Explore BrainMass

Approaches of Transfer Prices

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Describe and evaluate the various approaches for setting transfer prices. How can the use of different approaches between the selling and buying divisions be reconciled?

You should choose examples from your own experience or find appropriate cases on the Web that you can discuss. Credit will be given for references you make to relevant examples from real companies.

© BrainMass Inc. brainmass.com October 25, 2018, 9:52 am ad1c9bdddf

Solution Preview

Dear Student,

Please find help and some guidelines related to transfer prices in attached file.

The content below has been written to get ...

Solution Summary

This response provides guidance and references for various approaches of setting transfer prices. Further, it is also discussed how different approaches between the selling and buying divisions can be reconciled.

See Also This Related BrainMass Solution

Managerial accounting information and costing methods and Techniques

I need help figuring out the practice problems attached. Please show work were needed. Thanks so much for your help!

Practice Problems Week 5

1. Managerial accounting information
A) pertains to the entity as a whole and is highly aggregated.
B) must be prepared according to generally accepted accounting principles.
C) pertains to subunits of the entity and may be very detailed.
D) is prepared only once a year.

2. Which one of the following tasks would not be performed by a management accountant?
A) Being concerned with the impact of cost and volume on profits
B) Strategic cost management
C) Assisting in budget planning
D) Preparing reports primarily for external users

3. Which one of the following might a job order cost system most likely attempt to calculate?
A) A cost per overhead hour
B) A cost per product produced
C) A cost per job or batch
D) A cost per dollar of revenue

4. A materials requisition slip showed that total materials requested were $42,500 with $1,500 of this amount consisting of indirect materials. What entry is made to record the transfer of materials from the storeroom?
A) Work in Process Inventory 41,000
Manufacturing Overhead 1,500
Raw Materials Inventory 42,500

B) Work in Process Inventory 42,500
Raw Material Inventory 42,500

C) Direct Materials 41,000
Indirect Materials 1,500
Work in Process Inventory 42,500

D) Manufacturing Overhead 42,500
Raw Materials Inventory 42,500

5. Which statement best describes the function of the production cost report?
A) It is the key document used by management to understand the costs incurred in a department.
B) It is an exception report that is only read by management at the end of the year.
C) It is a job cost sheet that effectively tracks all separate department cost information.
D) It is a report that calculates the amount of bonuses for efficient production for the year.

6. Conversion cost per unit equals $6.00. Total materials cost equals $40,000. Equivalent units for materials are 20,000. How much is the total manufacturing cost per unit?
A) $8.00
B) $6.00
C) $10.00
D) $2.00

7. An activity that has a direct cause-effect relationship with the resources consumed is a(n)
A) cost driver.
B) overhead rate.
C) cost pool.
D) product activity.

8. A well-designed activity-based costing system starts with
A) identifying the activity-cost pools.
B) computing the activity-based overhead rate.
C) assigning manufacturing overhead costs for each activity cost pool to products.
D) analyzing the activities performed to manufacture a product.

9. All of the following statements are correct except that
A) activity-based costing has been widely adopted in service industries.
B) the objective of installing ABC in service firms is different than it is in a manufacturing firm.
C) a larger proportion of overhead costs are company-wide costs in service industries.
D) the general approach to identifying activities and activity cost pools is the same in a service company as in a manufacturing company.

10. The use of activity-based costing in service industries
A) has the same objective as in manufacturing.
B) results in improved costing of services provided.
C) uses cost pools to assign overhead.
D) all of these.

11. In September, Smith Company had the following financial statement amounts related to producing 1,000 units:
Direct materials $30,000
Depreciation expense 12,000
Sales revenue 88,000
Direct labor 10,000
Rent expense 13,000

How much is contribution margin per unit?
A) $48
B) $58
C) $35
D) $13

12. What is a relevant range of activity?
A) The geographical locations in which the company operates
B) The activity level at which profits are maximized
C) The levels of activity over which the company expects to operate
D) The level of activity in which all costs are constant

13. Fixed costs are $400,000 and the contribution margin per unit is $80. What is the break-even point?
A) $500,000
B) $2,000,000
C) 320,000 units
D) 5,000 units

14. A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant capacity. Given the following list of costs, which one should be ignored in a decision to produce additional units of product?
A) Variable selling expenses
B) Fixed factory overhead
C) Direct labor
D) Contribution margin of additional units

15. Diggs, Inc. has excess capacity. Under what situations should the company accept a special order for less than the current selling price?
A) Never
B) When additional fixed costs must be incurred to accommodate the order
C) When the company thinks it can use cheaper materials without the customer's knowledge
D) When incremental revenues exceed incremental costs

16. Market Makeup produces face cream. Each bottle of face cream costs $10 to produce and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen at a cost of $14 each. Market Makeup could sell the sunscreen bottles for $23 each.
A) Face cream must be further processed because its profit is $9 each.
B) Face cream must not be further processed because costs increase more than revenue.
C) Face cream must not be further processed because it decreases profit by $1 each.
D) Face cream must be further processed because it increases profit by $3 each.

17. Absorption costing
A) is required under GAAP.
B) is not allowed for external reporting purposes.
C) does not allow income to be manipulated through production decisions.
D) highlights differences between variable and fixed costs.

