Should fixed costs be included in the transfer price? From the manufacturers point of view, it would be best since it will cover all of the cost resulting a guaranteed profit? Provided fixed overhead absorption calculations are accurate…..
Could you please guide me as to how the seller takes it, why does he take it as as a variable cost? (Hammer june 2010)
Thanks in advance..
A company can have any rule it wants for fixing a transfer price.
If a question tells you how the transfer price is to be decided then you follow instructions.
However, if you are asked for a sensible range for a transfer price, then you assume that the selling division already makes (and sells) lots of other products and that fixed costs are already covered. Therefore producing an extra product to sell to the other division will not increase the existing fixed costs and it is only the marginal cost that needs to be covered.
When you say seller in your last sentence, I assume you mean the division that is buying the units from the other division. If so, then they will always treat the transfer price as a variable cost. It is because as far as they are concerned it is as though they are buying the goods from another company and it is no interest to them how the other company arrived at the price charged.
Thank you so very much…
You are welcome
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