Cost-based transfer pricing

Thomas Pfeiffer (), Ulf Schiller () and Joachim Wagner ()
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Thomas Pfeiffer: University of Vienna
Ulf Schiller: University of Bern
Joachim Wagner: University of Vienna

Review of Accounting Studies, 2011, vol. 16, issue 2, No 1, 219-246

Abstract: 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.

Keywords: Transfer pricing; Specific investments; Actual costs; Standard costs (search for similar items in EconPapers)
JEL-codes: D24 D82 L23 M41 (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1007/s11142-011-9140-0

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