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December 17, 2015 at 7:33 am
First of all, I wanted to thank you for the great lecture.
Secondly, I have an enquiry on the last qn (example 8) of this chap.
I did arrive at the ans of min. TP of $110, but my approach is a little different sir. What I did was, first I deduced the TP of Y wouldn’t go below $100, as an unlimited external demand is available, then I simply proceed to add the lost cont. of $10 for ea making of Y (every unit of Y produced, provides cont. of $30 but lost $40 for NOT making 2u of X).
So my ans turned out to be the same, but I was wondering is there anything inappropriate for this approach?
Thank you for your time sir!
John Moffat says
December 17, 2015 at 8:37 am
November 14, 2015 at 1:16 am
I just wanted to ask again why does the transfer price will usually based on standard cost and not actual cost?
November 14, 2015 at 8:01 am
That is certainly not a rule.
However, since the transfer price in practice will usually need to be fixed in advance it will need to be based on the expected cost (i.e. the standard cost).
October 29, 2015 at 8:52 am
I just wanted to know for the past year paper dec 2011 transfer pricing question (Bath co),
why is it the material cost $ 265?
October 29, 2015 at 10:41 am
In future please ask this sort of question in the F5 Ask the Tutor Forum, and not as a comment on a lecture.
$265 is the cost for only some of the materials. Division B produces 200,000 fittings and will sell 180,000 externally, which leaves only 20,000 available for Division A.
Division A needs 80,000 fittings. They will get 20,000 from B and the other 60,000 externally.
It is these 60,000 that cost $265. $200 for materials bought externally, plus $65 for fittings (which are also materials) bought externally.
October 30, 2015 at 4:17 am
Thanks Sir for making it more clearer for me to understand
October 25, 2015 at 11:25 pm
Hi, sir john Moffat
Thank you for your great lectures, you are the best teacher in the world, God bless you and opentuition.com team
October 26, 2015 at 6:57 am
October 24, 2015 at 3:49 pm
In final example,Why do we charge entire lost contribution of X from division B when we get $30(10hrs*$3) from them. So actually we lose only $10($40-$30),therefore it should be $80 (70+10)
Can you please explain me why we charge entire $40..?
October 24, 2015 at 4:09 pm
If they were only selling externally, they would prefer to make X because it would generate $4 per hour.
They are only prepared to produce Y if Y generates a contribution of $4 per hour as well.
For Y to generate a contribution of $4 per hour then it would need to have a selling price of $110.
(If they only charged $80 then they would only be making a contribution of $10 per unit or $1 per hour – there is no way they would be prepared to produce Y and make $1 per hour when they could be generating more by producing X and selling it externally)
October 24, 2015 at 5:57 pm
Thank you sir. I understand now. Your lectures are very interesting and very helpful.Keep it up sir and thanks for the quick reply sir..
October 24, 2015 at 6:11 pm
I am really pleased that my answer made sense
Thanks a lot for the comment!
October 12, 2015 at 7:56 pm
Thank you so much however, a general notion is that transfer pricing has a great connection to Tax aspect, can you pls clarify a bit , if the above situation holds true
October 12, 2015 at 8:30 pm
In practice you are correct – tax is a main factor.
However this is excluded from F5. (You can worry about it if you take Paper P5 )
October 15, 2015 at 6:47 pm
Thank you so much John, Appreciate your help and kind response.
October 7, 2015 at 10:23 am
Kindly clarify something for me, if the buying division has a limited quantity required (e.g 9) and the selling division (e.g 10) has more than that but a limited external market (e.g 4). Will it satisfy it external customer 1st and sell the remaining to the buying division?
The transfer price will it between its variable cost rate and the price the buying division can get it outside? Or inclusive of the lost contribution?
October 7, 2015 at 10:46 am
The selling division will be quite happy to sell to the other division (rather then the external market) provided the transfer price gives them at least the same contribution that they could earn on the external market.
The minimum transfer price is always the variable (marginal) cost plus any lost contribution.
(It is not a question of selling to either party first – the division would always choose to sell where they could earn the highest contribution)
August 5, 2015 at 11:35 am
hi i don’t get why we use the contribution for x at the final example instead of y’s contribution per hour
August 5, 2015 at 12:18 pm
We would prefer to make X at the current prices because it gives the biggest contribution per hour.
