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Transfer pricing

Basics

When interdivisional (intercompany) trading takes place between profit centres, the
centre providing the goods or services to the other will want to earn income from the
transfer. Unless it receives income from the transfer, it will make a loss on the
transaction.

Interdivisional transfers must therefore be priced. The price of the transfer is the
transfer price.

 The transfer is treated as an internal sale and an internal purchase within the
organisation. It provides sales income to the supplying division and is a
purchase cost for the receiving division.

 The sales income of one division is offset by the purchase cost of the other
division. The transfer therefore affects the profits of the two divisions
individually, but has no effect on the profit of the organisation as a whole.

Illustrations and further practice

Now try example 1 ‘Inter-divisional trading’ from Chapter 9.

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