Cost Accounting (15th Edition)

Published by Prentice Hall
ISBN 10: 0133428702
ISBN 13: 978-0-13342-870-4

Chapter 22 - Management Control Systems, Transfer Pricing, and Multinational Considerations - Assignment Material - Questions - Page 865: 22-14

Answer

No, I don't agree with the statement. Under the general guideline for transfer pricing, the minimum transfer price should not vary based on whether the supplying division has unused capacity or not. The minimum transfer price is typically determined by the incremental or variable cost of producing the product or service within the supplying division. This cost remains constant whether or not there is unused capacity. It ensures that transfer prices are based on the actual costs incurred by the supplying division to produce the transferred goods or services, promoting fairness and efficiency in internal transactions. Unused capacity may affect other aspects of decision-making, but it does not alter the basic principle of using incremental cost as the minimum transfer price.

Work Step by Step

No, I don't agree with the statement. Under the general guideline for transfer pricing, the minimum transfer price should not vary based on whether the supplying division has unused capacity or not. The minimum transfer price is typically determined by the incremental or variable cost of producing the product or service within the supplying division. This cost remains constant whether or not there is unused capacity. It ensures that transfer prices are based on the actual costs incurred by the supplying division to produce the transferred goods or services, promoting fairness and efficiency in internal transactions. Unused capacity may affect other aspects of decision-making, but it does not alter the basic principle of using incremental cost as the minimum transfer price.
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