Skip to main content
Erschienen in: Review of Accounting Studies 2/2011

01.06.2011

Cost-based transfer pricing

verfasst von: Thomas Pfeiffer, Ulf Schiller, Joachim Wagner

Erschienen in: Review of Accounting Studies | Ausgabe 2/2011

Einloggen

Aktivieren Sie unsere intelligente Suche um passende Fachinhalte oder Patente zu finden.

search-config
loading …

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.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

Anhänge
Nur mit Berechtigung zugänglich
Fußnoten
1
See, for instance, Ernst & Young (2008, p. 17).
 
2
For an illustration of additive markups see, for instance, Solomons (1965, pp. 167–171). For the practical use of the contribution-margin method, see Feinschreiber (2004) and Moses (2007).
 
3
Our analysis complements Sahay (2003) who investigates cost-plus transfer pricing for a one-sided supplier investment setting in which both divisions do not have any cost information at the trading stage.
 
4
Related, Feinschreiber (2004, p. 24) recognizes that the contribution-margin method “may lead to cooperation between the divisions” but “a division that reduces its cost is not entitled to the entire benefit and must share this benefit with other divisions.”
 
5
Our result extends Sahay’s (2003, Proposition 1) finding that cost-plus pricing dominates an entire class of actual cost-based transfer pricing methods with markups that are not conditioned on the buyer’s revenues.
 
6
Similarly, some textbooks observe that standard cost-based transfer prices do not properly incorporate actual cost information, thus leading to inefficient trade (e.g., Zimmerman 2006, p. 635). Other textbooks observe that divisions have no incentive to control their costs if they get exactly reimbursed their actual costs. In contrast, these textbooks also recognize that standard cost-based transfer prices provide incentives for divisions to control their costs (e.g., Atkinson et al. 2001, p. 537; Belkaoui 1992, p. 111).
 
7
These key forces have already been identified by Baldenius (2000, Section 5) for a binary trade setting where the buyer has no cost information at the trading stage.
 
8
For surveys on transfer pricing, see Göx and Schiller (2007) and Baldenius (2009).
 
9
In Baldenius’ (2000) binary setting, the maximum cost variance is below the cut-off level above which reported standard-cost pricing dominates centralized standard-cost pricing. Related, Baldenius (2000, Footnote 23) notes that reported standard-cost pricing may dominate centralized standard-cost pricing if the central office observes a sufficiently noisier signal about the support of the cost interval.
 
10
A related result can be found in Bajari and Tadelis (2001) who consider inter-company, not intra-company pricing.
 
11
Anctil and Dutta (1999) find that cost-based transfer pricing without markup dominates negotiated transfer pricing if there is no cost uncertainty and only the buyer invests. However, negotiated transfer prices become more favorable if the cost uncertainty increases because negotiated transfer prices improve risk sharing.
 
12
Our study is also related to agency-theoretic studies about the effectiveness of different transfer pricing methods (e.g., Harris et al. 1982; Amershi and Cheng 1990; Vaysman 1996). Wagenhofer (1994) compares cost-based versus negotiated transfer pricing with and without communication. Dikolli and Vaysman (2006) find that cost-based transfer pricing dominates negotiated transfer pricing if the firm’s information technology is sufficiently fine.
 
13
This assumption may be understood as a shortcut to a setting where the variables RCw i are verifiable, subject to the realizations of white noise variables. Our results are unaffected by this alternative model formulation.
 
14
A summary of the four alternative transfer pricing methods considered in this paper is provided in Table 1 of Appendix 1.
 
15
The efficient investment level I 1 eff need not coincide with the first-best investment level. Since the optimal transfer price equals expected marginal costs, the expected traded quantity equals the expected first-best quantity if r q (·) is linear in q. In that case, the efficient investment level \( I_{1}^{eff} \) and the buyer’s investment level equal the first-best values. If r q (·) is strictly convex in q, r qqq (·) > 0, the expected traded quantity is greater than the expected first-best quantity, as are the investment levels.
 
