Centralized Versus Decentralized Transfer Pricing and Cost-System Choice

45 Pages Posted: 18 Aug 2006

See all articles by Stephan Lengsfeld

Stephan Lengsfeld

University of Freiburg

Thomas Pfeiffer

University of Vienna - Accounting and Control

Ulf Schiller

University of Basel

Date Written: October 13, 2006

Abstract

Cost-based transfer pricing is used by many firms. However, there exist many cost-based methods that may be centralized or decentralized. If centralized, the firm's central office has discretion how accurately to measure the divisions' costs. In order to measure cost reliably, the firm must incur considerable setup costs for an information system. This paper analyzes the tradeoff between the fixed costs of such information gathering and the incentives that arise under several cost-based methods. Our central result is that transfer prices should be based on centralized standard costs if the returns on investments are high and/or if cost uncertainty is low. Decentralization should occur if there is intermediate uncertainty. Finally, transfer pricing should be centralized and based on actual costs if uncertainty is high.

Keywords: Transfer Pricing, Centralization, Decentralization, ERP Systems

JEL Classification: M40, M46, D82

Suggested Citation

Lengsfeld, Stephan and Pfeiffer, Thomas and Schiller, Ulf, Centralized Versus Decentralized Transfer Pricing and Cost-System Choice (October 13, 2006). Available at SSRN: https://ssrn.com/abstract=925170 or http://dx.doi.org/10.2139/ssrn.925170

Stephan Lengsfeld

University of Freiburg

Bertoldstr. 17, Alte Uni
Freiburg i. Br., D-79085
Germany

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

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