Transfer pricing

Definition

Transfer pricing is the price at which divisions of a company transact with each other for goods, services, or use of property. It affects performance evaluation by impacting reported profits of responsibility centers within an organization.

5 Must Know Facts For Your Next Test

1. Transfer pricing can influence managerial behavior and performance metrics.
2. Methods for setting transfer prices include market-based, cost-based, and negotiated prices.
3. Incorrect transfer pricing can lead to suboptimal decision-making and resource allocation within a decentralized organization.
4. Tax implications are significant in multinational companies as transfer pricing affects where profits are reported.
5. Internal disputes over transfer prices can arise between responsibility centers if not managed properly.

Review Questions

• What impact does transfer pricing have on the performance evaluation of responsibility centers?
• Name three methods used for setting transfer prices.
• Why is correct transfer pricing important in decentralized organizations?

Related terms

Responsibility Center:

An organizational unit headed by a manager responsible for its activities and performance.

Decentralization:

The distribution of decision-making authority to various levels within an organization.

Performance Evaluation:

The process of assessing the efficiency and effectiveness of a responsibility center's operations.