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Optimal Transfer Pricing Method and Fixed Cost Allocation
Author(s) -
SHIH MICHAEL S. H.
Publication year - 1996
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/j.1467-6281.1996.tb00458.x
Subject(s) - variable cost , variable (mathematics) , fixed cost , transfer pricing , unit (ring theory) , economics , transfer (computing) , microeconomics , empirical research , econometrics , control variable , operations management , computer science , mathematics , statistics , finance , mathematics education , mathematical analysis , machine learning , parallel computing , multinational corporation
Prior empirical research on transfer pricing only reported what firms do but seldom explained why. This study moves the research forward by introducing hypothesis testing. Atkinson (1987) shows that pricing transfers at variable cost when capacity is in excess. as prescribed by economic theory. would induce the buying unit to overstate expected demand at the capacity planning stage and cause a waste of resources. To test whether the strategic issue affects transfer pricing decisions, the study compares pricing methods for long‐ term transfer situations. which were provided for at the capacity planning stage, and ad hoc transfers. As well. while the two‐step method of charging full cost ‐charging variable cost for each unit transferred and separately charging a flat fee each period for capacity on reserve ‐has many good control qualities, it remained just an academic curiosity: there was no evidence of its wide use among firms. This study finds that the two‐step method is as widely in use as the one‐step method ‐charging variable cost plus unit fixed costs for each unit transferred.