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Horngren'S Financial And Managerial Accounting
Found in: Page 1355

Short Answer

Explain the difference between market-based transfer prices and cost-based transfer prices.

Transfer cost based on the current market price of the goods is known as market-based transfer cost. The cost of manufacturing things serves as the setting for cost-based transfer pricing.

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Step by Step Solution

Step 1: Meaning of market-based transfer prices

For internally exchanged products, market-based transfer prices are routinely used as price markers for decentralised control of internal production processes. Their use aims to create an internal market that would foster production motivation and efficiency, suggesting a beneficial effect of performance value-based transfer pricing.

Step 2: Difference between market-based transfer prices and cost-based transfer prices

The transfer price is determined by the market cost for comparable goods and services under a market-based process. If the upstream division needs to make a profit on internal sales, the exchange cost is calculated based on a markup based on production costs using a cost-based process.

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