Management Aspect of Transfer Pricing for Operating Companies within Iron and Steel Holding Corporations

Abstract

Background /Objectives: The rapid progress of science and technology in the iron and steel industry stimulated the development of the integration mechanisms resulting in the appearance of multinational and holding corporations. Vertical integration is the most common mechanism strengthening the ties between the successive links of the processing and distribution chains of iron and steel enterprises. Transfer pricing is an important aspect of interaction between all responsibility centers within holding corporations. A distinction should be drawn between the tax and management aspects of transfer pricing. Despite the single accounting item, there is a significant difference between the tax and management aspects of transfer pricing. This article looks into the transfer pricing mechanisms for management accounting purposes. Methods/Statistical Analysis: Graphic and analytical methods of multi-product break-even analysis (break-even analysis for multi-product production with a flexible product mix). Findings: Market-based pricing is an optimum transfer pricing method. However, sometimes it appears impossible to use this method for iron and steel companies. In case there are no market-based prices, transfer prices are supposed to be set using a full costing system. It requires allocation of fixed costs by types of products. Application/Improvements: The full cost pricing method suggested by the authors sets the transfer prices ensuring equal conditions for all responsibility centers in measuring their cost management performance.