COST ACCOUNTING
TRANSFER PRICING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Division A sells goods internally to Division B of the same company. The prevailing external price of Division A’s product is P 100 per unit plus transportation costs of P 20 per unit to transport the goods to Division B. Division A produces each unit for P 60 per unit. If the market-based transfer pricing is to be used, the transfer price must be set at
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P 60
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P 80
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P 100
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P 120
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Explanation:
Detailed explanation-1: -Transfer pricing accounting occurs when goods or services are exchanged between divisions of the same company. A transfer price is based on market prices in charging another division, subsidiary, or holding company for services rendered.
Detailed explanation-2: -Transfer Price = Outlay Cost + Opportunity Cost For example, consider a division that makes hats. The cost of making one hat is $2. That division can sell the hat in the marketplace for the market price of $5. Therefore, the opportunity cost of selling the hat internally instead of externally is $3.
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