- This topic has 3 replies, 2 voices, and was last updated 5 years ago by
.
- Posts
Hello Sir, I hope you’re doing good.
Please help me understand this phrase.If the transfer price is set at the STANDARD marginal cost then the inefficiencies and efficiencies stay within the divisions.
How does using the actual marginal cost make Div A transfer its inefficiencies to B?
Could you please explain and elaborate in simpler terms please?
You will know from your studies of variance analysis that we compare actual costs with standard costs to check wherever the company operated efficiently or not.
When we have divisions, then if we use standard costs to get the transfer price, then we can see in each division separately whether or not the actual costs are higher or lower and therefore check whether each division separately is operating efficiently or not.
Suppose division A is spending more than they should be doing (so is inefficient), then if the transfer price is based on the actual cost then it means division B will be paying more which will make it look less profitable even if division B is perfectly efficient.
Thanks a ton sir.. I was thinking to relate it with variance analysis but I couldn’t put it the right way. Thanks again.
And honestly love your lectures!
- The topic ‘TRANSFER PRICING’ is closed to new replies.