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Containing fiscal deficit: Provincial surpluses, CSF key factors
ZAHEER ABBASI
ISLANABAD: The government was able to contain fiscal deficit at 1.2 percent of GDP for July-September this year largely because of Rs85 billion provincial budget surpluses and $1.18 billion reimbursed by the US on account of the Coalition Support Fund (CSF).
According to data regarding fiscal operation released by the Ministry of Finance for this period, the total government bank and non-bank borrowing stood at Rs370 billion, equal to 1.6 percent fiscal deficit, which was reduce to Rs284 billion by utilising Rs85 billion provincial budget surplus to show 1.2 percent budget deficit for the first quarter. An official said that the major portion of the CSF reimbursement was used to provide subsidy to the power sector.
The total revenue collection stood at Rs692 billion – Rs451 billion collection by the Federal Board of Revenue (FBR) and Rs240 billion revenue from non tax sources – during the first quarter against the total expenditure of Rs975 billion.
The Public Sector Development Programme (PSDP) expenditure was recorded at Rs68 billion with Rs30 billion by the federal government and Rs38 billion by the provinces.
The provincial share in the revenue collection in the divisible pool was worked out at Rs277 billion and defence expenditure stood at Rs117 billion. The government made Rs312 billion interest payment during the first quarter of the current fiscal year with Rs299 billion for domestic debt and Rs13 billion on servicing of foreign debt.
Provincial fiscal operations also showed that the Punjab government closed its fiscal quarter with a surplus budget of Rs53 billion subsequent to Rs159 billion revenue and Rs105 billion expenditure.
The province’s own tax and non-tax collection stood at Rs24 billion whereas Rs128 billion was transferred to the province as its share from federal revenue and another Rs7 billion as federal loan and grant. Punjab’s total expenditure was Rs105 billion with Rs85 billion current expenditure and Rs18 billion development.
Sindh closed its fiscal operation with Rs37 billion surplus budget in the first quarter as total expenditure of the provincial government were Rs66 billion against the total revenue of Rs103 billion. The provincial government’s own tax and non-tax revenue collection was Rs25 billion during the first quarter and Rs73 billion was transferred to Sindh as its share in the federal revenue. Sindh’s current expenditure included Rs60 billion during the first quarter and development expenditure of Rs4 billion.
Khyber Pakntunkhwa closed its fiscal quarter with a surplus budget of Rs1.3 billion, with Rs 49 billion expenditure and Rs51 billion revenue. The total revenue collection by the provincial government remained at Rs2 billion. KP received Rs43 billion and Rs5 billion as loans and grants from the federal government. The province incurred Rs49 billion expenditure with Rs37 billion current expenditure and Rs12 billion development expenditure.
Baluchistan closed fiscal quarter with a budget surplus of Rs16 billion following Rs22 billion expenditure and Rs38 billion revenue. The provincial government received Rs32 billion revenue share from federal divisible pool and Rs4 billion was transferred to the province as federal loans and grants. The total expenditure of the provincial government was Rs22 billion with Rs19 billion current expenditure and Rs3 billion development expenditure.
US Helps Flood-Affected Pakistan Dairy Farmers Double Their Incomes
Islamabad: With U.S. assistance, more than 22,000 flood-affected dairy farmers throughout Pakistan doubled their incomes since May 2010.
These and other results of the U.S. Agency for International Development (USAID) Entrepreneurs Program were discussed at a conference held today for Pakistani entrepreneurs affected by natural disasters.In a country hit by natural disasters that leave millions of people homeless, destroy crops, and devastate livestock, sustaining a business can be a huge challenge.“Livelihood Recovery Support Conference” was specifically designed by US Embassy to address this challenge by bringing together entrepreneurs, government officials, academia, and the media so they could share their experiences dealing with disasters and discuss best practices for responding to them and rebuilding their businesses.
“Under normal conditions, Pakistan’s entrepreneurs face challenges on many fronts. These issues are compounded by Pakistan’s particular susceptibility to natural disasters,” said Ms. Catherine Moore, Deputy Mission Director, USAID Pakistan.“We are delighted that $4 million of U.S. support has successfully revitalized economic growth in disaster-affected regions and enabled resilient Pakistani entrepreneurs to recover and rebuild their businesses.”
