Question

What is transfer pricing in accounting?

Answer 1

In many big industrial houses, there are several departments producing different goods. These departments sell their production to outsiders. But the goods produced by one department may be used by another department of the same organization as a raw material for the goods produced by it. The price charged by one department from another department for goods supplied by it, is termed as transfer price. There are several ways to determine transfer price but in no case transfer price is lower than cost of production of the producing department.

For example, in an electronic goods manufacturing company, there are departments producing different electronic goods such as T.V. , Washing machine, Fans, Refrigerators, Air-conditioners , Component parts of electronic goods etc. Department producing component parts may sell the component produced to the outside buyers or these component parts may be bought by other departments within the same organization. The price at which component department sell the component parts to the other departments of its organization is termed as Transfer price.

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