›› 2019, Vol. 31 ›› Issue (8): 210-218.

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Internal Pricing Based on Standard Cost, Comparative Performance and Dynamic Incentives

Cui Jianbo1,2, Luo Zhengying1   

  1. 1. Dongwu Business School, Soochow University, Suzhou 215006;
    2. School of Economics and Management, Jiangsu University of Science and Technology, Zhenjiang 212003
  • Received:2016-12-16 Online:2019-08-28 Published:2019-09-11

Abstract:

Standard cost is commonly used as transfer price of inside trade in a company when market price is absent. When upstream sellers predict that standard cost of next period may decrease due to decline of actual cost of prior period and subsequently, transfer price may decline, they will not have motivation to control cost. This is why ratchet effect occurs. To address this problem, this paper designs a 2-stage dynamic incentive model. It shows that ratchet effects would be thwarted after comparative performance information being introduced if the weight on the realized cost of first stage decreases while expectation about cost of second stage is forming. Otherwise, it would be strengthened.

Key words: standard cost, ratchet effects, comparative performance, dynamic incentives