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dual-rate transfer prices


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*Transfer prices that are set at different levels for the supplying and receiving divisions of an organization. The dual prices method charges a low price, say a price based on the marginal cost, to the buying division, while at the same time crediting a high price, say a price based on full cost pricing, to the selling division. The idea is that this will encourage a buying division to buy within the organization without penalizing the selling division. However, this is only likely to be beneficial to the organization as a whole if the selling division has sufficient spare capacity to supply the buying division’s needs. A compensating entry to eliminate unrealized profits is required in the books of the head office when consolidation of the divisional results takes place. Managers rarely use this method in practice as it can easily lead to confusion.

Subjects: Accounting.


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