What is a Transfer Price?
The transfer price is the price based on which the divisions of the company transact which each other for trade supplies or labor. Transfer prices are used in a multi-entity setup where each entity is treated as a legal entity. The transfer price is also called transfer cost.
Breaking Down ‘Transfer Price’
In a multi-entity company, each entity is responsible for its own Return on Invested Capital (ROIC) and profits in accounting. In order determine the cost in multi-entity setup to transact between different divisions, transfer price is needed. The transfer price is not much different from the market prices as one of the entities loses out in such transactions. The price is either mapped as per the standard market price or less than the market price so that the performance is not affected.