COST ACCOUNTING
TRANSFER PRICING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The Davao division sells goods internally to the Cebu division of the same company. The quoted external price in industry publications from a supplier near Davao is P 200 per ton plus transportation. It costs P 20 per ton to transport the goods to Cebu. Davao’s actual market cost per ton to buy the direct materials to make the transferred product is P 10. Actual per ton direct labor is P 50. Other actual costs of storage and handling are P 40. The company president selects P 220 transfer price. This is an example of
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Negotiated transfer pricing
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Market-based transfer pricing
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Market-based transfer Pricing
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Cost plus 20% transfer pricing
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Explanation:
Detailed explanation-1: -Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided.
Detailed explanation-2: -When a division is operating at full capacity, the transfer price to other divisions should not include opportunity costs. The selling division in a transfer pricing situation should want the transfer price to cover at least the variable cost per unit plus the lost contribution margin per unit on outside sales.
Detailed explanation-3: -Transfer price, also known as transfer cost, is the price at which related parties transact with each other, such as during the trade of supplies or labor between departments.
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