A number of transfer pricing issues can arise in organizations.

a. Transfer pricing issues typically occur in decentralized organizations.

b. Financially based evaluation programs often encourage managers to act in the best interests of their own division, rather than the best interests of the company as a whole,

c. Typically, three methods are used for determining transfer prices among business units:

(1) Cost-based transfer pricing policies use either full cost or variable cost as a basis for determining transfer prices.

(2) Market-based transfer pricing policies rely on external market prices for identical (or comparable) goods or services to establish transfer prices.

(3) Negotiated transfer pricing policies permit managers to consider factors such as cost and external market prices when negotiating a mutually acceptable transfer price between two business units.