Division A produces a component and wants to sell it to Division B. Which of the following best describes the relationship of the transfer price to Division A and Division B?
A) revenue to Division A and a cost to Division B
B) revenue to Division B and a cost to Division A
C) a cost to Division B and no effect on Division A
D) revenue to Division A and no effect on Division B

Question

Quizplus · Accepted Answer

The transfer price is revenue to Division A as they are selling the component to Division B. At the same time, it is a cost to Division B as they are purchasing the component from Division A. Therefore, the transfer price has a revenue effect on Division A and a cost effect on Division B.

Division a Produces a Component and Wants to Sell It