Cost Based Transfer Pricing

Review of Accounting Studies, Vol. 16, No. 2, Forthcoming 2011

41 Pages Posted: 24 Oct 2007 Last revised: 11 May 2010

See all articles by Thomas Pfeiffer

Thomas Pfeiffer

University of Vienna - Accounting and Control

Ulf Schiller

University of Basel

Joachim Wagner

University of Vienna - Institute of Business Administration

Date Written: October 7, 2008

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. (i) Centralized standard-cost transfer pricing dominates the other methods if the central office and the divisions ex-ante face low cost uncertainty. (ii) 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. (iii) 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, Costs

JEL Classification: D24, D82, L23, M41

Suggested Citation

Pfeiffer, Thomas and Schiller, Ulf and Wagner, Joachim, Cost Based Transfer Pricing (October 7, 2008). Review of Accounting Studies, Vol. 16, No. 2, Forthcoming 2011. Available at SSRN: https://ssrn.com/abstract=1024112 or http://dx.doi.org/10.2139/ssrn.1024112

Thomas Pfeiffer

University of Vienna - Accounting and Control ( email )

Bruenner Strasse 72
Vienna 1210, Vienna
Austria
+43-1-4277-38002 (Phone)
+43-1-4277-38004 (Fax)

Ulf Schiller (Contact Author)

University of Basel ( email )

Peter-Merian-Weg 6
Basel, 4002
Switzerland

Joachim Wagner

University of Vienna - Institute of Business Administration ( email )

Bruenner Strasse 72
Vienna, A1210
Austria

Register to save articles to
your library

Register

Paper statistics

Downloads
2,159
Abstract Views
10,160
rank
6,214
PlumX Metrics