Flashcards
Flashcards_Reviewer_Chapter 7 & 8
Cards in this deck (35)
- 1What is the relationship between responsibility and authority?There should be a direct relationship between responsibility and authority. If an individual is answerable for his or her actions (responsible), that individual must have the authority to carry out actions and execute decisions. There is an undermining of a person’s performance and incentive when authority is not given while the person is still held accountable.
(7-1) - 2Why is it necessary to have a clearly defined organizational structure before responsibility accounting can be effective?There must be a clear chain of command. Individuals must know to whom they are responsible and for what tasks or jobs they are responsible. Ideally, each individual in the organization should have only one boss. If an individual has more than one boss, the tasks for which the individual is responsible to each boss should be defined.
(7-2)
- 3The standard cost sheet for Largo Corp. showed the following material cost related to one unit of product: 4 pieces at $4 per piece = $16 per unit During February 19X1,10,000units were produced. The costs recorded showed the following: Purchase of material 48,000 pieces at $3.80 Issue of material 43,000 pieces Determine the material purchase price variance and material quantity (usage) variance.Materials purchase price variance = AQ(AP -SP)
= (48,000 pieces)($3.80-$4.00)
= $9,600 (F)
Materials quantity (usage) variance = (A&-SQ)SP
= (43,000 pieces -40,000 pieces) ($4.00) = $12,000 (U)
(7-3) - 4Give the significance and possible explanation of each materials variance in the preceding problem.Materials purchase price variance (Favorable). This variance shows the influence on cost of a reduction in prices. It may be explained by a purchase of standard-grade material at less-than-standard prices, or it may
be explained by a purchase of a lower-grade material in order to economize on price.
Materials quantity (usage) variance (Unfavorable). This variance shows an increase in cost due to an increase in quantities used. It may be explained by poorly trained workers, by improperly adjusted machines, or by outright waste on the production line. In view of the favorable price variance, it is possible
that the quality of the material was inferior, resulting in breakage in production.
(7-4) - 5What are some causes of unfavorable materials purchase price variances?Unfavorable materials price variances may be caused by: inaccurate standard prices, inflationary cost increases, scarcity in raw material supplies resulting in higher prices, and purchasing department inefficiencies.
(7-5)
- 6The purchasing department of a large corporation using the responsibility accounting system delays placing an assembly department order for 10,000 parts at $2.00 each. By the time the order is placed, the price has risen to $2.20. Which department should be assigned the additional charges incurred? Why?The purchasing department should absorb the additional costs:, it did not place the order when originally
received. This will focus attention on cost efficiency as a function of time.
(7-6) - 7The standard cost sheet for York Corp. shows the following cost for a unit of product: Direct labor: 2% hours at $7 an hour During February 19x1,10,000 units were completed. The actual cost incurred was: 28,000 hours at $8 per hour = $224,000 Determine the labor rate variance and labor efficiency variance.Labor rate variance = AH(AR-SR)
= (28,000 hours)($8 - $7)
= $28,000 (U)
Labor efficiency variance = (AH -SH) SR
= (28,000 hours -27,500 hours)($7)
= $3,500 (U)
(7-7) - 8Give the significance and possible explanation of each labor variance in the preceding problem.Labor rate variance (Unfavorable). This variance shows the effect on cost of an increase in the hourly rate, as compared to the standard rate. It may be explained by an increase in wages, poor scheduling of
production resulting in overtime work, or the use of persons commanding higher hourly rates than contemplated in the standards.
Labor efficiency variance (Unfavorale). This variance shows the effect on cost of an increase in the number of hours worked, as compared to the standard time required to produce 10,000 units. It may be explained by poor supervision, poor quality of workers, improperly trained workers, poor quality of
materials requiring more labor time in processing, or machine breakdowns.