A recent impact assessment of USAID’s rehabilitation program found that, since May 2010, more than 22,500 dairy farmers increased their incomes by more than 200% as a result of receiving U.S. government flood-related assistance.“I would like to thank the U.S. government for their prompt response to our urgent need and for bringing tears of joy and hope to thousands of conflict and flood-affected families as they struggled to stand on their feet once again,” said Dr. Zafar Iqbal Qadir, Chairman of the National Disaster Management Authority, speaking at the conference.
source the newstribe website
Bank of England keeps interest rates at record low
(AFP) / 8 November 2012
LONDON – The Bank of England decided on Thursday against pumping the British economy up with more new cash and voted to hold its key interest rate at a record-low level of 0.50 percent after the country emerged from recession.“The Bank of England’s Monetary Policy Committee today voted to maintain the official bank rate paid on commercial bank reserves at 0.5 percent,” it said in a statement.The BoE added that its quantitative easing (QE) cash stimulus programme would remain at £375 billion ($604 billion, 467 billion euros).
Minutes of the latest regular monthly meeting, to be published on November 21, will provide the reasoning behind Thursday’s decisions.Also on Thursday, the European Central Bank voted to keep euro zone borrowing costs at a record low 0.75 percent, as it continues to assess the impact of its latest measures to fight the euro zone debt crisis.
The Bank of England had been expected to maintain its monetary policy stance after recent data showed the British economy bounced back from a double-dip recession in the third quarter of 2012, helped by the London Olympics.The BoE had cut its key lending rate to the current record low level in March 2009, when it also launched its radical QE policy to pump up the British economy with hundreds of billions of pounds.
The bank raised QE by £50 billion to £375 billion in July in a fresh attempt to stimulate lending by retail banks and help prevent economic contagion from the debt crisis in the neighbouring euro zone Last month, analysts had expected the Bank of England to announce an increase to its QE stimulus at the two-day November meeting but changed tack after data showed Britain had escaped its longest double-dip recession since the 1950s.
Gross domestic product (GDP) rallied by 1.0 percent in the third quarter, or three months to September, after output had contracted for the previous three quarters, recent data showed.But growth turned positive on one-off factors, including the London 2012 Olympic Games and rebounding activity after an extra public holiday for Queen Elizabeth II’s Diamond Jubilee in the second quarter.
“Up until last month, analysts had placed a 70-percent chance on an expansion of QE, but a bounceback in UK GDP, ongoing employment gains, good US data, signs of recovery in China and the aggressive ECB response to the eurozone crisis had seen these expectations plummet to just 40 percent last week,” said ING bank economist James Knightley.
Despite Britain’s emergence from recession, a weak run of economic data has sparked concern over the fragile nature of the recovery — and speculation over more QE stimulus.Economists expressed fears over the underlying health of the economy after weak purchasing managers surveys for Britain’s construction, manufacturing and services sectors in October.
Figures also British industrial output tumbled by 1.7 percent in September from the August level — far worse than market expectations for a small drop of 0.4 percent.“The MPC would have been disappointed with recent data, enough perhaps for some members … to consider further monetary stimulus,” said HSBC bank economist John Zhu.
“An unexpectedly sharp fall in the services PMI on Monday and then very weak industrial production and manufacturing numbers on Tuesday means that the vote today may be a split decision.”The mood was also soured this week by news of falling retail sales and house prices during October.Under QE, the Bank of England creates cash that is used to purchase assets such as government and corporate bonds with the aim of boosting economic activity.The BoE’s main task is to use monetary policy as a tool to keep annual inflation close to a target of 2.0 percent.British 12-month inflation slowed close to a three-year low at 2.2 percent in September, but many analysts warn that recent domestic energy price hikes would reverse the decline.
Only Hardship cases have been notified, Pharma Bureau
Karachi: The recent notification for increase in prices of a few hardship cases, is a revision and not increase as due to inflation and rising cost of the input materials it had become impossible for the industry to continue producing quality medicines, this was stated by spokesperson Pharma Bureau, a representative body of multinational pharmaceutical companies in Pakistan.
