Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 1

What is the purpose of a transfer price?

Step 1 of 4

Transfer Pricing

Before elaborating on the purpose of transfer pricing, let us first understand the concept of transfer pricing or what the transfer pricing is? Transfer pricing is a price that a division which is a part of a large business entity charges to another division within the same business entity while transferring services or goods. Now students should ask why it is so difficult task, especially when both divisions, the buying and the selling divisions belonging to same entity. Here students should know that the remunerations of the management executives in the buying division as well as in the selling division depend to a large extent upon the amount of profits their divisions made. Hence the executives in both the organizations would like to register as much profit as possible. It is more like milking the cow as long as it is beneficial to both the divisions.