Reasons For Implementing Intra Group Transfer Pricing(Part1)

It is interesting to find that in an organization where we have various departments, where one department act as “internal supplier” to another department which is then the “internal customer” there will be conflicts in exercising transfer pricing for divisional performance evaluation/management.

The question pose in this article is that whether an organization really need to implement such intra transfer pricing.

Before we answer that question, let understand what is transfer price.

“Transfer price is a price at which goods or service are transferred from one process or department to another or from one member a group to another.”

So what might be some of the possible rationales for having or to implement such intra transfer pricing?

Some of the reasons/justifications includes the following:

• by having a transfer pricing system, it allows a cost centre to be turned into a profit centre by enabling it to “sell” the goods or services it supplies to other part of the organization. By doing so, top management can review/monitor the efficiency of the centre by setting it profit targets.
• for the selling centre, this will hopefully encourage the relevant department or division to be efficient & effective to keep costs down and profits up.
• for the buying centre/department/division, it will encouraged the use of the transferred product economically because any waste will increase the buying centre’s costs and reduce their profits.