He further added that the revision will merely help the industry to continue producing those drugs at break-even, just to keep them available to the patients as otherwise they would have to buy imported drugs at prices as much as ten times higher than the locally produced drugs.
The spokesperson said that the recent notification by the government to approve increase in prices of few medicines was long overdue and it is much less than the increase which the industry demanded. However, it will help the companies to keep producing these drugs as most of these were being manufactured at loss.
He expressed hope that the government will consider the price adjustment request by the pharmaceutical companies as they have not been given an increase for the last 10 years whereas the input and operational costs have increased manifold, making it difficult for the manufacturers to produce many important drugs even at break-even.
SOURCE THE NEWS TRIBE WEB
HSBC’s US money-laundering bill hits $1.5 bn
London: HSBC has increased the amount set aside for fines linked to money-laundering in the United States to $1.5 billion, the British banking giant said Monday, adding it could face criminal charges over the matter.
The Asia-focused lender also announced in a results statement that net profits tumbled by more than half to $2.498 billion in the third quarter, or three months to September, compared with a year earlier.HSBC’s earnings were hurt by an extra $800-million provision over the money-laundering affair. It had already allocated $700 million earlier this year and admitted Monday that the overall total could be “significantly higher”.The London-listed bank also took another charge of $353 million to compensate clients in Britain who were mis-sold payment protection insurance, in a separate scandal which has blighted the country’s banking sector.HSBC has so far booked a total provision of $2.1 billion for the mis-selling scandal.
The bank was thrown into a separate crisis earlier this year when a US Senate report found it had allowed affiliates in Mexico, Saudi Arabia and Bangladesh to move billions of dollars in suspect funds into the US without adequate controls.“These results include an additional provision of $800 million in relation to US anti-money laundering, Bank Secrecy Act and Office of Foreign Asset Control investigations,” the bank said in Monday’s statement.\
HSBC said adjusted pre-tax profits more than doubled to $5.04 bn, aided by a strong investment banking performance © AFP/File Philippe Lopez“We are actively engaged in ongoing discussions with the relevant authorities regarding steps to achieve a resolution, including potential fines, penalties and forfeitures, although no agreement has yet been reached.“The resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges and the imposition of significant fines, penalties and/or monetary forfeitures,” HSBC added.
The bank in July apologised for failing to apply anti-laundering rules and one senior executive resigned. US lawmakers have accused the global bank of giving Iran, terrorists and drug dealers access to the US financial system.David Bagley, the head of group compliance for London-based HSBC, was forced to step down from his post in the wake of a US Senate subcommittee’s damning report on the bank’s operations.“The US authorities have substantial discretion in deciding exactly how to resolve this matter,” HSBC chief executive Stuart Gulliver said on Monday.
HSBC says ikts revenues soared 20% in the third quarter from a year earlier © AFP/File Arif Ali
“Indeed, the final amount of the financial penalties could be higher, possibly significantly higher, than the amount accrued.”HSBC on Monday added that the bank’s pre-tax earnings slumped 51 percent to $3.5 billion in the third quarter on large fluctuations in the value of its own debt.After stripping out exceptional items, adjusted pre-tax profits more than doubled to $5.04 billion, aided by a strong performance at HSBC’s investment banking division, and easing eurozone conditions.Market expectations had been for adjusted profit of about $5.45 billion, according to analysts polled by Dow Jones Newswires.Total revenues meanwhile soared by 20 percent to $16.13 billion in the reporting period. The group also slashed bad debts.HSBC’s share price dropped 1.29 percent to close at 618 pence on London’s FTSE 100 index of leading companies, which ended down 0.50 percent lower at 5,839.06 points.
source the newstribe
Foreign firms owe British taxman £5.5bn
London: Foreign companies in Britain owe around £5.5 billion in taxes, figures unearthed by The Times newspaper showed Saturday.
Her Majesty’s Revenue and Customs (HMRC), the tax-collecting body, has identified 258 big multi-national firms thought to have outstanding tax bills amounting to that sum, the daily said.
According to figures the newspaper obtained under Britain’s freedom of information laws, British businesses owned by foreign parent firms made up 44 percent of all potential tax lost through underpayments by the kingdom’s largest companies.
