Transfer Prices: An Exercise in Relevancy and Goal Congruence.

Abstract This article focuses on a study which proved the use of incremental costs as transfer prices to congruence of goals in a company. In the recent past, accountants and especially cost accountants have often behaved as if relevancy were irrelevant and the criterion of objective verifiability alone had any significance. Certainly, all those sunk costs have little relevancy to managerial problems. The result has necessarily been an ever increasing reliance by managers on engineering cost estimates, and a strong tendency for both managers and engineers to ignore the irrelevant, fully-allocated, original, historical cost data reported by cost accountants. It is alleged that, if an external market price exists, arrived at by competitive, arm's-length bargaining between independent buyers and sellers, such a market price is a valid transfer price. Such a transfer price tends to be irrelevant, and tends to lead to lack of goal congruence.