(7-8)
- 9Direct labor and variable overhead standards per finished unit for Century-Fox Metals Company are as follows: variable overhead, 10 hours at $2.00 per hour. During October, 5,000 units were produced. Direct labor hours used were 52,000 hours. Actual variable overhead costs were $109,200. Determine the spending variance and efficiency variance for variable overhead.Variable overhead spending variance
= AH(AR -SR)
= (AH X AR) -(AH X SR)
= (52,000 hours)($2.10 -$2)
$109,200 -$104,000 = $5,200 (U)
Variable overhead efficiency variance
= (AH -SH) SR
= (52,000 hours -50,000 hours)($2) = $4,000 (U)
(7-9) - 10Give the significance and possible explanation of each variable overhead variance in the preceding problem.Variable overhead spending variance (Unfavorabk). This variance might be caused by a large number of factors: acquiring supplies for a price different from the standard, using more supplies than expected for
the actual level of activity during the period, paying indirect laborers at a different rate than the standard rate, using more indirect labor than expected, waste, and theft of supplies.
Variable overhead efficiency variance (Unfavorable). This variance might be caused by such factors as: poorly trained workers, poor-quality materials, faulty equipment, work interruptions, poor production scheduling, poor supervision, employee unrest, etc.
(7-10)
- 11E. T. Toys, Inc., produces toys for national distribution. The management has recently established a standard cost system to control costs. The standards on a particular toy are: Materials: 12 pieces per toy at $0.56 per piece Labor: 2 hours per toy at $13.75 per hour During the month of February 19A, the company produced 1,000toys. Production data for the month are as follows: -Materials: 17,500 pieces were purchased for use in production, at a total cost of $8,925, of which 3,500 pieces were still in inventory at the end of the month. -Labor: 2,500 hours were worked, at a cost of $10,500. (a) Calculate the materials purchase price variance. (b) Calculate the materials quantity (usage) variance. (c) Calculate the labor rate variance. (d ) Calculate the labor efficiency variance.Materials purchase price variance = (17,500 pieces)($0.51 -$0.56)
= $8,925 -$9,800
= $875 (F)
Materials quantity (usage) variance = (14,000 pcs. -12,000 pcs.) ($0.56)
= $1,120 (U)
Labor rate variance = (2,500 hours)($4.2 -$3.75)
1$10,500 -$9,375
= $1,125 (U)
Labor efficiency variance = (2,500 hours -2,000 hours)($3.75)
= $1,875 (U)
(7-11) - 12The Schock Manufacturing Company uses a standard cost system. The standards are set before January 1 each year and remain unchanged until December 31. The standard costs set for the next year are: Direct materials $10.00 per unit Direct labor 7.50 per unit Overhead 6.00 per unit The labor standard above includes a methods change from 2 hours to 1%hours per unit, effective February 28, and a change in labor rates from $4.00 to $5.00 per hour effective February 28. Overhead will be applied on the basis of standard labor hours. The standard overhead rate per hour is $4.00 (11/2hours X $4.00 = $6.00 per unit). The variable portion is $2.00 per hour. The original budgeted production volume for January was 5,000 units. The actual cost data for January are: Units produced 6,000 units Direct materials used $62,000 Direct labor 11,000 hours costing $46,000 Actual overhead incurred: Variable $23,000 Fixed $14,000 1. Compute the variances for direct labor and variable overhead.1. For the direct labor variances:
Labor rate variance =
(11,000 hours)($4.181 -$5)
= $9,OOO (F)
Labor efficiency variance =
(11,000 hours -9,000 hours)($5)
= $10,000 (U)
For the variable overhead variances:
Variable overhead spending variance=(11,000 hours)($2.091 -$2)
= $1,000 (U)
Variable overhead efficiency variance=(11,000hrs.-9,000 hrs.) ($2)
= $4,000(U)
(7-12.1) - 13At the beginning of 19x4, Beal Company adopted the following standards: Direct material (3 pounds @ $2.50 per pound) $ 7.50 Direct labor (5 hours 0 $7.50 per hour) 37.50 Factory overhead: Variable ($3.00 per direct labor hour) 15.00 Fixed ($4.00 per direct labor hour) 20.00 Standard cost per unit $80.00 Normal volume per month is 40,000 direct labor hours. Beal’s January 19x4 budget was based on normal volume. During January, Beal produced 7,800 units, with records indicating the following: Direct material purchased 25,000 pounds 0 $2.60 Direct material used 23,100 pounds Direct labor 40,:lOO hours @ $7.30 Factory overhead $300,000 Prepare a flexible budget for January 19x4 production costs, based on actual production of 7,800 units.BEAL COMPANY
Flexible Budget
For the Month Ended Jan. 31, 19x4
Direct materials
(7,800 units X 3 pounds X $2.50)
$ 58,500
Direct labor
(7,800 units X 5 hours X $7.50)
292,500
Factory overhead:
Variable
