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Various approaches to setting transfer prices

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What are the main approaches for setting transfer prices? How can the problems that these approaches create be reconciled between the selling and buying divisions?

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Solution Summary

Your tutorial is 188 words and a reference and discusses three major approaches, cost, negotiated and market.

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Transfer prices are set usually based on performance policy (what gets rewarded) or tax minimization (shifting profits to low tax areas). The approaches generally include:

At Cost - this keeps all profits in transaction with outside parties at market rates and doesn't require any elimination of intra-company profits during financial statement ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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