Margaret Hodge, who chairs parliament’s Public Accounts Committee cross-party scrutiny body, told The Times: “Over the past few months there has been growing anger at what is seen to be unfairness in the tax system.
“If you’re rich, you get away with tax avoidance, and if you’re an ordinary person, you pay your fair share.”
HMRC chief executive Lin Homer is to be questioned by the committee on Monday.
In total, some 551 British and foreign big firms are thought to owe HMRC at total of £12.5 billion (15.6 billion euros, $20 billion) in tax.
source the news tribe
Teens’ secrets about internet research
The teachers who instruct the most advanced American secondary school students look confused when it comes to students’ research habits and the impact of technology on their studies.
Some 77% of advanced placement (AP) and National Writing Project (NWP) teachers surveyed say that the internet and digital search tools have had a “mostly positive” impact on their students’ research work.
But 87% say these technologies are creating an “easily distracted generation with short attention spans” and 64% say today’s digital technologies “do more to distract students than to help them academically.”
According to this survey of teachers, conducted by the Pew Research Center’s Internet & American Life Project in collaboration with the College Board and the National Writing Project, the internet has opened up a vast world of information for today’s students, yet students’ digital literacy skills have yet to catch up:
- Virtually all (99%) AP and NWP teachers in this study agree with the notion that “the internet enables students to access a wider range of resources than would otherwise be available,” and 65% agree that “the internet makes today’s students more self-sufficient researchers.”
- At the same time, 76% of teachers surveyed “strongly agree” with the assertion that internet search engines have conditioned students to expect to be able to find information quickly and easily.
- Large majorities also agree with the notion that the amount of information available online today is overwhelming to most students (83%) and that today’s digital technologies discourage students from using a wide range of sources when conducting research (71%).
- Fewer teachers, but still a majority of this sample (60%), agree with the assertion that today’s technologies make it harder for students to find credible sources of information.
- Given these concerns, it is not surprising that 47% of these teachers strongly agree and another 44% somewhat believe that courses and content focusing on digital literacy should be incorporated into every school’s curriculumThe teachers who instruct the most advanced American secondary school students look confused when it comes to students’ research habits and the impact of technology on their studies.Some 77% of advanced placement (AP) and National Writing Project (NWP) teachers surveyed say that the internet and digital search tools have had a “mostly positive” impact on their students’ research work.
But 87% say these technologies are creating an “easily distracted generation with short attention spans” and 64% say today’s digital technologies “do more to distract students than to help them academically.”
According to this survey of teachers, conducted by the Pew Research Center’s Internet & American Life Project in collaboration with the College Board and the National Writing Project, the internet has opened up a vast world of information for today’s students, yet students’ digital literacy skills have yet to catch up:
Virtually all (99%) AP and NWP teachers in this study agree with the notion that “the internet enables students to access a wider range of resources than would otherwise be available,” and 65% agree that “the internet makes today’s students more self-sufficient researchers.”At the same time, 76% of teachers surveyed “strongly agree” with the assertion that internet search engines have conditioned students to expect to be able to find information quickly and easily.
Large majorities also agree with the notion that the amount of information available online today is overwhelming to most students (83%) and that today’s digital technologies discourage students from using a wide range of sources when conducting research (71%).Fewer teachers, but still a majority of this sample (60%), agree with the assertion that today’s technologies make it harder for students to find credible sources of information.Given these concerns, it is not surprising that 47% of these teachers strongly agree and another 44% somewhat believe that courses and content focusing on digital literacy should be incorporated into every school’s curriculum
Source:the news tribe
US markets reopen after Hurricane Sandy; Dow loses 0.1%
New York: US financial markets reopened Wednesday after a historic two-day closure forced by superstorm Sandy, with the interruption having little impact on share prices themselves: the markets ended mostly unchanged from Friday’s close.
