Transfer prices based on flexible costs - will mis-cost transfers if the costing system allocates capacity related
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Question:
Transfer prices based on flexible costs
- will mis-cost transfers if the costing system allocates capacity related costs to transfer in a way that does not reflect the underlying behavior or cause of capacity related costs.
- promotes sourcing decisions of intermediate goods that are best for the organization in the long run.
- Results in reporting chronic losses for the supplying division, which is motivational debilitating.
- overestimates in the long run marginal cost to the supplying unit and the overall organization.
- Inevitably cause reduced demand on the supplying division.
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