If we make Y then we are losing production of X and therefore the lost contribution for every hour is the contribution per hour that we could have made by producing X instead.
(If you haven’t watched the chapter on Throughput accounting then do, because the first part of it goes through key factor analysis which is the reason we would prefer X to Y at the current prices.)
August 5, 2015 at 2:46 pm
okay thank you i will go through the chapter first then contact you incase of any difficulty
August 2, 2015 at 9:18 pm
in the last example, i ma interested in knowing whether we could ascertain the maximum transfer price. Could you explain whether this limit is applicable and how to calculate it?
August 3, 2015 at 7:07 am
No, it is not possible because there is not enough information. That is why the question only asks for the minimum transfer price.
August 3, 2015 at 9:58 am
Thanks a lot!
Further to your reply, is there any rule of the thumb to get to know whether there is a minimum or/and maximum transfer price in any specific situations?
Thank you once again for your support!
August 3, 2015 at 10:24 am
No. The question will make it clear whether they want both or just one of them. This question specifically only asked for the minimum price.
August 3, 2015 at 10:25 am
August 2, 2015 at 8:05 pm
Your course delivery is clear and plain. I love it! Thank you!
August 2, 2015 at 8:14 pm
Thats great – thank you very much
May 31, 2015 at 5:18 pm
Thank you and appreciated it.. finally I am able to understand TP~~
May 31, 2015 at 12:09 am
This is just great. Thanks to OT guys am enjoying the lectures and studying at the comfort of my living room time is 2 a.m in the morning. everything else is sssshhhhhh. can only hear the ticking of the wall clock.
May 31, 2015 at 12:06 pm
and my voice I trust?
May 31, 2015 at 1:04 pm
Of Course John your voice is loud and clear. thats great help you are giving students.
May 31, 2015 at 4:15 pm
May 25, 2015 at 8:11 pm
Dear Mr John,
Thank you for becoming my friend and one of the most favourite teachers ???? Hope I would be able to say in the nearest future – I passed F5 thanks to Mr John and OT ????
May 26, 2015 at 9:57 am
I hope so as well – best of luck with the exam
Allwell B Joseph says
December 27, 2014 at 7:29 pm
tnks a lot open tuition, last example really cracked my head but later figured it out
If division chooses to make product y they would be loosing $1($4-$3) profit which is not ideal for the organization, so they chose to make y ay x amount since they earn the highest contribution from y
Hope i’m correct
December 27, 2014 at 7:41 pm
Yes – you are correct
hassan rana says
November 13, 2014 at 2:09 pm
Can examiner asks us TPS MIS EIS ERP of 10 to 15 marks rather than asking performance of the business? Or examiner will just examine these systems in MCQs
November 13, 2014 at 3:13 pm
They could be asked in Section B, but if it is then I will be very surprised if it were more than a 2 or 3 mark part of a question.
November 13, 2014 at 3:14 pm
TPS MIS EIS ERP???
November 13, 2014 at 4:25 pm
Different management information software
May 13, 2015 at 7:39 am
Hi John is the video for transfer pricing unavailable? am not able to watch and really need to watch it.
May 13, 2015 at 8:06 am
It is there and it is working OK.
If you go to the support page then you should find help there – the link is just below the lecture.
November 6, 2014 at 7:39 pm
just a quick question. Do we charge the full contribution lost on the last example because we CAN make both? I initially done the question charging the marginal cost +£10 as this was the difference in lost contribution…
I can see how you have ended up with £70 + £40 but can also see my logic…. Could you pretty please explain….
Thank you again…
November 6, 2014 at 8:24 pm
If we did not supply the other division then we would prefer the make the one with the highest contribution per hour and would therefore be making $10 per hour.
If instead we use hours making the product for the other division, then because there are limited hours we would be losing $10 for every hour that we took away to make the product for the other division.
May 6, 2014 at 10:41 pm
Hi, the final example where product X’s income generated per hour was used for a question which was required to complete the minimum transfer price for Y? Could you please explain as to why the opposing products figure was used rather than the one which would have been required.
May 7, 2014 at 9:41 am
If Division B did not exist, then A would prefer to use the limited hours making product X (because X gives the biggest contribution per hour (key factor analysis)).
