Transfer prices were examined in a previous examination. It is, however deemed knowledge for this paper and can be asked again. It is therefore repeated here for revision.
What is a transfer price?
The transfer price is the price that one division charges another division of the same company for goods or services supplied from one to the other. It is an internal charge – the ‘sale’ of one division is the ‘purchase’ of the other. Although it will be reflected in the results for each division individually, there is no effect in the accounts of the company as a whole.
Ideally transfer prices should:
- Be perceived as fair to both divisions and therefore good for performance measurement and management
- Provide profits for both divisions because profits are motivating
- Promote goal congruence so that divisions volunteer to do what is good for the group
- Promote autonomy ie minimise head office interference