Question

Class: ACCT-301 --> WEEK 7: TRANSFER PRICING AND CAREER RESEARCH TASK

How is transfer pricing used to assess performance? Have you ever worked with transfer pricing before? What kinds of companies would benefit the most by using this properly? How could they hurt themselves without using it or without applying it properly?

Answer 1

A transfer price is that notional value at which goods and services are transferred between divisions in decentralized organisation. Transfer price are normally set for intermediate products, which goods and services that are supplied by selling division to buying division

Transfer prices can be determined under the market-based, cost-based, or negotiated method. Under the market-based method, the transfer price is based on the observable market price for similar goods and services. Under the cost-based method, the transfer price is determined based on the production cost plus a markup if the upstream division wishes to earn a profit on internal sales. Finally, upstream and downstream divisions' managers can negotiate a transfer price that is mutually beneficial for each division.

Transfer price can have impact on the division's performance and hence lot care is to be taken in fixation of the same.