1.1.1 In practice, an extremely
important function of the
transfer pricing system is
simply to assist in
recording the movement of
goods and services.
1.2.1 The system used to set transfer
prices should seek to maintain the
autonomy of profit centre managers. If
autonomy is maintained, managers tend
to be more highly motivated but
suboptimal decisions may be made.
1.3 Goal congruence
1.3.1 The decisions made by each profit centre
manager should be consistent with the
objectives of the organisation as a whole, i.e.
the transfer price should assist in maximising
overall company profits. A common feature of
exam questions is that a transfer price is set
that results in suboptimal behaviour.
1.4.1 The buying and selling divisions will be
treated as profit centres. The transfer price
should allow the performance of each division
to be assessed fairly. Divisional managers
will be demotivated if this is not achieved.
1.5 Minimise global
1.5.1 multinational companies can use their
transfer pricing policies to move profits
around the world and thereby minimise
their global tax liability.