Transfer prices based on actual costs of the selling division as opposed to standard costs:

Question

Quizplus · Accepted Answer

Transfer prices based on actual costs may reduce the incentive for the selling division to control its costs. This is because if the actual costs are higher than the transfer price, the selling division will not be able to make a profit. Therefore, the selling division may not have an incentive to control costs since any reduction in costs would not affect the transfer price. This may result in inefficient production and pricing decisions.

Transfer Prices Based on Actual Costs of the Selling Division