Methods of Transfer Pricing

Transfer pricing refers to a process where one division of a company charges price for selling good or service from another division even though they both are part of a same company. Since transfer pricing involves divisions of the same company the price is not easy to establish. Let’s look at methods which are used for establishing the transfer prices –

  1. Market Based Transfer Price – In this method of transfer pricing a division charges the market rate from another division that is the rate at which company sells the products to outside parties.
  2. Cost Based Transfer Price – Under this method of transfer pricing, company follows the policy where one division will sell goods or services to another division at a price which is equal to the actual cost of good or service, therefore in this method a division forgoes its profit percentage. In this method the price at which division of a company sells goods to outsiders is different from the price at which other division buys.
  3. Negotiated Transfer price – Under this method of transfer price the top management of the various divisions are given freedom to decide the price at which goods should be sold between divisions. Hence in this method the transfer price is the price which is mutually agreed by both the divisions.
1 comment… add one
  • i want an example to show how profit is calculated using
    the MARKET BASED transfer pricing.

Leave a Comment

Related pages

market skimming strategyinventory turnover ratio interpretationadvantages and disadvantages of importingstock exchange advantages and disadvantagesfactors affecting elasticity of demandkinds of preference sharesfloating currencyprivatisation definewhat is fdi and fiiwhat is the difference between debentures and sharesdisadvantages of penetration pricingdisadvantages of brandingexplicit cost vs implicit costcomplementary goods definition economicsdisadvantages of mail mergemixed economy advantagesdifference between term loan and overdraftover absorption of overheadscost push inflation definition economicsdiversifiable riskdisadvantages of mail mergethe concept of diminishing marginal utilityreserve accounting entriesunearned income entrywhat is derivative marketconcept of diminishing marginal utilitysocial media advantages disadvantagescrossed cheque definitiontypes of agro based industriesdirect and indirect quotation for exchange ratesexpenses meaning in hindisystematic risk and unsystematic riskordinary shares advantages and disadvantagesbenefits of cashless societyexample of penetration pricingcentrally planned economy advantages and disadvantagesexample of a monopolistic competition companydemerits of international tradedemonetized definitionaccounts receivable securitizationadvantages and disadvantages of global tradedisadvantages of globalisationassest meaningadvantages of convertible bondswhat is a horizontal mergerprivatisation definemonopolistic competition examples companiesconstant payout ratio dividend policy examplemeaning of current liabilitiesadvantages and disadvantages of globalization in international businessadvantages of fiimarginal diminishing utilitybreak even analysis advantages and disadvantagescapital turnover ratio calculationurbanisation advantageshypotheticationadvantages and disadvantages of social marketingdisadvantages of hire purchasedefine fictitious assetscharacteristics of monopolistic competition in economicsatm ka full formnationalization advantages and disadvantagesdisadvantages of mixed economic systemauthorized shares vs issued sharesequity shareholders and preference shareholdersunearned revenue on balance sheetwhat are the characteristics of traditional economyexamples of complements economicshorizontal integration disadvantagesbill discounting definitionsubstitutes and complements economicsdisadvantages of a joint ventureexamples of law of diminishing marginal utility