16
Like us, Baldenius (2000) assumes that θ1 and θ2 are independently distributed. If the random variables are not independently distributed, our optimal transfer price also includes a markup,\( \, t = E{{\left[ {c( \cdot )r_{qq}^{ - 1} ( \cdot )} \right]} \mathord{\left/ {\vphantom {{\left[ {c( \cdot )r_{qq}^{ - 1} ( \cdot )} \right]} {E\left[ {r_{qq}^{ - 1} ( \cdot )} \right]}}} \right. \kern-\nulldelimiterspace} {E\left[ {r_{qq}^{ - 1} ( \cdot )} \right]}} = E[c( \cdot )] + Cov{{\left[ {c( \cdot ),r_{qq}^{ - 1} ( \cdot )} \right]} \mathord{\left/ {\vphantom {{\left[ {c( \cdot ),r_{qq}^{ - 1} ( \cdot )} \right]} {E\left[ {r_{qq}^{ - 1} ( \cdot )} \right].}}} \right. \kern-\nulldelimiterspace} {E\left[ {r_{qq}^{ - 1} ( \cdot )} \right].}} \)
 
17
One might argue that there is no need for decentralization if costs are deterministic. For the linear-quadratic setting, Pfeiffer and Wagner (2007) show that centralized standard-cost transfer pricing strictly dominates the centralized solution if costs are deterministic and revenues are uncertain.
 
18
The contribution margin approach has widely entered transfer pricing practice (e.g., Moses 2007). It was first applied in the DuPont case (E.I. DuPont de Nemours & Co. v. United States, 608 F.2d 445 (Ct. Cl. 1979)) to test whether DuPont’s Swiss subsidiary benefited from profit shifting. The test consists of a computation of whether each partner receives roughly the same profit-over-variable-cost ratio (Berry ratio). Feinschreiber (2004, p. 23) calls this the equal contribution margin approach and describes several alternatives to determine the sharing parameter in managerial accounting practice.
 
19
For negotiated transfer prices under symmetric information see, for instance, Baldenius et al. (1999). However, negotiated transfer prices do not lead to contribution margin sharing under asymmetric information, as pointed out, for instance, by Baldenius (2000).
 
20
Note that since the two divisions have perfectly aligned interests after the investments are undertaken, contribution-margin transfer pricing also has the advantage that the supplier has an incentive to voluntarily share his perfect cost information with the partially-informed buyer if communication is not blocked, as assumed in our analysis.
 
21
If both divisions have the same productivity of investment, x = y and w 1(I 1) = w 2(I 2), the central office sets γ = 1/2. This is consistent with the equal contribution margin approach (Feinschreiber 2004, p. 23).
 
22
These tensions also arise with respect to negotiated transfer pricing under symmetric information (see, for instance, Baldenius et al. 1999).
 
23
Technically, we use a similar approach for our proof as Baldenius et al. (1999, Propositions 1 and 2).
 
24
In the Appendix, we prove this claim by using Jensen’s inequality and showing that the firm-wide profit margin is convex in s 1.
 
25
Recall that if there is no ex ante cost uncertainty, Var1] = 0, centralized standard-cost pricing induces the first-best solution, but not contribution-margin pricing. Thus, we can conclude that α ACM  < 1.
 
26
Technically, we show that for fixed \( (I,\delta ) \) the firm-wide contribution margin is convex in s 1. Applying Jensen’s inequality proves the first step.
 
27
Lengsfeld et al. (2006) prove this result for the linear-quadratic setting with symmetric information.
 
28
A sufficient (but not necessary) condition that ensures the convexity of −1/r qq (·) is that the ratio P(·) = − r qqq (·)/r qq (·) increases, \( P^{\prime}( \cdot ) \ge 0. \) Note that r qqq (·) ≥ 0 implies that the ratio P(·) is positive, P(·) ≥ 0. Since central office’s utility function is represented by the firm-wide profit function Π(·), we can interpret the ratio P(·) as the absolute prudence measure for utility functions (Kimball 1990), Π qq (·) = r qq (·) and Π qqq (·) = r qqq (·), that is often used to derive comparative static insights in risky environments (e.g., Eeckhoudt et al. 1996).
 
29
Our characterization of the transfer price is consistent with that in Baldenius et al. (1999) if the supplier has perfect revenue information.
 
30
As outlined in our previous version, we need conditions for the revenue function up to the fifth derivative to characterize a set of sufficient conditions for non-linear demand functions (see also Baldenius et al. 1999, for the symmetric information case).
 
31
Since reported standard-cost pricing never induces the first-best solution, even when costs and revenues are deterministic, Var1] = Var2] = 0,  we can conclude that α RSC  < 1.
 
32
See Lengsfeld et al. (2006, Proposition 2) for such a result under symmetric information.
 
33
As previously mentioned, the reason for this result is that in the binary setting the maximum variance is below the cut-off value.
 
