Question

• Standard costs rather than actual costs should be used in transfer-pricing methods because:

• standard costs facilitate a professionally negotiated, amicable settlement between the buying and selling divisions.

• inefficient producing divisions could pass on their inefficiencies to buying divisions in the transfer price.

• financial accounting rules (GAAP) require the use of standard costs.

• standard costs are more readily available than actual costs.

• tax rules require the use of standard costs.

Answer 1

Answer : B) Inefficient Producing Divisions Could Pass on their Inefficiencies to buying Division in the transfer Price

Transfer Price : Price Decided by the Firm to Transfer the Out-put of One Division to another Division With in the firm. To Determine the Transfer price Best Method to Determine the Transfer price is the Standard cost consideration Rather than the Actual cost:

Becasue :

Some Inefficient Divisions May have the more Actual cost than the Standard one. If Trasfered with Actual cost it will Impose additional cost burden to the next Division to decide the Price of the Product.