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Fixed cost in transfer pricing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Fixed cost in transfer pricing

  • This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.
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  • May 23, 2016 at 1:04 pm #316588
    complicated
    Member
    • Topics: 110
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    • ☆☆☆

    The question asked for the issues that would arise from including fixed cost in transfer prices.

    One of the answers given was “including it within transfer price could lead to manipulation of overhead treatment, such as employing absorption costing or ABC”

    I don’t understand this part, hope you could explain it to me. Thanks 🙂

    May 23, 2016 at 5:58 pm #316654
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54718
    • ☆☆☆☆☆

    You will know from Paper F2 that there are many ways in which the fixed costs (which, by definition, remain the same in total) can be absorbed. It could be absorbed by labour hours, or it could be absorbed using ABC.

    Absorbing them in different ways would affect the transfer price if fixed costs were to be included. That is why (as you will have seen in our free lectures on this) that we should determine the transfer price from the marginal (variable) costs without including any fixed costs (which are going to stay the same whatever happens).

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