ACCA Performance Management (F5) Certification Practice Exam

Which of the following is one of the methods for setting transfer price?

1. Standardized approach

2. Market based approach

3. Short-term contractual pricing

4. Benchmark pricing

The correct answer is: Market based approach

The market-based approach is a commonly used method for setting transfer prices because it relies on the prevailing market prices for similar products or services. This approach ensures that the transfer price reflects what external customers would pay in an open market scenario. Utilizing market prices as a reference point helps promote fairness and aligns the interests of both the selling and buying divisions within the same organization. This method can enhance managerial performance by providing clear benchmarks and maintaining market competitiveness. In contrast, other methods may not provide the same level of relevance to current market conditions. For example, a standardized approach may not account for fluctuations in demand or supply in the market, making it less adaptable. Short-term contractual pricing, while useful in certain contexts, might not consistently reflect the actual market value over time. Benchmark pricing could also be limited if the benchmarks used do not accurately represent comparable market transactions. Overall, the market-based approach is favored for its ability to uphold a connection with external market conditions, facilitating more effective internal pricing strategies.