ABSTRACT
Transfer prices are purely accounting prices used in accounting for transactions between different entities which are part of the same organization, usually between divisions of the same corporation or between corporate affiliates. Such prices perform a number of functions. One set of functions might best be described as motivation and control. Transfer prices used for this purpose help to administer a decentralized organization by conveying information. They enter divisional profit or contribution objectives, and provide the basis for calculating and reporting divisional performance. The second set of functions relates to the outside world rather than the world within the corporation. Here the role of the transfer price is to allocate group income among the constituent units, in order to determine the proper share of such income attributable to tax authorities, to minority interests and to the parent company and its shareholders.
