Saturday, November 1, 2014

Transfer Pricing

  • A transfer price is that notional value at which goods & services are to be transferred by the supply division to the receiving division. The goods that are produced by the buying division & sold to the outside world are known as final products.
  • The department who supply the goods are called supply division & the department who receives the goods are called receiving division.
  • Transfer price becomes Revenue for Supply Division. & transfer price become cost for the Revenue Division.

        General Rule is that:-
                           TRANSFER PRICE:- VARIABLE COST + CONTRIBUTION LOST
  • Goods & services which are the outputs of the 1 division, would be transferred to another division as inputs. It may be:-

1.       From 1 factory to another under the same company or,
2.       From 1 division to another division.
3.       From a subsidiary to holding company & vice versa. In such cases, there is a need to set “price” for the goods & services sold/transferred. Such a price, which applies within an organization, is called transfer pricing. 

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