This refers to a technique for calculating an appropriate transfer price for internal goods or services.
Market based, or arms length, transfer pricing assumes goods and services used internally are ‘sold’ in a similar way to external sales. There are no internal concessions or cost offsets; the approach assumes that, if the supplying unit is operating efficiently it should be able to make a profit at this price; equally, if the receiving unit is operating efficiently, it should be able to make a profit since it would have to purchase the item at this price if it was not available internally.
Market based cost is a term normally found in management accounting and performance management. Explore our learning zone to discover more