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I do not understand why the transfer pricing of housing component changing from 8,204 to 9,918.
(7,629 = 6,902 + 1,302 – 575).Here they are use COGS plus Fixed cost minus variance $575Then 7,629*1.3=9,918. But after that they minus the Fixed production cost of $1,302 again in the statement.
Could you please help to explain?
Thank you
Actual cost of making housing in the components division = 6,902 + 1,302 = 8,204
However, this contains an overspend of 575. Therefore the budgeted cost is 8,204 – 575 = 7,629.
If we allow the components division a mark-up of 30%, the transfer price would be 1.3 x 7629 = 9,918 (as you said above).
This is the transfer price and should allow a profit of 30% if all costs are kept in line. The profit made by the components division will be the income (sales + transfers) – costs.
This gives incentive to keep costs down.
Thank you, sir
I have another question regarding Transfer Price.
In an Transfer pricing article But still do not understand how we apply this knowledge for my coming exam. Could you please give me an example in number?
Even though my workplace seems to use Dual pricing as end of accounting period they always has adjustment.
VARIATIONS ON VARIABLE COST
1.Variable cost plus lump sum.
2.Dual pricing.
There are numberical examples in the lectures and notes. These will be of limited use in the exam because the question will be unique. What you have to relealise is that transfer prices should achieve goal congruence between what head office wants and what subsidiaries choose to do.
If HO wants one subsidiary to trade with another then it will have to make that attractive to both parties. Transfer prices can often do that.
Dual pricing must produce a year end adjustment otherwise the current accounts won’t balance.
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