34
If the buyer has complete cost information, contribution-margin pricing and negotiated transfer pricing induce identical trading and investment decisions and the same expected firm-wide profit. For linear demand functions, Baldenius et al. (1999, Proposition 3) have shown that negotiated transfer pricing dominates reported standard-cost pricing if both divisions have symmetric information and the bargaining power is distributed equally. Since this result encompasses the case where costs and revenues are deterministic, Var1] = Var2] = 0, we can conclude that α ACM  > α RSC and, thus, T 3 > 0.
 
35
For instance, Vaysman (1998) and Baldenius (2000) show how negotiated transfer prices transmit information between uninformed divisions.
 
Literatur
Zurück zum Zitat Amershi, A. H., & Cheng, P. (1990). Intrafirm resource allocation: The economics of transfer pricing and cost allocation in accounting. Contemporary Accounting Research, 7, 61–99.CrossRef Amershi, A. H., & Cheng, P. (1990). Intrafirm resource allocation: The economics of transfer pricing and cost allocation in accounting. Contemporary Accounting Research, 7, 61–99.CrossRef
Zurück zum Zitat Anctil, R. M., & Dutta, S. (1999). Negotiated transfer pricing and divisional vs. firm-wide performance evaluation. Accounting Review, 74, 87–104.CrossRef Anctil, R. M., & Dutta, S. (1999). Negotiated transfer pricing and divisional vs. firm-wide performance evaluation. Accounting Review, 74, 87–104.CrossRef
Zurück zum Zitat Anthony, R. N., & Govindarajan, V. (2007). Management control systems. Boston: McGraw-Hill. Anthony, R. N., & Govindarajan, V. (2007). Management control systems. Boston: McGraw-Hill.
Zurück zum Zitat Atkinson, A. A., Banker, R. D., Kaplan, R. S., & Young, S. M. (2001). Management accounting. Upper Saddle River: Prentice-Hall. Atkinson, A. A., Banker, R. D., Kaplan, R. S., & Young, S. M. (2001). Management accounting. Upper Saddle River: Prentice-Hall.
Zurück zum Zitat Bajari, P., & Tadelis, S. (2001). Incentives versus transaction costs: A theory of procurement contracts. RAND Journal of Economics, 32, 387–407.CrossRef Bajari, P., & Tadelis, S. (2001). Incentives versus transaction costs: A theory of procurement contracts. RAND Journal of Economics, 32, 387–407.CrossRef
Zurück zum Zitat Baldenius, T. (2000). Intrafirm trade, bargaining power, and specific investments. Review of Accounting Studies, 5, 27–56.CrossRef Baldenius, T. (2000). Intrafirm trade, bargaining power, and specific investments. Review of Accounting Studies, 5, 27–56.CrossRef
Zurück zum Zitat Baldenius, T. (2006). Ownership, incentives and the holdup problem. RAND Journal of Economics, 37, 276–299.CrossRef Baldenius, T. (2006). Ownership, incentives and the holdup problem. RAND Journal of Economics, 37, 276–299.CrossRef
Zurück zum Zitat Baldenius, T. (2009). Internal pricing. Foundations and Trends in Accounting, 3, 223–313.CrossRef Baldenius, T. (2009). Internal pricing. Foundations and Trends in Accounting, 3, 223–313.CrossRef
Zurück zum Zitat Baldenius, T., Melumad, N., & Reichelstein, S. (2004). Integrating managerial and tax objectives in transfer pricing. Accounting Review, 79, 591–615.CrossRef Baldenius, T., Melumad, N., & Reichelstein, S. (2004). Integrating managerial and tax objectives in transfer pricing. Accounting Review, 79, 591–615.CrossRef
Zurück zum Zitat Baldenius, T., & Reichelstein, S. (2006). External and internal pricing in multidivisional firms. Journal of Accounting Research, 44, 1–28.CrossRef Baldenius, T., & Reichelstein, S. (2006). External and internal pricing in multidivisional firms. Journal of Accounting Research, 44, 1–28.CrossRef
Zurück zum Zitat Baldenius, T., Reichelstein, S., & Sahay, S. (1999). Negotiated versus cost-based transfer pricing. Review of Accounting Studies, 4, 67–91.CrossRef Baldenius, T., Reichelstein, S., & Sahay, S. (1999). Negotiated versus cost-based transfer pricing. Review of Accounting Studies, 4, 67–91.CrossRef