While many market participants were still prevented by power and transport outages and flooding from getting back to their offices in the New York area, trading was generally smooth.Stocks jumped at the opening, only to turn back downward as the day progressed.At the close, the Dow Jones Industrial Average finished down 10.75 points (0.08 percent) at 13,096.46.The broad-based S&P 500 gained 0.22 (0.02 percent) at 1,412.16, while the Nasdaq lost 10.72 (0.36 percent) at 2,977.23.The US financial hub of New York shut down completely Monday and Tuesday for the mega-hurricane, forcing other electronic markets for bonds, futures and derivatives around the country to close as well.
New York City Mayor Michael Bloomberg (L) speaks with traders © AFP
While power blackouts remained widespread in the New York area Wednesday, the markets sprang to life again fortified by onsite power generators and traders’ needs to adjust their portfolios on the last day of the month.NYSE Euronext chief executive Duncan Niederauer told CNBC television that the exchange’s systems were working smoothly, and that even with the power outages, it could operate full-time on its own backup generators.“It’s been very smooth… the market-making community is more than staffed enough to be open,” he said early in the session.Traders said the absence of a number of players was evident.“Given the formidable challenge of opening, I think it has gone fairly smoothly,” said Hugh Johnson of Hugh Johnson Advisors.Even so, he added, “It’s a very disjointed day, and it doesn’t really reflect the views of all investors.”“There are still a lot of investors, players, large active investors that haven’t been able to return to work.”Stocks were generally mixed.
Ford Motor and General Motors shares were both sharply higher after beating expectations in their quarterly earnings; Ford gained 8.2 percent and GM 9.5 percent.Property and casualty insurers were slightly lower. Analysts said they would largely be able to absorb the hits from billions of dollars in claims from the storm disaster.Allstate lost 0.4 percent and Travelers 0.9 percent.Disney fell 1.9 percent after announcing it would buy “Star Wars” studio Lucasfilm for $4 billion.Facebook was 3.8 percent lower as the ban on employees selling their shares lifted.Bond prices rose: the 10-year US Treasury yield fell to 1.69 percent from 1.75 percent late Friday, and the 30-year dropped to 2.85 percent from 2.92 percent.
Trade was smooth on the New York Stock Exchange and the Nasdaq exchange © AFP
The financial industry seemed to weather the shutdown smoothly; the US Treasury said the payments, clearing and settlement infrastructure operated normally during the two days the markets were closed.The shutdown of two of the world’s largest equity markets and associated futures and derivatives exchanges had impact beyond US borders.With US investment managers offline, trading volumes plunged in Europe and elsewhere as well.Niederaurer defended the decision Sunday to halt trade completely for two days, which was done in consultation with the financial community and Washington regulators.
“The human safety concerns trump all… The markets should not have been open, because for the markets to be open a bunch of people would have had to put their lives at stake. Anybody who wants to question that decision just isn’t thinking clearly.”While electronic trading could theoretically have taken place, he said, many market participants, hit by electricity and cellphone outages, would still not have been able to trade, he added.
source:the news tribe
How Transfer Pricing Techniques Improve Profitability
How Transfer Pricing Techniques Improve Profitability
There are five transfer pricing techniques a corporation can choose from to improve profitability of not only business unit level, but the corporate-wide level. Each of the technique has strengths and weaknesses that, any incorrect transfer pricing can cause considerable dysfunctional purchasing behaviour and could suffer profitability on corporate-wide level—thus selecting the most suitable transfer pricing techniques is critical.
First, here s a quick comparison of the five transfer pricing techniques, each shows four variables: profitability enhancement, performance review process required, ease of use and common problems.
Five Transfer Pricing Techniques Summarized
A comparison of five transfer pricing methods can be summarized as follows:
1. Market Pricing
- Profitability Enhancement: Creates highest level of profits for entire company.
- Performance Review: Creates profits centres for all divisions.
- Ease of Use: Simple applicability.
- Problems: Market prices not always available; may not be large enough external market; does not reflect slight reduced internal selling costs; selling divisions may deny sales to other divisions in favor of outside sales.
2. Adjusted Market Pricing
- Profitability Enhancement: Creates highest level of profits for entire company.
- Performance Review: Creates profits centres for all divisions.
- Ease of Use: Requires negotiation to determine reductions from, market price.
- Problems: Possible arguments over size of reductions; may need headquarters’ intervention.
3. Negotiated Prices
- Profitability Enhancement: Less optimal result than market-based pricing, especially if negotiated prices vary substantially from the market.
