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Hi,
How high are the chances that transfer pricing will appear in Dec 14 sitting?We don’t make predictions like that. It’s your responsibility if you want to gamble.
Ok,
Please, explain why do we subtract adverse variance ($575k) to set new transfer pricing for housing components in June 2013, Q4, part a? Why using budgeted costs but not actual?
Thanks.
Actual total production costs for the housing division are 6902 + 1302 = 8204.
There is an adverse variance of 575.
Therefore the costs of 8204 are 575 higher than they should have been. The budget was therefore 8204 – 575 = 7629.
Budget based transfer price are better than actual based transfer prices because otherwise there is not incentive to control costs if these can be passed on to the next division. This effect is magnified if there is a cost plus transfer price.
For example, say transfer prices are Cost +25%
Budgeted cost = 100; transfer price = 125 and profit = 25
Actual cost = 120; transfer price = 150 and profit = 30The transferring division would therefore increase its profits by increasing its costs. Not a good set-up.
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