13. Transfer prices based on flexible costs

- will mis-cost transfers if the costing system allocates capacity related costs to transfer in a way that does not reflect the underlying behavior or cause of capacity related costs.

- promotes sourcing decisions of intermediate goods that are best for the organization in the long run.

- Results in reporting chronic losses for the supplying division, which is motivational debilitating.

- overestimates in the long run marginal cost to the supplying unit and the overall organization.

- Inevitably cause reduced demand on the supplying division.