Zurück zum Zitat Belkaoui, A. R. (1992). Accounting theory. San Diego: Academic Press. Belkaoui, A. R. (1992). Accounting theory. San Diego: Academic Press.
Zurück zum Zitat Dikolli, S., & Vaysman, I. (2006). Information technology, organizational design, and transfer pricing. Journal of Accounting and Economics, 41, 201–234.CrossRef Dikolli, S., & Vaysman, I. (2006). Information technology, organizational design, and transfer pricing. Journal of Accounting and Economics, 41, 201–234.CrossRef
Zurück zum Zitat Dutta, S., & Reichelstein, S. (2010). Decentralized capacity management and internal pricing. Review of Accounting Studies, 15, 442–478.CrossRef Dutta, S., & Reichelstein, S. (2010). Decentralized capacity management and internal pricing. Review of Accounting Studies, 15, 442–478.CrossRef
Zurück zum Zitat Eccles, R. G. (1983). Control with fairness in transfer pricing. Harvard Business Review, 61, 149–161. Eccles, R. G. (1983). Control with fairness in transfer pricing. Harvard Business Review, 61, 149–161.
Zurück zum Zitat Edlin, A., & Reichelstein, S. (1995). Specific investment under negotiated transfer pricing: An efficiency result. Accounting Review, 70, 275–291. Edlin, A., & Reichelstein, S. (1995). Specific investment under negotiated transfer pricing: An efficiency result. Accounting Review, 70, 275–291.
Zurück zum Zitat Eeckhoudt, L., Gollier, C., & Schlesinger, H. (1996). Changes in background risk and risk taking behavior. Econometrica, 64, 683–689.CrossRef Eeckhoudt, L., Gollier, C., & Schlesinger, H. (1996). Changes in background risk and risk taking behavior. Econometrica, 64, 683–689.CrossRef
Zurück zum Zitat Ernst & Young. (2008). Pricing under pressure—global transfer pricing survey 2007–2008. Technical report, Ernst&Young. Ernst & Young. (2008). Pricing under pressureglobal transfer pricing survey 20072008. Technical report, Ernst&Young.
Zurück zum Zitat Feinschreiber, R. (2004). Transfer pricing methods: An applications guide. New York: Wiley. Feinschreiber, R. (2004). Transfer pricing methods: An applications guide. New York: Wiley.
Zurück zum Zitat Göx, R. F., & Schiller, U. (2007). An economic perspective on transfer pricing. In C. S. Chapman, A. G. Hopwood, & M. D. Shields (Eds.), Handbook of management accounting research (Vol. 2, pp. 673–695). Oxford: Elsevier.CrossRef Göx, R. F., & Schiller, U. (2007). An economic perspective on transfer pricing. In C. S. Chapman, A. G. Hopwood, & M. D. Shields (Eds.), Handbook of management accounting research (Vol. 2, pp. 673–695). Oxford: Elsevier.CrossRef
Zurück zum Zitat Harris, M., Kriebel, C. H., & Raviv, A. (1982). Asymmetric information, incentives, and intrafirm resource allocation. Management Science, 28, 604–620.CrossRef Harris, M., Kriebel, C. H., & Raviv, A. (1982). Asymmetric information, incentives, and intrafirm resource allocation. Management Science, 28, 604–620.CrossRef
Zurück zum Zitat Hirshleifer, J. (1956). On the economics of transfer pricing. Journal of Business, 29, 172–184.CrossRef Hirshleifer, J. (1956). On the economics of transfer pricing. Journal of Business, 29, 172–184.CrossRef
Zurück zum Zitat Holmström, B., & Tirole, J. (1991). Transfer pricing and organizational form. Journal of Law, Economics, and Organization, 7, 201–228. Holmström, B., & Tirole, J. (1991). Transfer pricing and organizational form. Journal of Law, Economics, and Organization, 7, 201–228.
Zurück zum Zitat Johnson, N. B. (2006). Divisional performance measurement and transfer pricing for intangible assets. Review of Accounting Studies, 11, 339–365.CrossRef Johnson, N. B. (2006). Divisional performance measurement and transfer pricing for intangible assets. Review of Accounting Studies, 11, 339–365.CrossRef
Zurück zum Zitat Kimball, M. S. (1990). Precautionary saving in the small and in the large. Econometrica, 58, 53–73.CrossRef Kimball, M. S. (1990). Precautionary saving in the small and in the large. Econometrica, 58, 53–73.CrossRef
