Although the general rule for transfer prices is the outlay cost plus opportunity cost, many companies instead use negotiated prices to price their goods and services. When are negotiated transfer prices used? Are such prices consistent or inconsistent with responsibility accounting? Explain.
What will be an ideal response?
Negotiated transfer prices can be used when no market price exists for the transferred product or when a buying division can obtain a cheaper price outside of the organization.
Negotiated prices are typically consistent with responsibility accounting; they generally do not require intervention by top management and thus help to preserve divisional autonomy. This is important since the divisional structure is predicated on the advantage of giving managers a high degree of responsibility for their unit operations.
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