Transfer Pricing
By: Paul Jason S. Yu, CPA, CTT
Transfer Price
• A transfer price is the price or the monetary value charged by one
segment of a firm for the goods and services it supplies to another
segment of the same firm.
• The transfer price is an internal price, the amount charged by one
responsibility center for goods and services.
Transfer Pricing Methods
1. Negotiated Transfer Pricing
2. Cost-Based
• Variable Cost
• Full Cost
• Full Cost + Mark-up
3. Market-Based
4. Dual Transfer Price
Negotiated Transfer Pricing
• A negotiated transfer price is determined by bargaining between the
buying and selling divisions.
• The divisions are treated as if they are indeed separate entities.
• This method is only applicable only when any of the divisions can
actually buy from or sell to the external market.
Cost-Based Pricing
• BASED ON VARIABLE COST: Fixed costs are usually irrelevant
costs for they are expected to remain constant regardless of any
change in volume or what alternative is chosen. Therefore, instead of
using full costs, some companies use only the variable costs as basis in
establishing transfer prices. By excluding fixed costs, division
managers may avoid being misled to erroneous decisions.
• BASED ON FULL COST: Full cost (materials, direct labor and
overhead) may be used as a basis in setting the transfer price.
• BASED ON FULL COST + MARK-UP: a mark-up may be added to
the full cost to enable the selling division to earn a profit from the
interdivisional transaction.
Market-Based Pricing
• If a perfectly competitive market exists for the products to be
transferred between departments, the ideal transfer price is the
prevailing market price for such product at the time of transfer.
• This is the price that the selling division would charge if it sold the
goods to the outside market, and this is the price that the buying
division would pay if the goods were purchased from outside
suppliers.
• It is the most ideal and best approach in transfer pricing.
Dual-Transfer Pricing
• A method where the transfer price is set at different levels for the
supplying and receiving divisions of an organization.
• For instance, the selling division which produces a product at a cost of
P10 per unit may be allowed to sell to the buying division at a transfer
price of P15. The buying division, on the other hand, may be allowed
to record the purchase from the selling division at a transfer price (or
purchase cost) of P10.
• Disadvantage: difficult to monitor
Transfer Price Range
• Highest transfer price of buying division &
lowest transfer price of selling division
• Minimum Transfer Price = VC/unit +
(Total CM of Lost Sales / Total Units
Transferred)
• Maximum Transfer Price = External Price
