates
the other methods if the central office and the divisions ex ante face high cost uncertainty, and the buyer has insufficient
cost information at the trading stage. |
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Keywords: | |
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