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why is $575,000 variance deducted from housing component transfer price?
shouldn’t that be added as company has failed to incorporate the cost by $575,000The 575 variance is deducted so that sales price and profits are based on standard costs, no actual costs. If the mark-up were calculated on actual costs then the higher the costs, the higher the profit, so why control costs? By deducting the cost overrun when calculating the sales price, the variance ‘stays in’ the transferring division.
30% is only an example. Could have been, say 25%.
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