The impacts of inventory in transfer pricing and net income: Differences between traditional accounting and throughput accounting |
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| Institution: | 1. Universidad EAFIT, Carrera 49, 7 Sur-50, 050022, Medellín, Colombia;2. Universitat Jaume I. Universidad Jaume I, Campus Riu Sec, Ed.Ampliación de Biblioteca, 12071, Castellón, Spain;3. Universitat de València. Instituto de Economía Internacional, Departamento de Contabilidad, Avenida de los Naranjos, 46071, Valencia, Spain;1. School of Economics and Management, Beijing Jiaotong University, Beijing, 100044, China;2. School of Business, Renmin University of China, Beijing, 100872, China;1. School of Economics and Management, Southeast University, China;2. Xiamen National Accounting Institute, China;3. Farmer School of Business, Miami University, USA;4. Faculty of Business Administration, University of Macau, China;1. Department of Economics, University of Thessaly, Volos, 38 333, Greece;2. College of Administrative Sciences and Economics, Koc University, Istanbul, Turkey;3. University of Liverpool Management School, University of Liverpool, Liverpool, L69 7ZH, UK;4. Manchester Accounting and Finance Group, Alliance Manchester Business School, Manchester University, Manchester, M15 6PB, UK;5. Hellenic Open University, School of Social Sciences, Patras, Greece |
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| Abstract: | This research proposes the Theory of Constraints (TOC) throughput accounting (TA) as an alternative management control mechanism in an international transfer pricing setting. We compare TA with the traditional accounting method and demonstrate that the traditional method underestimate factors as demand variation and inventories, which affects decisions, such as moving production to an offshore plant. A detailed system dynamics model is built to simulate the production process in an offshore supply chain to compare the methods. The study aims to fill a gap in the management accounting studies and contribute to the understanding of international transfer pricing and their management controls, exploring more than just the tax savings, which are usually considered isolated from operational factors for supply chain (SC) offshoring decisions. Furthermore, we conduct a brief literature review, present the model and discuss the results. It has been observed that inventory levels are an important part of accounting, offshored supply chains, and transfer pricing. Traditional cost and accounting methods favour higher inventory levels, and they can overestimate net income results up to 70% – especially in higher demand variation scenarios – when compared to the throughput accounting. |
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| Keywords: | Transfer pricing Theory of constraints International supply chain Offshoring |
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