Transfer pricing with ABC

Article Abstract:

Teva Pharmaceutical Industries Ltd. in Israel saw a need to adopt a new transfer pricing system after it entered the generic drug market in the mid-1980s. Management wanted to improve profit consciousness as well as coordination between operations and the marketing department. However, senior managers, division managers and the financial staff wanted different things from a transfer pricing system and could not agree as to which approach to adopt. Several traditional methods were considered and then rejected, including market price, negotiated price, full cost and marginal cost. Finally, Teva experimented with an activity-based costing transfer price model and found it to be effective. Aside from promoting greater collaboration between marketing and manufacturing managers, this method now enables managers to measure profit performance across organizational boundaries and under changing organizational structures.

Pharmaceutical Preparation Manufacturing, Pharmaceutical preparations, Models, Pharmaceutical industry, Drugs, Transfer pricing, Teva Pharmaceutical Industries Ltd.

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Elgin Sweeper Company's journey toward cost management

Article Abstract:

Elgin Sweeper Co (Elgin, IL), a manufacturer of motorized street sweepers with $50 million in annual sales, began implementing a novel cost management system in 1986. The cost management system elucidates cost behavior by identifying cost drivers, those actions that prompt a cost, including actual labor hours and dollars, standard direct labor hours and dollars, and units shipped and produced. The idea underlying the new cost management system is that actions create costs. Departmental costs were allocated to product lines using specific drivers, including percent of sales, manager estimates, and manning.

Elgin Sweeper Co.

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