B wants Y, but if A makes Y then every hour they use to make Y’s takes away hours that could have been used to make X’s and therefore loses them contribution of $4 per hour. They will only be prepared to produce Y provided it earns them at least $4 per hour.
April 13, 2014 at 3:58 pm
It’s Sunday, the sun is shining and I am in studying!!! All i can say though is that these lectures are a great help and funnily enough make me want to studying more that what i was originally without using OT.
Great jobs guys and keep it up! Top Notch!
April 13, 2014 at 4:39 pm
Thanks a lot
November 28, 2013 at 12:37 pm
I am stating the obvious of course but:
Many thans John!
November 28, 2013 at 12:53 pm
November 24, 2013 at 7:54 am
Hello, I would be grateful if anyone could help me on my question sent on 15th Oct 2013. This is jeopardising my whole concept of opportunity cost. If we are sacrificing a contribution but then on the other hand we are gaining on the alternate choice. So, the lost contribution should be the NET loss, NOT the full loss, isn’t it? I still think we should charge $1 (4-3) per hour of lost contribution and not the full $4.
Kindly someone comment on this please.
November 24, 2013 at 8:40 am
Sorry your earlier comment was not answered, but it is not possible for us to read all comments on all lectures. If you want to ask a question of a tutor (as opposed to just making a comment) then it is best asked on the ‘Ask ACCA Tutor’ forums – questions there are always answered within 24 hours.
Your earlier comment is replied to below.
November 25, 2013 at 6:45 am
Thank you very much Sir, I really appreciate, ok, next time I’ll post on forums.
Thank you for the below reply I have now understood. This is the best ACCA website I’ve ever known. May God bless you and your team.
October 15, 2013 at 2:14 pm
Helo open tuition team, thank you very much for the excellent explanation however I have a small question regarding question 8, I see that Arsian10 raised a similar question on this. For the lost contribution, can’t we calculate it in a similar way like “opportunity cost” ? according to me for every ONE product of Y we can make TWO product of X. So, in that 10h of labour we are sacrificing the manufacture of TWO products X. So, contribution for 2 product X would be $40 wheras contribution for ONE product Y is $30. The lost contribution is therefore $40-$30 = $10. so then transfer pricing = $70 + $10 = $80.
I note that the EXTERNAL price = $100. (having a transfer price of $110 is technically not possible isn’t it?)
I would be very grateful if you could respond to this. Once again thank you very much
November 24, 2013 at 8:35 am
You are perfectly correct that for every one unit of Y that we make we are losing two units of X, and so what we are losing is 2 x $20 = $40.
We are only therefore prepared to make Y provided that we get from Y the $40 that we are losing by not making X’s.
In order to be getting $40 from making Y we need to be charging $70 (the marginal cost) + $40 = $110.
The lost contribution is indeed the opportunity cost – making Y is ‘costing’ them the $40 that they are losing by not being able to make X. It is no different that looking at an ‘opportunity cost’ of $4 per hour (which is the way we usually choose between products when there are limited hours available – key factor analysis).
A transfer price of $110 is perfectly possible! At $100 division A is not prepared to produce product Y for anyone – they prefer to produce product X. If someone (anyone) is prepared to pay $110 (or more) then (and only then) they are quite happy to produce it.
April 11, 2013 at 1:48 pm
i am using the previous books …can any body tell me is that ok or i have to use the new books?any big changes in the exam?
April 11, 2013 at 7:57 pm
Look at the syllabus on the ACCA website. The only real change is the addition of a bit on information for performance management. However there is not much (and there is a chapter in our course notes).
April 11, 2013 at 1:37 pm
very good lectures
April 11, 2013 at 7:32 am
i dont get it question 8….why we took 4/hr as forgone contribution in calculating transfer price of product y???
October 20, 2012 at 11:01 pm
Excellent explanation skills! This Tutor is brilliant, Transfer Pricing is much more clear now for me
September 26, 2012 at 12:35 pm
Very good tutor. Thank you very much!
June 8, 2012 at 9:16 pm
June 8, 2012 at 5:58 pm
please give me reference of transfer pricing past paper…..
June 10, 2012 at 3:14 am
@imboo, lool check the Acca websites for past papers then review the papers year on year or in any order (depends what works for you) to find related questions on Transfer Pricing. Simple! hope that works for you.
April 6, 2012 at 4:37 pm
Thank you, very good tutor!!!
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