Transfer Price

A transfer price is the price charged for a product or service that is transferred between two units of an organization. Transfer prices are used to allocate costs and profits between different parts of an organization.

There are two main types of transfer prices: market-based transfer prices and cost-based transfer prices. Market-based transfer prices are based on the price that would be charged if the product or service were sold to an external customer. Cost-based transfer prices are based on the cost of producing the product or service.

The choice of transfer price can have a significant impact on the profitability of different parts of an organization. For example, if a transfer price is set too high, the unit that is buying the product or service will be less profitable. If a transfer price is set too low, the unit that is selling the product or service will be less profitable.

Transfer prices can also be used to manage the flow of products and services between different parts of an organization. For example, a high transfer price can discourage a unit from buying products or services from another unit. A low transfer price can encourage a unit to buy products or services from another unit.

Transfer prices can be a complex issue. There is no one right answer to the question of how to set transfer prices. The best transfer price for a particular situation will depend on the specific circumstances of the organization.