Q. Show the Cost based approaches - Method of transfer pricing?
The pricing of products or services are based on their full or variable (marginal) production cost per unit. Full cost pricing would calculate a full cost per unit (variable and fixed cost per unit) and then add a mark-up to earn a profit. Marginal (variable) costing would add a mark-up to the variable production cost only to arrive at a transfer price, therefore does away with the need to consider cost apportioning methods like absorption or activity based costing (ABC). It could be fairer to the buyer if they were charged a transfer price based on standard (budgeted) cost not actual cost by an internal seller, this would ensure any inefficiencies by the seller are not passed on to the buyer in the form of higher prices. The main problem of cost based approaches is that they ignore what external competition are charging, for this reason goal incongruent decisions can often arise e.g. a decision by a buyer to buy elsewhere from an external supplier, which harms group financial results.