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ARIF Costing

A cost center is a division within a company that does not directly generate revenue but contributes to overall costs. Examples include research and development, marketing, and customer service departments. While not always profitable, cost centers can indirectly boost revenue through innovations, increased customers, and loyalty over time. Transfer pricing refers to the internal prices set between divisions of a company for goods, services, or asset use. These prices determine taxable profits in different jurisdictions. Most countries allow tax authorities to adjust transfer prices that are not within an arm's length range of market prices. There are several approaches to setting transfer prices, including cost-plus a markup, incremental cost of the selling division, prevailing market price, or negotiation between divisions

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86 views3 pages

ARIF Costing

A cost center is a division within a company that does not directly generate revenue but contributes to overall costs. Examples include research and development, marketing, and customer service departments. While not always profitable, cost centers can indirectly boost revenue through innovations, increased customers, and loyalty over time. Transfer pricing refers to the internal prices set between divisions of a company for goods, services, or asset use. These prices determine taxable profits in different jurisdictions. Most countries allow tax authorities to adjust transfer prices that are not within an arm's length range of market prices. There are several approaches to setting transfer prices, including cost-plus a markup, incremental cost of the selling division, prevailing market price, or negotiation between divisions

Uploaded by

Zaheer Aman
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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A unit or organization for which costs are accumulated or computed. In the State this may
take several forms: (1) a significant activity within a department for which administrative control is
desirable and/or necessary, (2) a designated area within a department with costs that have significance.

A cost center is part of an organization that does not produce direct profit and adds to
the cost of running a company. Examples of cost centers include research and development
departments, marketing departments, help desks and customer service, contact centers.

Although not always demonstrably profitable, a cost center typically adds to revenue
indirectly or fulfills some other corporate mandate. Money spent on research and development,
for example, may yield innovations that will be profitable in the future. Investments in public
relations and customer service may result in more customers and increased customer loyalty.


  

 

Transfer pricing refers to the setting, analysis, documentation, and adjustment of


charges made between related parties for good, services, or use of property (including intangible
property). Transfer prices among components of an enterprise may be used to reflect allocation
of resources among such components, or for other purposes. ³Transfer prices are significant for
both taxpayers and tax administrations because they determine in large part the income and
expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.´

Many governments have adopted transfer pricing rules that apply in determining or
adjusting income taxes of domestic and multinational taxpayers. The rules of nearly all countries
permit related parties to set prices in any manner, but permit the tax authorities to adjust those
prices where the prices charged are outside an arm's length range.



 
  





According to this transfer price equal to the cost price. This means the goods and services
transferred will be priced on the basis of the selling division¶s unit cost of production.

 



This type of transfer price is an improvement over the first category. it includes, besides unit
cost of production, some profit margin or normal mark-up.

 
 

Yet another basis of the transfer prices is the incremental cost is the in the selling division.
Depending up on the circumstances, incremental cost can be computed in two way. The first situation
may be such that the entire production of the selling division is transferred to the sister division and there
are no independent outside customer for the goods.





Another approach to the transfer pricing is the market based approach. There are three way to
arrive at the market price.

First, through the prevailing market price if there is an active market for the goods and services
transfer between divisions.

Secondly, in case where easily identified market price is not available, costs plus a normal margin
can be a reasonable approximation of market price.

Finally, in situation in which market is not readily available, bids from several different
manufactures can from the basis.




The inter-divisional exchange pricing can also be based on the price mutually agreed upon by the
buying as well as the selling department, through negotiation.




According to this method of transfer pricing for segment performance evaluation, the
transferring division is credit red with one price but the acquiring division is charged at different price


 
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