- Performance Review: May reflect manager negotiating skills more than division performance.
- Ease of Use: Easy to understand but requires substantial preparation for negotiations.
- Problems: May result in better deals for divisions if they buy or sell outside the company; negotiations are time consuming; may require headquarters’ intervention.
4. Contribution Margins
- Profitability Enhancement: Allocates final profits among cost centres; divisions tend to work together to achieve large profit
- Performance Review: Allows for some basis of measurement based on profits, where cost centre performance is only other alternative.
- Ease of Use: Can be difficult to calculate if many divisions involved.
- Problems: A division can increase its share of the profit margin by increasing its costs; a cost reduction by one division must be shared among all divisions; requires headquarters’ involvement.
5. Cost Plus
- Profitability Enhancement: May result in profit build-up problem, so that division selling externally has no incentive to do so.
- Performance Review: Poor for performance evaluation, since will earn a profit no matter what cost is incurred.
- Ease of Use: Easy to calculate profit add-on.
- Problems: Margins assigned do not equate to market-driven profit margins; no incentive to reduce costs.
This post further discusses each of the transfer pricing techniques in greater details and provides guidance on how to make use of each technique—and improve profitability on the corporate-wide level, instead of department-or-business unit level. But let us start with the basic first. Read on…
What is Transfer Pricing, When Is It Important?
Simply put, transfer pricing is a task of determining prices at which products (or could be components) will be sold between divisions (or department or business units) in a corporation. It is most common in vertically integrated companies, where each division in succession produces a component that is a necessary part of the product being created by the next division in line.
So, if an organization sells its own products internally—from one division to another—then transfer pricing is important.
Next, let us take a look at each transfer pricing techniques and how each technique can be used to improve profitability in the corporate-wide level.
Technique#1. Using External Market Price
Using external market price as transfer pricing technique is the most common. Under this approach, the selling division matches its transfer price to the current market rate. By doing so, a company can achieve four goals:
- Goal#1. Maximize profits – A company can achieve the highest possible corporate-wide profit. This happens because the selling division can earn just as much profit by selling all of its production outside of the company as it can by doing so internally—there is no reason for using a transfer price that results in incorrect behaviour of either selling externally at an excessively low price or selling internally when a better deal could have been obtained by selling externally.
- Goal#2. Profit centre structure – Using the market price allows a division to earn a profit on its sales, no matter whether it sells internally or externally. By avoiding all transfers at cost, the senior management group can structure its divisions as profit centres thereby allowing it to determine the performance of each division manager.
- Goal#3. Simplified information sources – The market price is simple to obtain—it can be taken from regulated price sheets, posted prices, or quoted prices, and applied directly to all sales. No complicated calculations are required, and arguments over the correct price to charge between divisions are kept to a minimum.
- Goal#4. Outside shopping – A market-based transfer price allows both buying and selling divisions to shop anywhere they want to buy or sell their products. For example, a buying division will be indifferent as to where it obtains its supplies, for it can buy them at the same price, whether that source is a fellow company division or not. This leads to a minimum of incorrect buying and selling behaviour that would otherwise be driven by transfer prices that do not reflect market conditions.
However, market prices are not always available. This happens when the products being transferred do not exactly match those sold on the market, or if they are intermediate- level products that have not yet been converted into final products, so there is no market price available for them.
Another problem with market-based pricing is that there must truly be an alternative for a selling division to sell its entire production externally. This is a common problem for speciality products, where the number of potential buyers is small, and their annual buying needs are limited in size. A final issue is that market-based pricing can drive divisions to sell their production outside of the company.
Technique#2. Using Adjusted Market Pricing
Adjusted market pricing involves price setting in order to simplify transfer prices and adjust for the absence of sales-related costs. For example, if market prices vary considerably by the unit volume ordered, there may be a broad range of transfer prices in use, which can be very complicated to track.
A single adjusted market price can be used instead, which is based on the average shipment or order size. If a buying division turns out to have purchased in significantly different quantities from the ones that were assumed at the time prices were set, a company can retroactively adjust transfer prices at the end of the year; or it can leave the pricing alone and let the divisions do a better job of planning their inter-divisional transfer volumes in the next year.
