Performance Measurement in Transfer Pricing Practice

Abstract

Transfer pricing is the price that one segment of an organization sells a product or service to another segment of the same organization (Horngren, Sundem, Burgtahler, & Schatzberg, 2014). But in practice there is often a conflict of interest from the division or the company that will make the transaction. This article discusses the determination of transfer pricing within company between companies and divisions. Transfer pricing in this article will be reviewed from the point of view of transfer pricing based on existing methods, performance measurement used as a result of the transfer price outside the market price, and compensation to division managers and companies of performance measurement results. The prowess of manager in analyzing the situation and conditions to determine the proper transfer price method is crucial in order to avoid dysfunctional decisions. However, there is often a conflict of interest between divisions or companies because of the trade-off between personal incentives and the best interests of the company as a whole. Selected performance measurement tools and the role of top manager are the key to overcome the conflict of interest that occurs in transfer pricing.