(7,800 units X 5 hours X $3.00)
117,000
Fixed (40,000 hours X $4.00)
160,000
Total budgeted production costs
$628,000
(7-14.1) - 14At the beginning of 19x4, Beal Company adopted the following standards: Direct material (3 pounds @ $2.50 per pound) $ 7.50 Direct labor (5 hours 0 $7.50 per hour) 37.50 Factory overhead: Variable ($3.00 per direct labor hour) 15.00 Fixed ($4.00 per direct labor hour) 20.00 Standard cost per unit $80.00 Normal volume per month is 40,000 direct labor hours. Beal’s January 19x4 budget was based on normal volume. During January, Beal produced 7,800 units, with records indicating the following: Direct material purchased 25,000 pounds 0 $2.60 Direct material used 23,100 pounds Direct labor 40,:lOO hours @ $7.30 Factory overhead $300,000 1. Direct materials price variance, based on purchases 2. Direct materials usage variance 3. Direct labor rate variance 4. Direct labor efficiency variance 5. Factory overhead spending variance 6. Variable factory overhead efficiency variance 7. Factory overhead volume variance1. Direct materials price variance based on materials purchased:
($2.60 -$2.50) X 25,000 pounds $ 2,500 U
2. [23,100 pounds -(7,800 units X 3 pounds)] X $2.50
Direct materials usage variance:
$ (750) F
3. Direct labor rate variance:
($7.30 -$7.50) X 40,100 hours $ (8,020) F
4. Direct labor efficiency variance:
[40,100 hours -(7,800 units X 5 hours)] X $7.50 $ 8.250 U
5. Factory overhead spending variance:
Actual total factory overhead $300,000
Budgeted total factory overhead at actual hours:
(40,100 X $3.00) + (40,000X $4.00) -$280,300
Factory overhead spending variance $ 19,700 U
6. Variable factory overhead efficiency variance:
Budgeted total factory overhead at actual hours $280,300
Budgeted total factory overhead at standard hours:
$117,000 + $160,000 -$277.000
Variable factory overhead efficiency variance $ 3.300 U
7. Factory overhead volume variance:
Budgeted total factory overhead at standard hours $277,000
Applied total factory overhead:
7,800 X 5 hours X ($3.00 f $4.00) -$273.000
Factory overhead volume variance $ 4.000 U
(7-14.2) - 15What is the relationship between responsibility accounting and cost control?There is a direct relationship between responsibility accounting and cost control. Costs are easier to control when a responsibility accounting system is in effect. Department heads know immediately when cost overruns occur and can work quickly to reduce them. Department heads are aware that their supervisors are receiving data on their performance and will make efforts to perform in a more
cost-efficient manner.
(7-20)
- 16List items that should be excluded from an assembly line foreman’s responsibility accounting (or performance) report.Noncontrollable costs such as depreciation, insurance, property taxes, rent, and his own salary.
(7-21) - 17The printing department of a large corporation informs the marketing department that the price of printing 100,000color flyers will be $60,000.The marketing department submits the material for the flyer two weeks later than originally planned and tells the printing department that the scheduled date of completion has been advanced two weeks. In order to achieve the new schedule, the printing department incurs an additional production cost of $15,000. 1. In an organization using responsibility accounting, where would the additional costs be? Would these costs be considered controllable costs? What effect might this have on future printing orders from the marketing department?1. In an organization using responsibility accounting, the originally quoted price of $60,000 plus the additional cost of $15,000 would be assigned to the marketing department. This would be considered a controllable cost. The long-range effect might be ‘that the marketing department will become more cost-conscious and will plan activities better.
(7-22.1) - 18The printing department of a large corporation informs the marketing department that the price of printing 100,000color flyers will be $60,000.The marketing department submits the material for the flyer two weeks later than originally planned and tells the printing department that the scheduled date of completion has been advanced two weeks. In order to achieve the new schedule, the printing department incurs an additional production cost of $15,000. 2. In an organization that does not use responsibility accounting, where would the various costs be assigned? What effect might this have on future printing orders from the marketing department?2. In an organization that does not employ responsibility accounting, the additional production costs
most probably would be assigned to the printing department. There would be no motivation by the
marketing department to adhere to scheduled dates or to plan printing needs in a better fashion.
