Transfer Price

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DEFINITION of 'Transfer Price'

The price at which divisions of a company transact with each other. Transactions may include the trade of supplies or labor between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities.

Also known as "transfer cost".

BREAKING DOWN 'Transfer Price'

In managerial accounting, when different divisions of a multi-entity company are in charge of their own profits, they are also responsible for their own "Return on Invested Capital". Therefore, when divisions are required to transact with each other, a transfer price is used to determine costs. Transfer prices tend not to differ much from the price in the market because one of the entities in such a transaction will lose out: they will either be buying for more than the prevailing market price or selling below the market price, and this will affect their performance.

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RELATED FAQS
  1. How does transfer pricing affect managerial accounting?

    In managerial accounting, the transfer price represents a price at which one subsidiary, or upstream division, of the company ... Read Full Answer >>
  2. What is the difference between transfer price and standard cost?

    While an item's standard cost can be used to determine its transfer price, the two values are inherently different. An item's ... Read Full Answer >>
  3. How does transfer pricing help business?

    Transfer pricing involves the trade of goods or services between two related companies, and both can come out the winner. ... Read Full Answer >>
  4. Are there any regulations on transfer pricing?

    The United States, like many nations, imposes some restrictions and regulations on transfer pricing. Tax treatment of transfer ... Read Full Answer >>
  5. How are transfer prices set?

    The United States, like most nations, does not want to allow transfer pricing methods that reduce the amount of taxes the ... Read Full Answer >>
  6. How are arm's-length transactions determined by law?

    The law defines arm's length transactions as those whose parties are independent and transact on an equal footing. This principle ... Read Full Answer >>
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