The chapter on pricing looks at various concepts, but this discussion focuses on the transfer of price conducted by division managers of a given company for their internal sales. Transfer price is used in managerial accounting to represent the price used by one part of the company in charging another part of the same company for its goods and services. Therefore, it comes to the valuing transfer of goods and services (such as labor and the general consulting services) between company divisions and results in ethical decision-making for managers. The main intent of using this policy is to encourage managers to make decisions that serve the best interests of the company they are representing, and they achieve all this by liaising with division managers (Caplan, 2010).
The general economic transfer pricing rule states:
Transfer price = Differential cost to selling + Opportunity cost of selling
division internally
Determination of transfer price looks at using negotiated, cost-based, and market-based approaches. The market-based approach based on the observable market price for similar competing goods and services. Many companies employ this approach because of its objectivity and its provision of proper economic incentives. As for the cost-based method transfer price, it is determined by production cost plus markup (Edmonds et al., 2016). It is only possible if the upstream division would wish to earn a profit on its internal sales. Here, the authors are trying to imply that the price is based on cost variables alone or variable costs plus fixed costs. Nonetheless, the improper use of transfer price in this approach leads to a loss of profitability. Moreover, the performance of the division is also affected because evaluation is conducted unfairly. Managers of both upstream and downstream have the opportunity to negotiate a transfer price that would be of mutual benefit to each of their divisions. It is referred to as the negotiated transfer price and has a sound basis because of the proper decision rules used by both divisions (Weygandt, Kimmel & Kieso, 2014).
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Budgetary planning is the other chapter under scrutiny, and the most interesting section looked at the advantages of budgeting. In our everyday life, we need to conduct budgeting and by being aware of the benefits of budgeting goes a long way in making sound decisions that are more realistic in this world. When it comes to managerial aspects, budgeting is a worthwhile practice because it serves as an integral feature of effective management (Edmonds et al., 2016).
The benefits of budgeting have been seen to compel the planning process for many managers in a given organization because they are looking at the future. Through budgeting, the essential principles of coordination and communication are promoted for organizations. In such cases, the sales function of the company will normally talk to the operations or customer service function. For management, budgets give them a guide when it comes to undertaking a specific action on behalf of the company. Therefore, we can say that budgets are known to motivate an action within company managers, and this means that company objective or mission will be attained. It is through having proper budgets that companies can perform funding planning that helps in supporting company operations that propel the organization to meet their intended goals in society (Weygandt, Kimmel & Kieso, 2014).
Managers are also known to take part in the decision-making process of the company and therefore, having a budget helps them when it concerns evaluating the performance of their subordinates. Managers are an integral part when it comes to reviewing and controlling company budgets because through it established targets are realized and even achieved within a short period. Therefore, saving on company resources, time, costs and overheads and has become important database when it comes to decision-making. Nonetheless, we should also remember that budgets have managed to keep organizations fit through monitoring their progress (Tanase, 2013).
References
Caplan, D. (2010). Management accounting concepts and techniques . New York, NY: University of Albany
Edmonds, T. P., Edmonds, C. D., Tsay, B. Y., & Olds, P. R. (2016). Fundamental managerial accounting concepts . McGraw-Hill Education.
Tanase, G. L. (2013). An Overall Analysis of Participatory Budgeting Advantages and Essential Factors for an Effective Implementation in Economic Entities. Journal of Eastern Europe Research in Business & Economics , 1.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2014). Managerial Accounting: Tools for business decision making (7th Ed.) Hoboken, NJ: Wiley.
