What is transfer pricing?

Transfer pricing involves the price that one division (or other responsibility center) of a company charges for the goods or services that it provides to another division of the same company.

Depending on the production capacity and the market for each division's goods or services, a transfer price could be based on cost, market prices, or some other amount.

A concern of transfer pricing is whether the amount of the transfer price will cause a divisional manager to take action that is not consistent with the action that is best for the company as a whole.