When is it more appropriate to use market-based transfer price rather than cost-based transfer price?
When is it more appropriate to use market-based transfer price rather than cost-based transfer price?
Transfer pricing:- Its the price at which one unit of a company sells goods to its another unit. This helps in maximizing the profit for the overall organization. Also, departments or subsidiaries are able to minimize their cost and time with the help of transfer pricing. The company sets its profit centers and each of them helps in increasing the revenue of its own.
For example- if one department charges a higher price from the other department of the same company then the selling department profit earning is more than the buying department.
Market-based transfer pricing:- In this, department or division set their transfer price as per the price prevailing in the market. This pricing is mostly used in competitive markets.
Cost-based transfer pricing:- In this, pricing is based on the total cost of production, manufacturing cost, and distribution cost. Product price estimate by adding a portion of the total production cost so that departments/division can earn profits.
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