Setting transfer prices at full cost can lead to bad decisions because, among other reasons, full cost does not take into account opportunity costs.

Question

Quizplus · Accepted Answer

Full cost includes direct and indirect costs, but it does not consider the opportunity cost of selling a product or service internally versus externally. Opportunity cost refers to the value of the next best alternative that is given up when a choice is made. Therefore, setting transfer prices at full cost may not reflect the true value of a product or service and can result in suboptimal decision-making.

Setting Transfer Prices at Full Cost Can Lead to Bad