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Re: Transfer price (MCQ)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Re: Transfer price (MCQ)

  • This topic has 9 replies, 2 voices, and was last updated 6 years ago by John Moffat.
Viewing 10 posts - 1 through 10 (of 10 total)
  • Author
    Posts
  • November 28, 2018 at 9:38 am #486253
    lamfko
    Member
    • Topics: 8
    • Replies: 17
    • ☆

    Dear Mr John,

    Good day.

    Please help to explain the question as follows.

    A company has a divisonalised structure in which Division A transfer its output to Division B. There is no external market for the transferred item and the cost will be used as the basis for setting a transfer price. Which of the following will be the most appropriate basis for negotiating and agreeing a transfer price?
    a) Actual cost
    b) Actual cost plus a profit margin equal to a percentage of cost
    c) Standard cost
    d) Standard cost plus a profit margin equal to a percentage of cost

    I wrongly selected a) and the answer is d). Please help with your explanation.

    Thank you.

    Warmest regards,
    Eric Lam

    November 28, 2018 at 3:40 pm #486293
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Of the four choices (d) is best.

    Firstly because using actual cost (or actual cost plus a profit margin) means there is no incentive for Division A to cut costs.

    Secondly, using standard cost alone would give A an incentive to try and cut costs, but if the standard cost has been fixed sensibly (and therefore they will be unlikely to cut costs more) then Division A would be getting no profit and so would not have an incentive to even produce the goods.

    November 30, 2018 at 3:49 am #486507
    lamfko
    Member
    • Topics: 8
    • Replies: 17
    • ☆

    Dear Mr John,

    Thank you for your clear explanation.

    However, B may feel unfair being charge with higher cost as this will pull down its division profit margin. Overall company profit suffered if B stop production. If this is the case, how to prevent this from happening. Please advice with your explanation.

    Thank you.

    Warmest regards,
    Eric Lam

    November 30, 2018 at 8:43 am #486524
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    The way to avoid it happening is to determine a sensible transfer price using the rules I go through in my free lectures, and not to use a transfer price simply based on cost.

    I do explain all of this, with examples, in my lectures.

    The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.

    November 30, 2018 at 10:01 am #486554
    lamfko
    Member
    • Topics: 8
    • Replies: 17
    • ☆

    Dear Mr John,

    In that case, the suitable transfer price must be based the lowest cost of all, the actual cost more close to marginal cost, so performance measurement, divisional autonomy and company profit is maximized. Please advice and thank you very much.

    Warmest regards,
    Eric Lam

    November 30, 2018 at 3:46 pm #486587
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    The minimum transfer price should be the marginal cost plus any lost contribution.

    Again, please watch my free lectures because I explain in detail in my lectures (and you cannot expect me to type them all out here 🙂 )

    November 30, 2018 at 5:47 pm #486605
    lamfko
    Member
    • Topics: 8
    • Replies: 17
    • ☆

    I watched your lectures and learned the rules that minimum transfer price is marginal cost + any lost contribution. My question is can this rule be applied to the above question, i.e. a) actual cost is the lowest cost among all of them. Please advice. Thank you.

    December 1, 2018 at 9:25 am #486641
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    I have already answered your question. Of course you cannot use the rule because that is not one of the choices. The question asks which of the four choices given would be the best – it does not ask what they should do!

    December 2, 2018 at 1:52 am #486733
    lamfko
    Member
    • Topics: 8
    • Replies: 17
    • ☆

    Dear Mr John,

    Thank you for your excellent explanation.

    Warmest regards,
    Eric Lam

    December 2, 2018 at 9:23 am #486747
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

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Viewing 10 posts - 1 through 10 (of 10 total)
  • The topic ‘Re: Transfer price (MCQ)’ is closed to new replies.

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