Transfer price is the cost of buying the product in the buying division and is the sales revenue for the selling division. The level of the transfer price will affect the profitability of both divisions and thus has performance appraisal implications. Transfer pricing occurs where an organizational structure itself into separate independent divisions. When separate divisions within the organization buy and sell to and from one another, then transfer pricing occurs.
Four methods which transfer price may be set
- A transfer price may be set equal to the additional outlay cost incurred because goods are transferred, plus the opportunity cost to the organization because goods are transferred.
- A transfer price may be based on the external market price.
- A transfer price may be set on the basic pricing negotiation among the division manager.
- A transfer price may be based on the cost of producing the goods or services to be transferred to be transferred
Methods used to determine Transfer Pricing Others:
- Transactional net margin method
- Comparable uncontrolled price
- Resale price method
- Transactional profit split method