Inefficiencies are charged to the department that is receiving, not transferring, the goods.
Cost-based transfer price provide clarity and administrative convenience.
In cost-based transfer pricing, costs do not need to be adjusted by any markup.
The basic issue of transfer prices is how much should one unit of a company charge another unit of the same company for its goods or services. The goal in setting a transfer price is that the method used will stimulate the department managers to do what will provide the greatest benefit to the company as a whole, rather than to act in their own interest. A transfer price based on actual cost does not motivate managers to use resources more efficiently, which can lead to suboptimal decisions for the company as a whole.
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