NOTES 2.pdf

NOTES 2.pdf - FINAL C.A COSTING J.K SHAH CLASSES CHAPTER 3...

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J.K. SHAH CLASSES FINAL C.A. COSTING : 1 : Q. 1. S. V. Ltd. manufactures a product which is obtained basically from a series of mixing operations. The finished product is packaged in the company made glass bottles and packed in attractive cartons. The company is organised into two independent divisions viz. one for the manufacture of the end product and the other for the manufacture of glass bottles. The product manufacturing division can buy all the bottle requirements from the bottle manufacturing divisions. The general manager of the bottle manufacturing division has obtained the following quotations from the outside manufacturers for the supply of empty bottles. Volume (empty bottles) Total purchase value ( ` ) 8,00,000 14,00,000 12,00,000 20,00,000 A cost analysis of the bottle manufacturing division for the manufacture of empty bottles reveals the following production costs. Volume (empty bottles) Total cost ` 8,00,000 10,40,000 12,00,000 14,40,000 The production cost and sales value of the end product marketed by the product manufacturing division are as under : Total cost of Volume end product Sales value (Bottles of end product) (excluding cost (Packed in bottles) of empty bottles) 8,00,000 ` 64,80,000 ` 91,20,000 12,00,000 ` 96,80,000 ` 1,27,80,000 There has been considerable discussion at the corporate level as to the use of proper price for transfer of empty bottles from the bottle manufacturing division to product manufacturing division. This interest is heightened because a significant portion of the Divisional General Manager’s salary is an incentive bonus based on profit centre results. As a corporate management accountant responsible for defining the proper transfer prices for the supply of empty bottles by the manufacturing division to the product manufacturing division, you are required to show for the two levels of volumes of 8,00,000 and 12,00,000 bottles, the profitability by using, (i) Market price (ii) Shared profit relative to the costs involved basis for the determination of transfer prices. The profitability position should be furnished separately for the two divisions and the company as a whole under each method. CHAPTER 3 - DIVISIONAL TRANSFER PRICING
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J.K. SHAH CLASSES FINAL C.A. COSTING : 2 : Q. 2. B Ltd. producing a range of minerals, is organised into two trading groups. One handles wholesale business and the other sales to retailers. One of its products is a moulding clay. The wholesale group extracts the clay and sells it to external wholesale customers as well as to the retail group. The production capacity is 2,000 tonnes per month but, at present, sales are limited to 1,000 tonnes wholesale and 600 tonnes retail. The transfer price was agreed at ` 200 per tonne in line with the external wholesale trade price at 1 July which was beginning of the budget year. As from 1 December, however competitive pressure has forced the wholesale trade price down to ` 180 per tonne. The members of the retail group contend that the transfer price to them should be the same as for outside customers. The wholesale group refute the argument on the basis that the original budget established the price for the whole budget year.
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