The price at which different departments of the company continues their transactions internally can be considered as the transfer price. The transactions may contain the labor between various departments or the trade of supplies. The transfer pricing method generally occurs when the multi entity firm can be treated as the separate entities individually.
Purposes of Transfer Pricing
Let us go through some important reasons for which the transfer pricing scheme can be applied:
- The transfer pricing method allows the company to generate profit figures for each division in separate manner.
- The sales, pricing and the production departments can be coordinated through this method. The managers can also get aware of the value of the services and the products in other segments of the firm.
- It helps in generating not only the reported profits of the entire center but also the resource allocation of the organization.
- Performance evaluation of each department becomes easy as it can generate separate profits.