1. What are the two types of pricing environments for sales to external parties?
2. What is a transfer price? Why is determining a fair transfer price important to division managers?
3. Standard costs facilitate management planning. What are the other advantages of standard costs?
4. Distinguish between an ideal standard and a normal standard.
1. External sales may be in a cost-based or market-based environment. Usually, pricing is based on demand, or whatever the market will bear. In a few specialized markets, sales prices are often based on cost. The U.S. Defense Department frequently contracts with companies for the design and manufacture of military equipment using cost-plus contracts: the contractor receives reimbursement for production costs plus a negotiated profit. Cost-plus contracts are useful when it is difficult for the manufacturer to predict production costs, when product specifications may have to change after the contract is signed, or when there is only one logical supplier.
11. The transfer price is the price at which divisions of a company ...
This solution discusses how division managers use pricing environments and standard costs to make accounting decisions and the importance of determining transfer prices. This solution is 481 words.