The Effects of Joint Cost Allocation on Intra-Firm Trade: A Comparison of Insulating and Non-Insulating Approaches

2016 ◽  
Vol 29 (2) ◽  
pp. 1-10 ◽  
Author(s):  
Anil Arya ◽  
Jonathan C. Glover ◽  
Brian Mittendorf
Keyword(s):  
Private Information ◽  
Cost Allocation ◽  
Transfer Pricing ◽  
Trade Barriers ◽  
Cost Allocations ◽  
Mutual Monitoring ◽  
Fruitful Cooperation

ABSTRACT While it is generally believed that insulating cost allocations help managers focus their attention on their own actions and shield them from the actions of others, non-insulating schemes can have appeal by encouraging teamwork and/or mutual monitoring among divisions. In this paper, we demonstrate that non-insulating allocations can induce fruitful cooperation among parties even when teamwork and mutual monitoring are nonissues. In particular, we show that in the case of intra-firm trade governed by transfer pricing, non-insulating allocations can permit one division to internalize benefits of private information borne by another and thereby alleviate information-induced trade barriers. Unlike in the traditional case of fostering teamwork, however, the cooperative nature of non-insulating allocation introduced by information differences is distinctly more circumstance-specific. In line with this view, the paper also identifies conditions under which the use of non-insulating allocation shifts divisional incentives in a manner that only adds further tension to trade.

scholarly journals Cost-based transfer pricing with the existence of a direct channel in an integrated supply chain

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jumpei Hamamura
Keyword(s):  
Supply Chain ◽  
Cost Allocation ◽  
Transfer Pricing ◽  
Variable Cost ◽  
Fixed Cost ◽  
Direct Channel ◽  
Content Type ◽  
Fixed Cost Allocation ◽  
Transfer Prices ◽  
Integrated Supply Chain

Purpose This study aims to analytically explore the economic role of transfer pricing in a vertically integrated supply chain with a direct channel, specifically when it uses cost-based transfer prices, as is frequently observed in management practices. We compare two representative transfer pricing methods: full-cost and variable-cost pricing. Although many firms open a direct channel, which affects the optimal decision on transfer prices, prior literature has not considered this case. Design/methodology/approach We demonstrate the results using a non-cooperative game theoretical approach. Findings The results show that full-cost pricing is more profitable than variable-cost pricing when the fixed cost allocation to the marketing division is low, contrary to the established position in prior studies, from which I select their benchmark case. Moreover, we obtain a counterintuitive result, whereby, the firm-wide profit of a vertically integrated supply chain increases with fixed cost allocation. Originality/value This study considers the direct channel and internal transfer pricing in a vertically integrated supply chain, while prior research only considers one or the other. This model suggests an optimal choice of cost-based transfer pricing in managerial decisions. In addition, the authors demonstrate the positive effect of increasing fixed cost allocation, which prior management studies do not show. The findings of this study have implications for managerial practice by providing insights into supply chain design and showing that firms should consider the competition between channels when making decisions about transfer pricing methods.

scholarly journals Transfer Pricing In Transnational Operations: A Case- And Literature-Based Analysis

2011 ◽  
Vol 2 (8) ◽  
Author(s):  
Virginia A. Taylor ◽  
E.J. (Roy) Knaus ◽  
William E. Matthews
Keyword(s):  
Marketing Strategy ◽  
Transfer Pricing ◽  
International Management ◽  
Management Team ◽  
Multinational Firm ◽  
Academic Environments ◽  
Organizational Perspective ◽  
Cost Allocations ◽  
The Difference ◽  
Competitive Marketing Strategy

This paper represents a combined case- and literature-based analysis of transnational pricing and highlights the difference in the issues and perspectives of the business and academic environments. Following an introduction to the issue (noting the growing importance of the transfer of goods from one organizational entity to another within a multinational firm), a short case - The Henderson Company - illustrates how a relatively simple announcement can lead to a lengthy and heated discussion that points out the differences in opinion both between the headquarters and the subsidiaries and between the various regional entities themselves. The analysis of the case reflecting the concerns and perspectives of the members of the international management team (in terms of involvement and partnership, legal and operational concerns, competitive marketing strategy, and evaluation, compensation, and motivational issues) is followed by a literature-based analysis that looks at the complexities of the situation in terms of management, economics, taxation, and finance research. The paper concludes with the recognition that the issue of transnational pricing is a complex one that needs to be addressed from both an organizational perspective and from an international viewpoint emphasizing the development of ways of more accurately reflecting cost allocations.

Cost Allocation, Regulation and Incentives in Joint Production of Goods

2015 ◽  
Vol 2015 (1) ◽  
pp. 18-40
Author(s):  
Andrey Shastitko ◽  
Anna Meleshkina ◽  
Anastasiya Shastitko
Keyword(s):  
Comparative Analysis ◽  
Market Structure ◽  
Chemical Industry ◽  
Cost Allocation ◽  
Price Policy ◽  
Allocation Problem ◽  
Joint Production ◽  
Cost Allocations ◽  
Antitrust Legislation ◽  
Theoretical Foundations

This article addresses the joint cost allocation problem in context of firm’s price policy, market structure, enforcement of tax, environmental and antitrust legislation and the correlating problem of incentives’ design. The paper presents the theoretical foundations to distinguish such concepts as joint and by-product, their correlation with the category of waste. Moreover, the authors provide a comparative analysis of different methods of joint cost allocations and their areas of applicability. The practical part of this work involves the overview of actual practices of cost allocation in chemical industry. It confirms the need for an adjusted approach assessment of the efficiency and legitimacy of joint production in each particular case.

Business Intelligence is No ‘Free Lunch'

2018 ◽  
Vol 9 (1) ◽  
pp. 1-15
Author(s):  
Johannes Epple ◽  
Robert Winter ◽  
Stefan Bischoff ◽  
Stephan Aier
Keyword(s):  
Business Intelligence ◽  
Cost Allocation ◽  
Scientific Literature ◽  
State Of The Art ◽  
Future Research ◽  
Free Lunch ◽  
Cost Transparency ◽  
Cost Allocations ◽  
Cost Awareness ◽  
No Free Lunch

Cost allocations for business intelligence (BI) costs create cost awareness, enhance cost transparency, and support the management of BI systems. Although BI cost allocation is highly relevant in practice, the field is widely uncharted in current scholarly research. In this article, the state of the art in scientific literature is analyzed. The review is comprised of three iterations. It shows that certain general approaches for information systems cost allocation are suitable candidates if being combined and tailored to BI systems. Based on synthesis, an agenda is derived for future research into cost allocation for BI systems.

Sign in / Sign up

Export Citation Format

Share Document