Transfer Price

AAA

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".

INVESTOPEDIA EXPLAINS '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.

VIDEO

Loading the player...
RELATED TERMS
  1. Deal Slip

    A record of the essential details of a transaction entered into ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating ...
  3. Revenue

    The amount of money that a company actually receives during a ...
  4. Managerial Accounting

    The process of identifying, measuring, analyzing, interpreting, ...
  5. Expense

    1. The economic costs that a business incurs through its operations ...
  6. Profit Center

    A branch or division of a company that is accounted for on a ...
RELATED FAQS
  1. 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 >>
Related Articles
  1. Investing

    What's a Transfer Price?

    A transfer price is what one unit of a business charges another unit of the same business for a good or service. The transfer price is usually close to the prevailing market rate when different ...
  2. Investing Basics

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  3. Options & Futures

    Find Quality Investments With ROIC

    Return on invested capital is a great way to measure the true value produced by a company. Learn to use the ROIC metric and increase your chances of finding successful investments.
  4. Options & Futures

    Advanced Financial Statement Analysis

    Learn what it means to do your homework on a company's performance and reporting practices before investing.
  5. Investing

    What's a Run Rate?

    Run rate is a term used to denote annualized earnings extrapolated from a shorter time frame. Management uses the run rate to estimate future revenues.
  6. Professionals

    Financial Accounting

    Financial accounting is the process of gathering, recording, summarizing and reporting financial data relating to a business. The ultimate goal is to accurately report the financial picture and ...
  7. Investing

    What are Direct Costs?

    Direct costs for finished goods refer to the items and services directly used in production. Other costs such as rent and insurance for the production site are indirect costs. These costs may ...
  8. Investing

    What is Contingent Liability?

    A contingent liability is an amount that might have to be paid in the future, but there are still unresolved matters that make it only a possibility. Lawsuits and the threat of lawsuits are the ...
  9. Investing

    What's Accrued Interest?

    Accrued interest has two meanings. In accounting, it is interest that has been earned, but the time for payment has not yet occurred.
  10. Investing

    What is Absorption Costing?

    Absorption costing is an accounting method primarily used in manufacturing. In absorption costing, the cost of a manufactured product includes the direct costs plus an apportioned share of the ...

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center