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Transfer Pricing - How to know if its Marginal or Absorption in Income statement

RRubySupporter5y ago
Hi sir John, Would like to ask you how to know if it's Marginal or Absorption costing to construct the Net Income for each division? Im talking about the treatment of the 2 fixed costs below: "Annual divisional fixed production overheads" and "Annual divisional fixed administrative overheads". The transfer price is set at Wolverhampton's full cost plus a 25% profit mark up. The answer provided to me is for Birmingham Division, gross profit minus (875k+375k) so I assume they are using Marginal costing but I used Absorption costing instead. Appreciate your kind assistance and I thank you in advance! Wolverhampton Division Birmingham Division External Selling Price per unit £25 £32 Direct material cost per unit £8 £3 Direct labour cost per unit £5 £3 Annual divisional fixed production overheads £2,500,000 £875,000 Annual divisional fixed administrative overheads £1,000,000 £375,000 Variable selling overheads per unit £1.75 £1.75 Annual production capacity 1,250,000 units 700,000 units Sales to outside customers 900,000 units 350,000 units Internal sales 350,000 units
John MoffatJohn MoffatTutor5y ago#1
As I explain in my free lectures on this, we always assume (unless told otherwise) that the divisions are making many products and that therefore the fixed costs will remain unchanged regardless of what is transferred. Have you watched my free lectures?
RRubySupporter5y ago#2
Thank you for the response. I've watched 2 videos about Transfer pricing on your youtube channel, will revisit them. :-)
John MoffatJohn MoffatTutor5y ago#3
You are welcome :-)
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