(7-22.2) - 19You have a client who operates a large retail self-service grocery store that has a full range of departments. Management has encountered difficulty in using accounting data as a basis for making decisions concerning possible changes in departments operated, products, marketing methods, and so forth. List several overhead costs, or costs not applicable to a particular department, and explain how the existence of such costs (sometimes called common costs or joint costs) complicates and limits the use of accounting data in making decisions in such a store.There are many examples of “common” costs to the sales department of a self-service grocery store. Some are rent, supervision, trucking, and advertising. Common costs are usually apportioned on various arbitrary bases to the sales departments, but for
numerous managerial decisions such apportionments produce misleading results. Decisions as to discounting a department, adding a department, enlarging a department, or decreasing a department cannot be made
based on the data produced from the apportionments. For example, if a department is discontinued because it appears to be unprofitable, it may be determined that the costs of other departments will increase as a result of having to absorb more of the shared common costs. Thus, the overall operating results will be less favorable if the “unprofitable” department is discontinued. For decision-making purposes, the incremental approach discussed in Chapter 5 is more appropriate to arrive at the correct decision.
(7-23) - 20The Schock Manufacturing Company uses a standard cost system. The standards are set before January 1 each year and remain unchanged until December 31. The standard costs set for the next year are: Direct materials $10.00 per unit Direct labor 7.50 per unit Overhead 6.00 per unit The labor standard above includes a methods change from 2 hours to 1%hours per unit, effective February 28, and a change in labor rates from $4.00 to $5.00 per hour effective February 28. Overhead will be applied on the basis of standard labor hours. The standard overhead rate per hour is $4.00 (11/2hours X $4.00 = $6.00 per unit). The variable portion is $2.00 per hour. The original budgeted production volume for January was 5,000 units. The actual cost data for January are: Units produced 6,000 units Direct materials used $62,000 Direct labor 11,000 hours costing $46,000 Actual overhead incurred: Variable $23,000 Fixed $14,000 2. State the possible causes of each variance which you have computed.For labor:
-Favorable rate variance may arise from: using unskilled workers paid lower rates, piecework, and
inaccurate standards.
- Unfavorable efficiency variance may arise from: production delays, using poor-quality machinery,
employee unrest, power failure due to an energy shortage, poor production scheduling, using the
wrong mixture of labor for a given job, and using poor-quality materials.
For variable overhead:
- Unfavorable spending variance may arise from: increase in supplier prices, inaccurate standards,
waste, theft of supplies, etc.
- Unfavorable efficiency variance may arise from the same factors as unfavorable labor efficiency
variance.
(7-12.2) - 21Acme, a division of Ace Manufacturing, has assets of $225,000 and an operating income of $55,000. 1. What is the division’s ROI? 2. If the minimum rate of return is 12 percent, what is the division’s residual income?1. $ 55,000/$225,000
= 24.44% ROI
2. Operating income $55,000
Minus minimum required rate
(12% X $225,000) 27,000
Residual income $28,000
(8-1) - 22The following data are given for the Key West division for 19A: Return on investment (ROI) 25Yo Sales $1,200,000 Margin 10% Minimum required rate of return 18% 1. Compute the division’s operating assets. 2. Compute the division’s residual income (RI)1. By definition,
ROI = Margin X Turnover
25% = 10% X Turnover
Therefore, the turnover must be 2.5 times.
Since the turnover is sales/operating assets,
2.5 times = $1,200,000+ Operating assets
Therefore,
Operating assets = $480,000
2. RI = Operating income -Minimum required operating income
Margin = 10% = Operating income/Sales = Operating income/$1,200,000
Therefore, the operating income must be $120,000.
RI = $120,000 -(18%X $480,000) = $120,000-$86,400 = $33,600
(8-3) - 23The Pip division has the following operating data: Operating assets $200,000 Operating income $ 50,000 Minimum required rate of return 16% 1. Compute the ROI and RI for this division.1. ROI RI
Op. assets $200,000(a) $200,000
Op. income $ 50,000(b) $50,000(b)
ROI (b/a) 25%
Minimum required income
(16% X $200,000) 32,000 (c)
RI (b -c) $ 18,000
(8-6.1) - 24The Pip division has the following operating data: Operating assets $200,000 Operating income $ 50,000 Minimum required rate of return 16% 2. Assume that the Pip division is presented with an investment project yielding a 20 percent return on its investment requiring a cash outlay of $30,000. Would the manager of the Pip division accept this investment under the ROI approach? How about under the RI approach?The manager of the Pip division would not accept this project under the ROI approach, since the
division is already earning 25 percent. Accepting this project would reduce the present divisional performance, as shown below.
