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June 2013 Exam Qs 4 part a

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA APM Exams › June 2013 Exam Qs 4 part a

  • This topic has 2 replies, 2 voices, and was last updated 7 years ago by peter1009.
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  • November 29, 2015 at 3:17 pm #286158
    peter1009
    Member
    • Topics: 8
    • Replies: 4
    • ☆

    Hi

    In the model answer transfer price for housing now budgeted total production cost 6,902 cost of sales + 1,302 fixed cost – 575 adverse variance marked up by 30%.

    Why do you deduct adverse variance (don’t you add because it is an extra cost i.e. underestimated costs)

    Thanks

    November 29, 2015 at 3:26 pm #286159
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10197
    • ☆☆☆☆☆

    If a division is allowed to transfer at actual production cost (or actual production cost + mark-up) what is the incentive for that division to control its costs? If transfer price = actual cost the division will always break even. If transfer price = actual cost + markup, the higher its costs the higher its profit.

    Removing the advese cost variance means that the transfer price is based on standard costs and the cost over-run stays with the transferring (selling) division thus encouraging it to control costs better.

    December 3, 2015 at 5:11 pm #287344
    peter1009
    Member
    • Topics: 8
    • Replies: 4
    • ☆

    thanks for the clarification

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