what do you understand by transfer pricing?

Transfer pricing is an arrangement within a business for transferring goods and services from one department to another. Each department is set up to operate as a profit center or a cost center. A profit center department provides goods and services to other departments and charges for them. A cost center charges other departments for its goods and services also but is not organized to show a profit. the transfer prices are designed to provide control over operations and also to evaluate the efficiency of management. there is no actual payment taking place, it is only a matter of recording money transfers in the books of the company. One department's budget is debited and another's credited. In the end the results show if everything was done according to plan and what the variations are from the plan.