Transfer price is defined as the price at which two parties transact with each other. For example, during the trade of supply or labor between the two departments. These prices are used when two individual parties of a big multi-entity firm are treated as though they are run separately. This is common in very large corporations. A transfer price is also called transfer cost.
There are five types of transfer pricing methods that can be applied. Three of the five are traditional pricing methods while the last two are transactional pricing methods.