As another example, there should be no bad debts when selling between divisions, as opposed to the occasional losses incurred when dealing with outside firms; accordingly, this cost can be deducted from the transfer price.
The same argument can be made for the sales staff, whose services are presumably not required for interdepartmental sales. However, these price adjustments are subject to negotiation, so more aggressive division managers are more likely to resist reductions from their market-based prices while those managing the buying divisions will push hard for excessively large price deductions. The result may be pricing anomalies that do not yield the optimum profit for the company as a whole.
Technique#3. Using Negotiated Transfer Prices
The managers of buying and selling divisions can negotiate a transfer price between themselves, using a product’s variable cost as the lower boundary of an acceptable negotiated price and the market price (if one is available) as the upper boundary. The price that is agreed on, as long as it falls between these two boundaries, should give some profit to each division, with more profit going to the division with better negotiating skills.
The method has the advantage of allowing division managers to operate their businesses in a more independent manner, not relying on preset pricing. It also results in better performance evaluations for those managers with greater negotiation skills.
However, it also suffers from these flaws:
- Sub-optimal behavior – If the negotiated price excessively favors one division over another, the losing division will search outside the company for a better deal on the open market and will direct its sales and purchases in that direction; this may result in sub-optimal company-wide profitability levels.
- Negotiation time – The negotiation process can take up a substantial proportion of a manager’s time, not leaving enough for other management activities. This is a particular problem if prices require constant renegotiation.
- Brokered deals – Inter divisional conflicts over negotiated prices can become so severe that the problem is kicked up corporate headquarters, which must step in and set prices that the divisions are incapable of determining by themselves.
For all these reasons, the negotiated transfer price is a method that is generally relegated to special or low-volume pricing situations.
Technique#4. Using Contribution Margin
What if there is no market price at all for a product? A company then has no basis for creating a transfer price from any external source of information, so it must use internal information instead.
One approach is to create transfer prices based on a product’s contribution margin. Under this pricing system, a company determines the total contribution margin earned after a product is sold externally and allocates this margin back to each division, based on their respective proportions of the total product cost.
There are several good reasons for using this approach, which:
- Converts a cost center into a profit center – By using this method to assign profits to internal product sales, divisional managers are forced to pay stricter attention to their profitability, which helps the overall profitability of the organization.
- Encourages divisions to work together – When every supplying division shares in the margin when a product is sold, it stands to reason that it will be much more eager to work together to achieve profitable sales rather than bickering over the transfer prices to be charged internally. Also, any profit improvements that can be brought about only by changes that span several divisions are much more likely to receive general approval and cooperation under this pricing method, since the changes will increase profits for all divisions. These arguments make the contribution margin approach popular as a secondary transfer pricing method, after the market price approach.
Despite its useful attributes, there are a number of issues with it that a company must guard against in order to avoid behavior by divisions that will lead to less-than optimal overall levels of profitability. The contribution margin approach:
- Can increase assigned profits by increasing costs – When the contribution margin is assigned based on a division’s relative proportion of total product costs, the divisions will realize that they will receive a greater share of the profits if they can increase their overall proportion of costs.
- Must share cost reductions – If a division finds a way to reduce its costs, it will receive an increased share of the resulting profits that is in proportion to its share of the total contribution margin distributed. For example, if Division A’s costs are 20% of a product’s total costs and Division B’s share is 80%, then 80% of a $1 cost reduction achieved by Division A will be allocated to Division B, even though it has done nothing to deserve the increase in margin.
- Requires the involvement of the corporate headquarters staff – The contribution margin allocation must be calculated by somebody, and since the divisions all have a profit motive to skew the allocation in their favor, the only party left that can make the allocation is the headquarters staff. This may increase the cost of corporate overhead.
- Results in arguments – When costs and profits can be skewed by the system, there will inevitably be arguments between the buying and selling divisions, which the corporate headquarters team may have to mediate. These issues detract from an organization’s focus on profitability.
The contribution margin approach is not a perfect one, but it does give companies a reasonably understandable and workable method for determining transfer prices. It has more problems than market-based pricing but can be used as an alternative or as the primary approach if there is no way to obtain market pricing for transferred products.