Zurück zum Zitat Lengsfeld, S., Pfeiffer, T., & Schiller, U. (2006). Centralized versus decentralized transfer pricing and cost-system choice. Working paper, University of Hannover, Hannover. Available at SSRN: http://ssrn.com/abstract=925170. Lengsfeld, S., Pfeiffer, T., & Schiller, U. (2006). Centralized versus decentralized transfer pricing and cost-system choice. Working paper, University of Hannover, Hannover. Available at SSRN: http://​ssrn.​com/​abstract=​925170.
Zurück zum Zitat Milgrom, P., & Roberts, J. (1990). Rationalizability, learning, and equilibrium in games with strategic complementarities. Econometrica, 58, 1255–1277.CrossRef Milgrom, P., & Roberts, J. (1990). Rationalizability, learning, and equilibrium in games with strategic complementarities. Econometrica, 58, 1255–1277.CrossRef
Zurück zum Zitat Moses, M. (2007). Berry remembered as bringing economics to transfer pricing with du Pont testimony. TM Transfer Pricing Report, 16, 346. Moses, M. (2007). Berry remembered as bringing economics to transfer pricing with du Pont testimony. TM Transfer Pricing Report, 16, 346.
Zurück zum Zitat Nöldeke, G., & Schmidt, K. M. (1995). Option contracts and renegotiation: A solution to the hold-up problem. RAND Journal of Economics, 26, 163–179.CrossRef Nöldeke, G., & Schmidt, K. M. (1995). Option contracts and renegotiation: A solution to the hold-up problem. RAND Journal of Economics, 26, 163–179.CrossRef
Zurück zum Zitat OECD. (2001). Transfer pricing guidelines for multinational enterprises and tax administrations. Paris: OECD Publications. OECD. (2001). Transfer pricing guidelines for multinational enterprises and tax administrations. Paris: OECD Publications.
Zurück zum Zitat Pfeiffer, T., & Wagner, J. (2007). Internal markets or hierarchies: Transfer prices or budgets? Journal of Economics and Business, 59, 177–209.CrossRef Pfeiffer, T., & Wagner, J. (2007). Internal markets or hierarchies: Transfer prices or budgets? Journal of Economics and Business, 59, 177–209.CrossRef
Zurück zum Zitat Sahay, S. A. (2003). Transfer pricing based on actual cost. Journal of Management Accounting Research, 15, 177–192.CrossRef Sahay, S. A. (2003). Transfer pricing based on actual cost. Journal of Management Accounting Research, 15, 177–192.CrossRef
Zurück zum Zitat Solomons, D. (1965). Divisional performance: Measurement and control. Homewood, IL: Richard D. Irwin. Solomons, D. (1965). Divisional performance: Measurement and control. Homewood, IL: Richard D. Irwin.
Zurück zum Zitat Vaysman, I. (1996). A model of cost-based transfer pricing. Review of Accounting Studies, 1, 73–108.CrossRef Vaysman, I. (1996). A model of cost-based transfer pricing. Review of Accounting Studies, 1, 73–108.CrossRef
Zurück zum Zitat Vaysman, I. (1998). A model of negotiated transfer pricing. Journal of Accounting and Economics, 25, 349–384.CrossRef Vaysman, I. (1998). A model of negotiated transfer pricing. Journal of Accounting and Economics, 25, 349–384.CrossRef
Zurück zum Zitat Wagenhofer, A. (1994). Transfer pricing under asymmetric information—an evaluation of alternative methods. European Accounting Review, 3, 71–103.CrossRef Wagenhofer, A. (1994). Transfer pricing under asymmetric information—an evaluation of alternative methods. European Accounting Review, 3, 71–103.CrossRef
Zurück zum Zitat Zimmerman, J. (2006). Accounting for decision making and control. Boston: Irwin. Zimmerman, J. (2006). Accounting for decision making and control. Boston: Irwin.
Metadaten
Titel
Cost-based transfer pricing
verfasst von
Thomas Pfeiffer
Ulf Schiller
Joachim Wagner
Publikationsdatum
01.06.2011
Verlag
Springer US
Erschienen in
Review of Accounting Studies / Ausgabe 2/2011
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI
https://doi.org/10.1007/s11142-011-9140-0

Weitere Artikel der Ausgabe 2/2011

Review of Accounting Studies 2/2011 Zur Ausgabe