New
Present Project Overall
Operating assets
(a) $200,000 $30,000 $230,000
Operating income
(b) $ 50,000 $ 6,000* $ 56,000
ROI (b/a) 25% 20% 24.35%
*$30,000X 20% = $6,000.
Under the RI approach, on the other hand, the manager would accept this project, since the new project provides a higher return than the minimum required rate of return (20% vs. 16%).
The new project would increase the overall divisional residual income, as shown below.
New
Present Project Overall
Operating assets
(a) $200,000 $30,000 $230,000
Operating income
(b) $ 50,000 $ 6,000 $ 56,000
Minimum required return at 16% (c) 32,000 4,800* 36,800
RI (b -c) $ 18,000 $ 1,200 $ 19,200
*$30,000X 16% = $4,800.
(8-6.2) - 25From an organizational point of view, two approaches to transfer pricing are (a) to let the managers of profit centers bargain with one another and arrive at their own transfer prices (negotiated transfer pricing) and (b) to have the firm’s top management set transfer prices for transactions between the investment centers. Identify the advantages and disadvantages of each approach.(a) Negotiated transfer pricing:
Advantages: The division managers have control over the transfer prices and can be held responsible for their resulting impact on profits.
Disadvantages: Individual managers, in their attempt to maximize profits of their own divisions, may make decisions detrimental to the overall profit of the firm as a whole.
(b) Ordinary transfer pricing:
Advantages: It is possible for top management to set transfer prices that will guide profit center
managers to make decisions that will maximize the profits of the company as a whole.
Disadvantages: The managers do not have authority in an area affecting their own profit performance.
(8-11) - 26Division A normally purchases its parts from Division B of the same company. Division A has learned that Division B is increasing its price to $110 per unit. As a result, the Division A manager has decided to purchase the parts from an outside supplier at a unit cost of $100, $10 less than it would cost to purchase the same part from Division B. The Division B manager has explained that inflation is the cause of the price increase and that the loss of parts normally transferred to Division A will hurt the division as well as the company profits. The Division B manager feels that the company as a whole would benefit from the sale of parts to Division A. The following costs and unit purchases represent the normal annual transaction: Units purchased 1,000 Division B’s variable costs per unit $95 Division B’s fixed cost per unit $10 1. Will the company as a whole benefit if Division A purchases the units from the outside supplier for $100 per unit? Assume that there are no alternative uses for Division B’s facilities.1. Division A’s Action
Buy Outside Buy Inside
Total purchase costs $100,000 -
Total outlay costs - $95,000
Net cash outflow to the company as a whole
$100,000 $95,000
The company as a whole will benefit if Division A buys inside.
(8-12.1) - 27Division A normally purchases its parts from Division B of the same company. Division A has learned that Division B is increasing its price to $110 per unit. As a result, the Division A manager has decided to purchase the parts from an outside supplier at a unit cost of $100, $10 less than it would cost to purchase the same part from Division B. The Division B manager has explained that inflation is the cause of the price increase and that the loss of parts normally transferred to Division A will hurt the division as well as the company profits. The Division B manager feels that the company as a whole would benefit from the sale of parts to Division A. The following costs and unit purchases represent the normal annual transaction: Units purchased 1,000 Division B’s variable costs per unit $95 Division B’s fixed cost per unit $10 2. What would be the effect if the outside selling price decreases by $8.00 per unit, assuming that Division B remains idle?2. Buy Outside Buy Inside
Total purchase costs $92,000 -
Total outlay costs - $95,000
Net cash outflow to the company as a whole $92,000 $95,000
The company as a whole will benefit if Division A buys from the outside supplier for $92 per unit.
