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The housing component division has an adverse variance of $575000 in the last year and it uses actual production costs as the basis of its transfer transfer price.
Why there are variances if it uses the actual production costs as it can recover any additional cost through the price charged to tranfree department. Aren’t variances only occur in budgeting?BPP KIT: 31 Landual Lamps
Thanks Ken.
The variances are in the cost of production. That is separate from being able to recover those costs by increasing the transfer price.
The problem with this method is that there is little incentive to control costs: all their costs are covered by transfer income. It makes no difference to the division, but cost overruns will hurt the group.
Part (c) discusses how this would change if the housing division were treated as a cost centre and had to stay within budgeted costs.
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