Transfer Prices

A transfer price is a price used to measure the value of goods/services furnished by a profit centre to other responsibility centres within a company. When internal exchange of goods and services take place between the different divisions of a firm, they have to be expressed in monetary terms. The monetary amount for these inter-divisional exchanges or transfers is called the transfer price. The implication of the transfer price is that for the selling division it will be a source of revenue, whereas for the buying division it is an element of cost. It will, therefore, have a significant bearing on the revenues, costs and profits of responsibility centres.

The transfer price should be determined objectively. It should be equal to the value of the intermediate products being transferred, that is, the transfer price should reward/compensate the transferring division and charge the buying division in keeping with the value of the functions performed and the value of the product exchanged. The transfer price should be compatible with the policy that maximises attainment of company goals and evaluation of segment performance. Transfer prices can be either cost-based or market-based.