All of the following are true of cost-based transfer prices EXCEPT that they:
A)provide no incentive to the supplying division to control costs when actual costs are used.
B)may use standard costs to help maintain operating efficiency.
C)promote the optimal level of transactions for the overall organization.
D)don't give proper guidance when operating capacity is constrained.

Question

Quizplus · Accepted Answer

Cost-based transfer prices may not always promote the optimal level of transactions for the overall organization as they do not take into account market conditions or the true value of the product. Instead, they may encourage suboptimal decisions for the organization as a whole in order to maximize the individual division's profits.

All of the Following Are True of Cost-Based Transfer Prices