tailieunhanh - Lecture Advanced management accounting - Chapter 25

This chapter prepare an income statement using super-variable costing and reconcile this approach with variable costing. After studying this chapter, you should be able to prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions, compute companywide and segment break-even points for a company with traceable fixed costs. | Lecture 25: Cost-Based Decision making (Pricing) Continued In this lecture we will study the following: Uses costs incurred by the division producing the goods as its foundation. May be based on variable costs alone or on variable costs plus fixed costs. Selling division may also add markup. Can result in improper transfer prices causing: Loss of profitability for company. Unfair evaluation of division performance. Transfer Pricing for Internal Sales Cost-Based Transfer Prices 3 Illustration: Alberta Company requires the division to use a transfer price based on the variable cost of the sole. With no excess capacity, the contribution margins per unit for the two divisions are: Cost-based transfer price—10,000 units Cost-Based Transfer Prices 4 Cost-based pricing is bad deal for Sole Division – no profit on transfer of 10,000 soles to Boot Division and loses profit of $70,000 on external sales. Boot Division is very happy; increases contribution margin by $6 per sole. If Sole Division has excess capacity, the division reports a zero profit on these 10,000 units and the Boot Division gains $6 per unit. Cost-Based Transfer Prices 5 Overall, the Company is worse off by $60,000. Does not reflect the division’s true profitability nor provide adequate incentive for the division to control costs. Cost-Based Transfer Prices 6 Based on existing market prices of competing goods. Often considered best approach because it is objective and generally provides the proper economic incentives. It is indifferent between selling internally and externally if can charge/pay market price. Can lead to bad decisions if have excess capacity. Why? No opportunity cost. Where there is not a well-defined market price, companies use cost-based systems. Transfer Pricing for Internal Sales Market-Based Transfer Prices 7 The Plastics Division of Weston Company manufactures plastic molds and then sells them for $70 per unit. Its variable cost is $30 per unit, and its fixed cost per unit is $10. . | Lecture 25: Cost-Based Decision making (Pricing) Continued In this lecture we will study the following: Uses costs incurred by the division producing the goods as its foundation. May be based on variable costs alone or on variable costs plus fixed costs. Selling division may also add markup. Can result in improper transfer prices causing: Loss of profitability for company. Unfair evaluation of division performance. Transfer Pricing for Internal Sales Cost-Based Transfer Prices 3 Illustration: Alberta Company requires the division to use a transfer price based on the variable cost of the sole. With no excess capacity, the contribution margins per unit for the two divisions are: Cost-based transfer price—10,000 units Cost-Based Transfer Prices 4 Cost-based pricing is bad deal for Sole Division – no profit on transfer of 10,000 soles to Boot Division and loses profit of $70,000 on external sales. Boot Division is very happy; increases contribution margin by $6 per sole. If Sole Division

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