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  Transfer Pricing Methods

Introduction to Transfer Pricing Methods

We have observed that the transfer prices are fixed mainly for the evaluation of divisional performance. It is the notional value of services and goods that are transferred from one division to other division. Other words, while internal exchange of goods and services occur among the different divisions of a firm they must be explained in monetary terms. The monetary amount for these inter divisional exchanges is termed as 'transfer price'. Though the determination of transfer prices is a very difficult and delicate task like lot of complicated issues are included in similar. Inter division conflicts are also possible. There are various methods of fixation of 'Transfer Price'. They are described as follow:

  • Cost Based Pricing
  • Market Based Pricing
  • Negotiated Pricing
  • Opportunity Cost Pricing: This pricing identifies the minimum price that the selling division is prepared to accept and the maximum price that the buying division is prepared to pay. The final transfer price might be relies on these minimum expectations of both the divisions. The most ideal condition will be while the minimum price supposed through the selling division is less than the maximum price accepted through the buying division. Though in practice, it may occur very seldom and there is chance of conflicts over the opportunity cost.

Conclusion: By the above discussion, it is clear that fixation of transfer prices is an extremely delicate decision. There may be clash of interests among the selling and buying division and therefore when fixing the transfer price, entire interests of the organization should be taken into consideration.

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