Second, if cost is used as the transfer price, the selling division will never show a profit on any internal transfer. The only division that shows a profit is the division that makes the final sale to an outside party.
Third, cost-based prices do not provide incentives to control costs. If the actual costs of one division are simply passed on to the next, there is little incentive for anyone to work to reduce costs. This problem can be overcome by using standard costs rather than actual costs for transfer prices.
Despite these shortcomings, cost-based transfer prices are often used in practice. Advocates argue that they are easily understood and convenient to use.