Transfer pricing refers to the costs incurred in transferring the goods from one department to another within the organization. At times what happens is that the finished product of one department is the input for the next department and the cost incurred in transferring of materials is called transfer pricing. The prices of these materials is not set according to the market mechanism of demand and supply but are determined by the organization itself. The price set by the firm is called standard cost and the transfer price equals standard price plus the transportation costs. For example if a firm has a subsidiary in a foreign country then all the costs incurred in transferring the goods to that place will be transfer price. It also helps the organizations to save taxes as their costs will appear to be higher and will reduce their revenues.
