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September 2, 2009

Transfer Pricing and Lean Accounting

One of the commonest queries I get during lean accounting implementations is “what does lean accounting say about transfer pricing ?”.

To be honest the answer is “not very much !”. The decision about transfer prices is not really anything to do with your costing system; it is a political decision.

 

Transfer pricing is a corporate decision guided more by tax and regulatory issues than by the costing system you use.

 

For example, a company moving goods from a low tax environment to a higher tax environment would be well advised to “absorb” as much overhead into the transfer price as it can (legally) to maximise the profit in the low tax environment and reduce it in the higher tax jurisdiction. The reverse is true for transfers in the opposite direction.

 

Thus the optimal transfer price for the corporation bears little relation to either the “average value stream cost” or the “standard cost” of a product; rather it is a question of devising a methodology that maximises (within what is legally allowed) the benefit for the organisation as a whole. It does not affect, at all, the organisations ability to use lean accounting for control, decision making and so on.