Technique#5. Using Cost-Plus Method
The cost-plus approach is an alternative when there is no market from which to determine a transfer price. This method is based on its name—just accumulate a product’s full cost and add a standard margin percentage to the cost; this is the transfer price. This approach has the singular advantage of being very easy to understand and calculate, and can convert a cost center into a profit center, which may be useful for evaluating the performance of a division manager.
The cost-plus method’s flaw is that the margin percentage added to a product’s full cost may have no relationship to the margin that would actually be used if the product were to be sold externally. If a number of successive divisions were to add a standard margin to their products, the price paid by the final division in line—the one that must sell the completed product externally—may be so high that there is no room for its own margin, which gives it no incentive to sell the product. Because of this issue, the cost-plus method is not recommended in most situations.
Words of Caution
A company must set its transfer prices at levels that will result in the highest possible levels of profits, not for individual divisions but rather for the entire organization. Otherwise a division may enjoy maximum profit while the corporate-wide level does not.
For example, if a transfer price is set at a product’s cost, the selling division would rather not sell the product at all, even though the buying division can sell it externally for a profit that more than makes up for the lack of profit experienced by the division that originally sold it the product. The typical division manager will select the product sales that result in the highest level of profit only for his or her division, since the manager has no insight (or interest) in the Financial results of the rest of the organization.
Only by finding some way for the selling division to also realize a profit will a company have an incentive to sell its products internally, thereby resulting in greater overall profits.
An example of such a solution is when a selling division creates a by-product that it cannot sell but that another division can use as an input for the products it manufactures. The selling division scraps the by-product, because it has no incentive to do anything else with it. However, by assigning the selling division a small profit on sale of the by product, it now has an incentive to ship it to the buying division. Such a pricing strategy assists a company in deriving the greatest possible profit from all of its activities.
Another factor is that the amount of profit allocated to a division through the transfer pricing method used will impact its reported level of profitability—therefore the performance review for that division and its management team.
If the management team is compensated in large part through performance-based bonuses, its actions will be heavily influenced by the profit it can earn on inter-company transfers. For example, an excessively low transfer price will result in low production priority for that item, as long as the selling division has some other product available that it can sell for a greater profit.
Finally, altering the transfer price used can have a dramatic impact on the amount of income taxes a company pays, if it has divisions located in different countries that use different tax rates.
Companies that are frequent users of transfer pricing must create prices that are based on a proper balance of the goals of overall company profitability, divisional performance evaluation, and (in some cases) the reduction of income taxes. The attainment of all these goals by using a single transfer pricing method should not be expected. Instead, focus on the attainment of the most critical goals, while keeping the adverse affects of not meeting other goals at a minimum. This process may result in the use of several transfer pricing methods, depending on the circumstances surrounding each inter-divisional transfer.
Unemployment 30mn higher than before crisis: ILO
Tokyo: There are now 30 million more people without jobs around the world than before the global financial crisis began, the head of the International Labour Organization said in remarks published Friday.
The figures come amid a growing debate over the merits of austerity, especially in Europe, where painful budget-cutting has pushed jobless levels as high as 25 percent in some countries, including debt-hit Greece and Spain.
“Global unemployment is still more than 30 million higher than before the crisis,” said Director-General Guy Ryder. “And nearly 40 million more women and men have stopped looking for work.”
He said around a third of the more than 200 million unemployed around the world are under 25.
“With the world’s workforce growing by around 40 million a year we face large and growing decent-work deficits stretching out years ahead.
“Of those employed, 900 million women and men are unable to earn enough to lift themselves and their families above the $2 a day poverty line.”
Ryder said that figure would be 55 percent lower if the poverty reduction trend seen before the crisis had been maintained.
“This means that the damage of austerity measures has been more profound than previously thought.
“There is now an urgent need to revisit the timelines for fiscal balances, taking a much longer view of the time it will take to repair the damage done by the financial excesses of the pre-crisis period.”
On Thursday, International Monetary Fund chief Christine Lagarde said too much austerity too quickly could cause difficulties, particularly if a number of economies were chasing targets at the same time.
