Management Accounting · Transfer Pricing

Transfer Pricing Meaning and Objectives for CMA Inter

Updated 10 October 2026 · Fact-checked

Transfer pricing is the price at which one division of a company sells goods or services to another division of the same company. It is an internal price, not a market sale. Its objectives are fair performance evaluation, goal congruence, divisional autonomy, and sound decisions on resource use.

Understand Transfer Pricing: Meaning and Objectives

A large company is often split into divisions, each run by a manager. Division A may make a component, and Division B may use it to make the final product. Goods move between them. The company has to put a value on that movement. That internal price is the transfer price.

The transfer price is revenue for the selling division and cost for the buying division. It cancels out for the company as a whole, because the company pays itself. But it changes the profit shown for each division. That is why it matters.

Without a transfer price, you cannot measure each division's profit, ROI or residual income. A division that supplies others would show no revenue. A division that receives goods would show no cost. Transfer pricing makes divisions act like separate businesses, so that managers can be held responsible for results.

The main objectives are:

Performance evaluation: the price should let you judge each division's profit fairly.
Goal congruence: when divisional managers act in their own interest, they should also act in the company's interest.
Divisional autonomy: managers should be free to make decisions about buying and selling, without constant interference from head office.
Optimal use of resources: the price should guide supply and buying decisions that maximise total company profit.
Motivation: managers should feel the system is fair, so they stay committed.

These objectives can conflict. A price that gives a division full freedom may lead it to reject a transfer that benefits the company. A good transfer price balances them. In exams, you are often asked to state the meaning and list and explain the objectives, sometimes with a short example.

Key rules to remember

Meaning of transfer price: Transfer price = internal price charged by the supplying division to the receiving division; It is revenue for the seller division and cost for the buyer division. It nets to zero for the company as a whole.
Divisional profit of the selling division: Profit = (Transfer price − Cost per unit) × Units transferred; Use this when a question asks you to show how the transfer price changes divisional profit.
Effect on company profit: Total company profit does not change because of the transfer price itself; Only the split of profit between divisions changes. Company profit changes only if the price leads to different decisions, such as rejecting a beneficial transfer.

How to solve Transfer Pricing: Meaning and Objectives questions

Use this method for any theory or short numerical question on the meaning and objectives of transfer pricing.

1Define transfer pricing in one sentence: the price charged for goods or services passing between divisions of the same company.
2State why it is needed: divisions are treated as profit or investment centres, so each needs revenue and cost figures.
3List the objectives with a heading for each: performance evaluation, goal congruence, divisional autonomy, optimal resource use, motivation.
4Add one line of explanation under each objective. Do not just name it.
5If numbers are given, compute the profit of each division at the stated transfer price.
6Check whether the transfer price changes the company total. It should not, unless decisions change.
7Close with a short conclusion: a good price balances the objectives, and they may conflict.

Quickest way: Define, list, link to profit

When to use it: Use this for MCQs and for 4 to 6 mark short answers when time is short.

Write the definition first: internal price between divisions.
Remember the five objectives as: evaluate, align, autonomy, allocate, motivate.
For numbers, work out each division's profit separately, then add them. The total should match the company profit.
For MCQs, reject any option that says the transfer price changes total company profit by itself.

Common mistakes in Transfer Pricing: Meaning and Objectives

Treating transfer price as a sale to an outside customer
The word 'price' suggests a market sale.
Fix: Say clearly it is an internal price between divisions of one company. Total company profit is not affected by it directly.
Listing objectives with no explanation
Students memorise names and run short of time.
Fix: Write one line for each objective, saying what it means and why it matters.
Confusing goal congruence with divisional autonomy
Both relate to manager behaviour.
Fix: Goal congruence means divisional decisions help the whole company. Autonomy means freedom to decide. Head office control helps congruence but reduces autonomy.
Saying a higher transfer price raises company profit
Students look only at the selling division.
Fix: A higher price raises the seller's profit and lowers the buyer's by the same amount. The company total is unchanged.
Ignoring the conflict between objectives
Notes list objectives as if all can be met together.
Fix: Mention that a price that gives full autonomy may lead to decisions that harm the company, so a balance is needed.

Worked examples

Example 1

Division X makes a component at a variable cost of ₹40 per unit and transfers 5,000 units to Division Y at ₹60 per unit. Y uses it in a product it sells externally for ₹110 per unit, with other variable costs of ₹20 per unit. Compute the profit of each division from this transfer and the company, ignoring fixed costs.

Show the solution

Division X profit = (60 − 40) × 5,000 = 20 × 5,000 = ₹1,00,000.
Division Y cost per unit = 60 (transfer) + 20 (other) = ₹80.
Division Y profit = (110 − 80) × 5,000 = 30 × 5,000 = ₹1,50,000.
Company profit = 1,00,000 + 1,50,000 = ₹2,50,000.
Check: company profit per unit = 110 − 40 − 20 = ₹50. For 5,000 units this is ₹2,50,000. It matches.

Answer: X earns ₹1,00,000, Y earns ₹1,50,000, and the company earns ₹2,50,000. The transfer price only splits the profit between divisions.

Example 2

Using the data of the first example, the transfer price is raised to ₹70 per unit. Show the effect on each division and on the company, and explain what this tells you about the purpose of transfer pricing.

Show the solution

Division X profit = (70 − 40) × 5,000 = 30 × 5,000 = ₹1,50,000.
Division Y cost per unit = 70 + 20 = ₹90.
Division Y profit = (110 − 90) × 5,000 = 20 × 5,000 = ₹1,00,000.
Company profit = 1,50,000 + 1,00,000 = ₹2,50,000, the same as before.
Change: X gains ₹50,000 and Y loses ₹50,000. The net change is nil.

Answer: The company profit stays at ₹2,50,000. The price only moves ₹50,000 of profit from Y to X. So the price should be set to evaluate divisions fairly and to encourage decisions that suit the company, not to change total profit.

Exam tips

Start every theory answer with a clear one-line definition. It earns marks quickly.
Give each objective its own bullet with a short explanation. Examiners look for separate points.
In numerical questions, always show each division's profit and the company total. The check that totals match is worth showing.
For MCQs, remember that the transfer price alone never changes total company profit, and a higher price helps the seller and hurts the buyer.
If asked about conflicts, mention goal congruence versus autonomy with a one-line example.

Practice questions from Transfer Pricing

Transfer Pricing: Meaning and Objectives in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Transfer Pricing: Meaning and Objectives: frequently asked questions

What is transfer pricing in management accounting?

It is the price set for goods or services passed from one division of a company to another division of the same company. It is used to measure each division's profit and to guide decisions.

What are the main objectives of transfer pricing?

The main objectives are fair performance evaluation, goal congruence, divisional autonomy, optimal use of resources, and motivation of managers. A good price balances these.

Does the transfer price affect the company's total profit?

Not directly. It is revenue for one division and cost for another, so it cancels out. It affects company profit only if it leads managers to take different decisions.

What is goal congruence in transfer pricing?

It means the divisional manager, while pursuing the division's own targets, also acts in a way that benefits the whole company. The transfer price should be set to support this.