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The question asked for the issues that would arise from including fixed cost in transfer prices.
One of the answers given was “including it within transfer price could lead to manipulation of overhead treatment, such as employing absorption costing or ABC”
I don’t understand this part, hope you could explain it to me. Thanks 🙂
You will know from Paper F2 that there are many ways in which the fixed costs (which, by definition, remain the same in total) can be absorbed. It could be absorbed by labour hours, or it could be absorbed using ABC.
Absorbing them in different ways would affect the transfer price if fixed costs were to be included. That is why (as you will have seen in our free lectures on this) that we should determine the transfer price from the marginal (variable) costs without including any fixed costs (which are going to stay the same whatever happens).
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