(8-12.2) - 28Division A normally purchases its parts from Division B of the same company. Division A has learned that Division B is increasing its price to $110 per unit. As a result, the Division A manager has decided to purchase the parts from an outside supplier at a unit cost of $100, $10 less than it would cost to purchase the same part from Division B. The Division B manager has explained that inflation is the cause of the price increase and that the loss of parts normally transferred to Division A will hurt the division as well as the company profits. The Division B manager feels that the company as a whole would benefit from the sale of parts to Division A. The following costs and unit purchases represent the normal annual transaction: Units purchased 1,000 Division B’s variable costs per unit $95 Division B’s fixed cost per unit $10 3. If Division B’s facilities could be put into production for other sales at an annual cost saving of $14,500, should Division A still purchase from the outside?3. Buy Outside Buy Inside
Total purchase costs $100,000 -
Total outlay costs - $95,000
Revenue (or cash savings) from using Division B’s facilities (14,500)
Net cash outflow to the company as a whole $ 85,000 $95,000
In this case, the company as a whole will be better off if Division A buys outside and Division B’s facilities are utilized elsewhere.
(8-12.3) - 29The Domino Company has two decentralized divisions, A and B. Division A has always purchased certain units from Division B at $75 per unit. Because Division B plans to raise the price to $100 per unit, Division A desires to purchase these units from outside suppliers for $75 per unit. Division B’s costs follow: Division B’s variable costs per unit $70 Division B’s annual fixed costs $15,000 Division A’s purchase 1,000 units If Division A buys from an outside supplier, the facilities Division B uses to manufacture these units will remain idle. Would it be more profitable for the company to enforce the $100 transfer price than to allow Division A to buy from outside suppliers at $75 per unit?Total purchase costs $75,000
Total outlay costs if purchased inside 70,000
Net advantage to the company as a whole $ 5,000
Therefore, it would be more profitable for the company to enforce the $100 transfer price.
Alternatively,
Division A’s Action
Buy Inside Buy Outside
Total purchase costs - $75,000
Total outlay costs $70,000 -
Net cash outflow to the company as a whole $70,000 $75,000
(8-13) - 30The Caplow Company is a multidivisional company, and its managers have been delegated full profit responsibility and complex autonomy to accept or reject transfers from other divisions. Division A produces a subassembly with a ready competitive market. This subassembly is currently used by Division B for a final product that is sold outside at $1,200.Division A charges Division B market price for the subassembly, which is $700 per unit. Variable costs are $520 and $600 for Divisions A and B, respectively. The manager of Division B feels that Division A should transfer the subassembly at a lower price than market because at this price, Division B is unable to make a profit. 1. Compute Division B's profit contribution if transfers are made at the market price, and also the total contribution to profit for the company.1. Selling price of final product
$1,200
Less:
Division B's purchased cost $700
Division B's variable cost 600 1,300
Division B's loss $ (100)
Selling price of final product $1,200
Less:
Division B's variable cost $600
Division A's variable cost 520$1,120
Company contribution margin $ 80
(8-14.1) - 31The Caplow Company is a multidivisional company, and its managers have been delegated full profit responsibility and complex autonomy to accept or reject transfers from other divisions. Division A produces a subassembly with a ready competitive market. This subassembly is currently used by Division B for a final product that is sold outside at $1,200.Division A charges Division B market price for the subassembly, which is $700 per unit. Variable costs are $520 and $600 for Divisions A and B, respectively. The manager of Division B feels that Division A should transfer the subassembly at a lower price than market because at this price, Division B is unable to make a profit. 2. Assume that Division A can sell all its production in the open market. Should Division A transfer goods to Division B? If so, at what price?2. Selling price of subassembly
$ 700
Less: Division A's variable cost
520
Company contribution margin
$ 180
(8-14.2) - 32The Safeway division of Amco Products manufactures batteries that it sells primarily to the Alpha-Beta division for inclusion with that division’s main product. In 19A, half of the batteries were sold to outside companies at a price of $2 each. The remaining batteries went to the Alpha-Beta division. Cost data for 19B for the Safeway division are given below. Production 120,000 units Variable manufacturing costs $1 20,000 Fixed overhead $60,000 Selling expenses (all variable) $30,000 Administrative expenses (all fixed) $20,000 1. What should be the transfer price for the batteries if the company uses: (a) Market price? (b) Variable cost? (c) A negotiated transfer price that will yield a markup of 20 percent on its product cost (absorption cost) for Safeway?1. (a) Market price: $2 per unit
(b) Variable cost:
($120,000 + $30,000)/120,000 units
= $1.25 per unit
(c) Absorption cost:
$120,000 + $60,000
= $180,000
$180,000/120,000units = $1.50 per unit
Thus, the negotiated transfer price is:
$1.50 +20% ($1.50) = $1.50 + $0.30 = $1.80 per unit
(8-16.1) - 33The Sattle Automobile Company has just acquired a battery division. The company’s motor division is presently purchasing 100,000 batteries each year from Bendox Corporation at the price of $24 per battery. Through the acquisition of the battery division top management now feels that the company’s motor division should begin to purchase its batteries from the newly acquired battery division. The battery division’s cost per battery is as follows: Direct materials $12 Direct labor 4 Variable overhead 2 Fixed overhead -2* Total unit cost $20 - *Based on 250,000 units of capacity of the battery division. Top management wishes to decide on the transfer price to be charged on the intracompany transfers. 1. Explain why each of the following would or would riot be an appropriate transfer price: (a) $24 (b) $20 (c) $21$24 would not be an appropriate transfer price, since the price charged to the motor division
should not exceed (or equal) the outside market price which the motor division is presently
paying ($24).
