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Cost-based transfer price

Cost-based transfer price is an internal charge derived from the selling division's costs, set at variable cost, full absorption cost, or cost plus a markup when no reliable external market price exists.

Also known ascost-based transfer pricing

ByHoang TruongUpdated

FrameworkTransfer pricing

See it move

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A stacked bar builds the cost-plus transfer price of €66 per unit from three layers: variable cost of €40, fixed overhead of €15, and a 20% markup of €11. The full stack makes three distinct transfer price levels visible within a single chart — variable cost only at €40, full cost at €55, and cost-plus at €66 — showing how each approach progressively recovers more of the selling division's costs.

Where it fits
SubjectManagerial AccountingAdvancedTopicTransfer PricingAdvanced

The formula

LaTeX
Transfer Price=Variable Cost per Unit\text{Transfer Price} = \text{Variable Cost per Unit}

Variable-cost variant — buyer pays marginal cost only

LaTeX
Transfer Price=Variable Cost per Unit+Allocated Fixed Overhead per Unit\text{Transfer Price} = \text{Variable Cost per Unit} + \text{Allocated Fixed Overhead per Unit}

Full (absorption) cost variant

LaTeX
Transfer Price=Full Cost per Unit×(1+Markup %)\text{Transfer Price} = \text{Full Cost per Unit} \times (1 + \text{Markup }\%)

Variables

Variable cost plus allocated fixed overhead per unit (€)
Profit markup expressed as a decimal (—)

Cost-plus variant — gives the selling division a positive margin

Check yourself

PracticeCORE

Division A produces a component at a variable cost of €60 per unit and fixed manufacturing overhead of €15 per unit (full absorption cost: €75). The company sets a cost-plus transfer price equal to full absorption cost plus a 20% markup. What is the transfer price per unit?

Select an answer to check your understanding.