Question

a) define decentralization and briefly discuss its merit and demerits

(b) briefly discuss any five possible objectives of transfer pricing

Answer 1

a Decentralization
The word decentralization means diffusion of authority from the higher level to the lower level management. It include transfer of activities to the lower level.
Anything that goes to increase importance of subordinate's role is known as Decentralization.

Merits
1)Decentralization helps in increasing efficiency as it involves delegation of authority and responsibility.
2)It helps in better co-ordination.
3)It helps in the diversification of the activities
4)Decentralization helps in lowering down the burden of the top executive by sharing his burden with the lower level management.

Demerits
1) While doing decentralization it becomes difficult to maintain uniformity
2) Decentralization includes more cost because it includes duplication of functions.
3) No specialization is seen
4) Lack of uniformity in actions because methods differ from department to department.

b) Objectives of Transfer Pricing
1) Performance Appraisal
Transfer prices are designed so that they help in measuring economic performance. The prices should guide the decision making and should assess worth of division as an economic unit.
2) Goal congruence
Transfer prices should be set in a manner that the divisional management desire to maximize the divisional earnings is consistent.
3) To maximize total profit of the subsidiaries
Transfer prices is the value attached to the transfer of goods and services and it helps in maximizing the total profit of the subsidiaries.
4) Minimize the tax burden

Transfer prices helps in minimizing the tax burden by shipping goods to countries with high rate of tariff at less prices so that duty base of these transaction are low.

5) Divisional autonomy
The prices should be maintained to its maximum divisional autonomy so that its benefits are maintained.