18. Variable costing
A) is required under GAAP.
B) is required for external reporting purposes.
C) allows income to be manipulated through production decisions.
D) highlights differences between variable and fixed costs.

19. The cost-plus pricing approach's major advantage is
A) it considers customer demand.
B) that sales volume has no effect on per unit costs.
C) it is simple to compute.
D) it can be used to determine a product's target cost.

20. Factors that can affect pricing decisions include all of the following except
A) cost considerations.
B) environment.
C) pricing objectives.
D) all of these are factors.

21. All of the following are correct statements about the cost-based transfer price approach except that it
A) can understate the actual contribution to profit by the selling division.
B) can reduce a division manager's control over the division's performance.
C) bases the transfer price on standard cost instead of actual cost.
D) provides incentive for the selling division to control costs.

22. The negotiated transfer price approach should be used when
A) the selling division has available capacity and is willing to accept less than the market price.
B) an outside market for the goods does not exist.
C) no market price is available.
D) any of these situations exist.

23. Which of the following is not a benefit of budgeting?
A) It promotes efficiency.
B) It deters waste.
C) It is a basis for performance evaluation.
D) It assures the company that management will perform at a particular operational level.

24. Which one of the following is one of the factors that must be present if budgets are to be effective?
A) All upper level managers should verify the validity of the amounts in the budgets.
B) Research and analysis should occur in order to set realistic goals.
C) The company must have the stockholders' approval of the budget.
D) The budget committee must prepare the budget.

25. Surprise Company's sales budget showed expected sales of 13,400 widgets. Beginning finished goods contained 1,200 widgets. The company determined that 14,100 units should be produced. How many widgets will the company have on hand at the end of the year?
A) 500
B) 1,200
C) 1,900
D) 700

26. Jason Company determined that the budgeted cost of producing a product is $1.20 per unit. On June 1, there were 11,000 units on hand. The sales department budgeted sales of 320,000 units in June. The company desires to have 8,000 units on hand on June 30. How much is the budgeted cost of goods manufactured for June?
A) $380,400
B) $317,000
C) $323,000
D) $387,600

27. Which one of the statements below is correct concerning the comparison of differences between actual and planned results?
A) The difference must be reported on external financial statements.
B) The differences always require investigation.
C) It reflects information from the static budget.
D) It enables managers to take corrective action when differences are material.

28. How does a graph of a flexible budget compare to a CVP graph?
A) Fixed costs appear differently.
B) Variable costs appear differently.
C) Sales revenues are not shown on a flexible budget graph.
D) The two are graphed identically.

29. The difference between a budget and a standard is that
A) a budget expresses what costs were, while a standard expresses what costs should be.
B) a budget expresses management's plans, while a standard reflects what actually happened.
C) a budget expresses a total amount while a standard expresses a unit amount.
D) standards are excluded from the cost accounting system, whereas budgets are generally incorporated into the cost accounting system.

Use the following to answer questions 30-32:

Bridgeware Company has a materials price standard of $6.00 per pound. Two thousand pounds of materials were purchased at $6.60 a pound. The actual quantity of materials used was 2,000 pounds, although the standard quantity allowed for the output was 1,800 pounds.

30. Bridgeware Company's materials price variance is
A) $120 U.
B) $1,200 U.
C) $1,080 U.
D) $1,200 F.

31. Bridgeware Company's materials quantity variance is
A) $1,200 U.
B) $1,200 F.
C) $1,320 F.
D) $1,320 U.

32. Bridgeware Company's total materials variance is
A) $2,400 U.
B) $2,400 F.
C) $2,520 U.
D) $2,520 F.

33. Tip Top Painting Company has the following production data for January:

? Beginning work in process, 0 units
? Units transferred out, 35,000
? Units in ending work in process, 4,000, which are 30% complete for conversion costs

Materials are added only at the beginning of the process. Compute equivalent units of production for both materials and conversion costs using the weighted average method.

34. The following information is available for a product manufactured by Gardenia Corporation:
Per Unit Total
Direct materials $ 62.50
Direct labor $ 47.50
Variable manufacturing OH $ 15.00
Fixed manufacturing OH $ 250,000
Variable selling and admin expenses $ 10.00
Fixed selling and admin expenses $ 55,000

Gardenia has a desired ROI of 16%. It has invested assets of $8,250,000 and expects to produce 2,000 units per year.

Compute each of the following:
1. Cost per unit of fixed manufacturing overhead and fixed selling and administrative expenses.
2. Desired ROI per unit.
3. Markup percentage using the absorption cost approach.
4. Markup percentage using the contribution approach.

35. The income statement for Raple Stark Company for 2006 appears below.

Raple Stark Company
Income Statement
For the Year Ended December 31 , 2006

Sales (25,000 units) $ 650,000
Variable expenses 227,500
Contribution margin 422,500
Fixed expenses 439,400
Net income (loss) $ (16,900)

Answer the following independent questions and show computations to support your answers:
1. How much additional sales revenue does the company need to break-even in 2006?
2. If the company is able to reduce variable costs by $1.25 per unit in 2007 and other costs and unit revenues remain unchanged, how many units will the company have to sell in order to earn a net income of $50,650?

View Full Posting Details