The impacts of inventory in transfer pricing and net income: Differences between traditional accounting and throughput accounting

• Published in: The British accounting review Vol. 54; no. 2; p. 101001
• Main Authors: da Silva Stefano, Gustavo, Antunes, Tiago dos Santos, Lacerda, Daniel Pacheco, Wolf Motta Morandi, Maria Isabel, Piran, Fabio Sartori
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01-03-2022
• Subjects: International supply chain; Offshoring; Theory of constraints; Transfer pricing; International supply chain; Theory of constraints; Transfer pricing; Offshoring
• ISSN: 0890-8389; 1095-8347
• DOI: 10.1016/j.bar.2021.101001

This research proposes the Theory of Constraints (TOC) throughput accounting (TA) as an alternative management control mechanism in an international transfer pricing setting. We compare TA with the traditional accounting method and demonstrate that the traditional method underestimate factors as demand variation and inventories, which affects decisions, such as moving production to an offshore plant. A detailed system dynamics model is built to simulate the production process in an offshore supply chain to compare the methods. The study aims to fill a gap in the management accounting studies and contribute to the understanding of international transfer pricing and their management controls, exploring more than just the tax savings, which are usually considered isolated from operational factors for supply chain (SC) offshoring decisions. Furthermore, we conduct a brief literature review, present the model and discuss the results. It has been observed that inventory levels are an important part of accounting, offshored supply chains, and transfer pricing. Traditional cost and accounting methods favour higher inventory levels, and they can overestimate net income results up to 70% – especially in higher demand variation scenarios – when compared to the throughput accounting.