Procurement Glossary
Internal transfer pricing: Definition, methods and application in Procurement
November 19, 2025
Internal transfer prices are a key cost accounting tool that enables the valuation of services between different areas of the company. In procurement management, they play an important role in cost transparency and the management of purchasing decisions. Find out below what internal transfer prices are, which methods are used and how they are used strategically in Procurement .
Key Facts
- Internal transfer prices evaluate the exchange of services between divisions
- They create cost transparency and support decentralized decision-making
- Various methods such as full cost, marginal cost or market price allocation are available
- In Procurement , they enable the evaluation of shared services and internal services
- Used correctly, they promote efficiency and cost awareness in the organization
Contents
Definition: Internal transfer prices
Internal transfer prices are prices for goods and services that are charged between different areas or profit centers of a company.
Basic properties
Internal transfer prices are used for the monetary valuation of services that are not transacted on the market. They make it possible to create cost transparency and measure the profitability of individual areas.
- Evaluation of internal service interdependencies
- Basis for decentralized control
- Income statement instrument
- Basis for make-or-buy decisions
Internal transfer prices vs. market prices
In contrast to market prices, internal transfer prices are not determined by supply and demand, but by the company's internal calculation procedures. They can be based on market pricing mechanisms or deviate from them.
Importance in Procurement
Internal transfer prices are relevant for Procurement when evaluating shared services, IT services or logistics services. They support the cost-benefit analysis and enable well-founded outsourcing decisions.
Methods and procedures
The design of internal transfer prices is based on various methodological approaches, which are selected depending on the objective and corporate context.
Cost-oriented billing
The cost-oriented method is based on the actual costs of the service provider. This can be done using full cost allocation or marginal cost allocation.
- Full cost allocation: Inclusion of all direct and indirect costs
- Marginal cost allocation: Only variable costs are allocated
- Standard cost allocation: Use of planned costs
Market-oriented billing
Internal prices are based on comparable market prices from external suppliers. This method promotes the competitiveness of internal areas and supports price negotiations with external suppliers.
Negotiation-oriented billing
Pricing is determined through negotiations between the divisions involved. This requires clear governance structures and can be supported by controlling mechanisms.
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Important KPIs for internal transfer prices
Measuring the success of internal transfer pricing requires specific key figures that evaluate both the efficiency and fairness of pricing.
Cost recovery ratio
This KPI measures the extent to which the internal transfer prices cover the actual costs of the divisions providing the services. A cost recovery ratio of 100% means full cost recovery.
- Calculation: (clearing revenue / total costs) × 100
- Target value: 95-105% depending on objectives
- Monitoring: Monthly or quarterly
Market price deviation
The deviation from comparable market prices shows the competitiveness of internal areas. This key figure supports target/actual comparisons and make-or-buy decisions.
Billing volume and frequency
The volume and frequency of internal settlements provide information about the intensity of use and the administrative effort involved. High transaction costs can impair the efficiency of the system.
Risks, dependencies and countermeasures
The implementation of internal transfer pricing involves various risks that can be minimized by taking appropriate measures.
Distortion of decisions
Incorrectly selected transfer prices can lead to suboptimal decisions. Internal prices that are too high encourage unnecessary outsourcing, while prices that are too low conceal inefficiencies.
- Regular review of pricing
- Benchmarking with external providers
- Transparent calculation basis
Complexity and administrative effort
Complex billing systems can increase process costs and limit flexibility. A balance between accuracy and practicability is required.
Conflicts of interest between areas
Differing objectives between the sectors can lead to conflicts in pricing. Clear governance structures and neutral arbitration bodies are necessary to ensure fair solutions.
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Practical example
A car manufacturer implements internal transfer pricing for IT services between the central IT department and the production areas. The IT department charges for its services based on full costs plus a 5% profit mark-up. This makes the actual IT costs transparent and the production areas can make well-founded decisions about external IT service providers. The system leads to a 15% reduction in IT costs through conscious use and optimization of services.
- Transparent cost allocation to consumers
- Incentive for efficient use of resources
- Well-founded make-or-buy decisions
Current developments and effects
Digitalization and new forms of organization are significantly changing the application of internal transfer prices and creating new opportunities for cost control.
Digitization of billing processes
Modern ERP systems and business intelligence tools enable automated and transparent processing of internal invoicing. Real-time reporting and dynamic price adjustments become possible.
- Automated cost recording and distribution
- Real-time analysis of cost structures
- Integration into dashboards and reporting systems
AI-supported pricing
Artificial intelligence supports the optimization of internal transfer prices by analyzing cost patterns and market data. Machine learning algorithms can generate price recommendations based on historical data and external benchmarks.
Agile organizational structures
Flexible billing models are becoming increasingly important in agile and project-based organizations. Budgeting processes are becoming more dynamic and require adaptable billing systems.
Conclusion
Internal transfer prices are a powerful tool for creating cost transparency and controlling decentralized decisions. In Procurement , they enable well-founded make-or-buy decisions and promote the efficiency of internal departments. Success depends on the careful selection of the calculation method and the regular review of pricing. Modern digital tools support automated processing and create new opportunities for optimization.
FAQ
What are internal transfer prices?
Internal transfer prices are prices for goods and services that are charged between different areas or profit centers of a company. They create cost transparency and enable the economic evaluation of internal service interdependencies.
What methods are there for pricing?
The three main methods are cost-oriented allocation (full costs or marginal costs), market-oriented allocation (based on external market prices) and negotiation-oriented allocation (through negotiations between the divisions). The choice depends on the objective and company context.
How are internal transfer prices used in Procurement ?
In Procurement , they are used to evaluate shared services, IT services or logistics services. They support make-or-buy decisions, enable cost comparisons with external providers and create incentives for the efficient use of resources in internal areas.
What are the risks of using it?
The main risks are distortion of decisions due to incorrect pricing, high administrative costs for complex systems and conflicts of interest between areas. These can be minimized through regular reviews, clear governance structures and balanced calculation methods.
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