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Impact of a direct channel on the choice of absorption versus direct costing using cost-based transfer price

Hamamura, Jumpei (2018): Impact of a direct channel on the choice of absorption versus direct costing using cost-based transfer price.

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Abstract

This study analytically investigates the choice of a cost accounting system based on the cost-based transfer price by a divisionalized firm that has a direct channel through electronic commerce (EC). The findings show that the optimal choice between direct and absorption costing affects the increase of overhead allocation for the retail division through the cost-based transfer price. While traditional strategic transfer pricing literature shows that absorption costing is optimal in specific economic environments, this study demonstrates that direct costing is also optimal in a specific economic environment by considering dual channel competition. This research thus contributes to the extant strategic transfer pricing literature, which considers the choice of a cost accounting system in management accounting.

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