Module 5.

3
Transfer Pricing
 Module Objectives
▪ Understand the meaning and essential
features of responsibility accounting
▪ Differentiate responsibility centers
(cost, profit, and investment centers)
▪ Determine basis of transfer pricing
▪ Enumerate advantages of
responsibility accounting
 Transfer Pricing
Transfer pricing is used to measure goods and services
furnished by a profit center to other responsibility centers
within a company
▪ Should be objectively determinable
▪ Should compensate the transferring division and charge
the buying division commensurate with the value of the
goods and services exchanged
 Transfer Price
▪ Cost Price – goods and services are transferred on the
basis of cost of production
▪ Cost Plus Normal Mark-up – a margin of profit is added to
the cost of the product
▪ Incremental Cost – total variable cost plus fixed costs
directly attributable to the center; or taken as
opportunity cost in the form of loss of revenue that
would have been charged to outside customer
 Transfer Price
▪ Shared Profit Relative to Cost – aggregate cost of various
divisions is deducted from total sales revenue of the
company, then profit is shared by various profit centers
relative to the cost basis
▪ Standard Price – fixed on predetermined standard price
basis; may be on the basis of production and prevailing
market condition
 Transfer Price
▪ Negotiated Price – based on negotiations between the
buying and the transferring division; mutually agreed price
▪ Dual or Two-way Price – price for the transferring division
is different from the charges to the buying division; meant
for internal purposes of performance only
▪ Market Price – prices are determined on the basis of
prevailing market price
Advantages of Responsibility Accounting
▪ Each and every individual in the organization is assigned
some responsibility and accountability for their work
▪ Assigning of tasks acts as a motivational factor to
improving performance
▪ Full information is collected about costs and revenues
▪ Authority is delegated but overall control is retained
▪ Information is helpful in planning future actions