Which of the following is a key objective when agreeing a basis for setting transfer prices?

The primary objective of establishing a transfer pricing system is to promote goal congruence. This ensures that the decisions made by divisional managers, who are motivated to maximize their own division's profits, also align with the overall objectives and maximize the profits of the company as a whole. A well-designed system prevents sub-optimal decisions where a division might reject an internal transfer that would have been beneficial for the entire organization. The transfer price should guide managers to make the correct decision from a corporate viewpoint.

B. Increasing market share is a high-level corporate strategy; transfer pricing is an internal accounting mechanism and does not directly influence it.

C. Rewarding managers is an outcome of the performance evaluation system that transfer pricing supports, not the primary objective of setting the price itself.

D. While transfer prices are based on costs which may include overheads, their fundamental purpose is to influence decision-making and evaluate performance, not simply to act as a cost allocation method.

1. Horngren

C. T.

Datar

S. M.

& Rajan

M. V. (2015). Cost Accounting: A Managerial Emphasis (15th ed.). Pearson Education. In Chapter 22

"Multinational: Transfer Pricing and Tax Considerations

" the text explicitly states that the first and most important criterion for evaluating a transfer price is that it "should promote goal congruence" (p. 816).

2. Drury

C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning. Chapter 19

"Divisional financial performance measures

" outlines the objectives of transfer pricing

stating

"The transfer pricing system should be designed so that it encourages goal congruence" (p. 568). It emphasizes that this prevents sub-optimal decisions that harm overall company profitability.

3. Chartered Institute of Management Accountants (CIMA). (2022). CIMA Official Terminology 2022. The principles underlying the CIMA syllabus (including P2) consistently identify goal congruence

performance measurement

and divisional autonomy as the key objectives of transfer pricing. The system is designed to ensure divisional actions contribute to corporate goals.