What Is An Effective Transfer Pricing System In A Divisional Organization

An effective transfer pricing system in the context of a divisional organization has to satisfy several basic criteria. The challenge is presently no transfer pricing system has been perfect. However, for an effective system of transfer pricing, some of the basic criteria need to be satisfied:

• it should encourage divisional managers to actin the best interests of the organization as a whole eg maximise the wealth of the shareholders and achieve goal congruence
• facilitate the assessment of management performance by ensuring that one division is not subsidizing another division
• support divisional autonomy eg managers should be abl to purchase from the cheapest supplier
• the transfer pricing should be deemed to be fair
• the system should be clear and understood by all concerned
• if appropriate, the system should aim to minimize the tax liability of the company.