$20 would be an appropriate price if top management treats the two divisions as simple cost centers with no profit responsibility. Note that $20 is the full absorption cost and all profits from both divisions will accrue to the motor division.
$21 would be an appropriate transfer price if top management wishes to treat the two divisions
as profit or investment centers, but to share the benefits of the intracompany transfer equally
between them. The $21 price is computed as follows:
Variable costs of the battery division $18
One-half of the difference between the variable costs
and the outside market price, that is,
1/2 X ($24 -$18) = $3 3
Transfer price $21
(8-17.1) - 34The Sattle Automobile Company has just acquired a battery division. The company’s motor division is presently purchasing 100,000 batteries each year from Bendox Corporation at the price of $24 per battery. Through the acquisition of the battery division top management now feels that the company’s motor division should begin to purchase its batteries from the newly acquired battery division. The battery division’s cost per battery is as follows: Direct materials $12 Direct labor 4 Variable overhead 2 Fixed overhead -2* Total unit cost $20 - *Based on 250,000 units of capacity of the battery division. Top management wishes to decide on the transfer price to be charged on the intracompany transfers. 2. Assuming that the battery division is operating at full capacity, explain why each of the transfer prices given in parts l(a) through l(d) would or would not be an appropriate price.2. None of these prices except for $24 is an appropriate transfer price if the battery division is selling all it can produce to outside customers. The reason is that the transfer price should not be lower than the battery division’s (the selling division’s) opportunity costs. In this problem, the opportunity cost is $24 per unit -- the price that can be obtained from outside customers.
(8-17.2) - 35The Ajax division of Gunnco Corporation, operating at capacity, has been asked by the Defco division of Gunnco to supply it with electrical fitting no. 1726. Ajax sells this part to its regular customers for $7.50 each. Defco, which is operating at 50 percent capacity, is willing to pay $5 each for the fitting. Defco will put the fitting into a brake unit that it is manufacturing on essentially a cost-plus basis for a commercial airplane manufacturer. Ajax has a variable cost of producing fitting no. 1726 of $4.25. The cost of the brake unit as being built by Defco follows: Purchased parts (outside vendors) $22.50 Ajax fitting no. 1726 5.00 Other variable costs 14.00 Fixed overhead and administration 8.00 $49.50 Defco believes the price concession is necessary to get the job. The company uses return on investment and dollar profits in the measurement of division and division manager performance. 1. Assume that you are the division controller of Ajax. Would you recommend that Ajax supply fitting no. 1726 to Defco? Why or why not? (Ignore any tax issues.)1. The division controller should not recommend that Ajax supply Defco with fitting no. 1726 for the $5.00 per unit price. Ajax is operating at capacity and would lose $2.50 ($7.50 -$5.00) for each fitting sold to Defco. The management performance of Ajax is measured by return on investment and dollar
profits; selling to Defco at $5.00 per unit would adversely affect those performance measures.
(8-20-1)
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- Flashcards on Flashcards_Reviewer_Chapter 7 & 8, created by g see on 06/04/2021.
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