The heart of the issue is how to assess costs and set prices for goods produced

The heart of the issue is how to assess costs and set

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The heart of the issue is how to assess costs and set prices for goods produced in one venue and transferred to an affiliate in another. The governments of each country have a keen interest in taxing activities within their domain (whether it be by a value added tax, income tax, tariff system, custom duties, etc.). And, companies will envision an opportunity to shift profits from high tax jurisdictions to low tax jurisdictions by shuffling costs and prices between entities. This is a fertile area of tax dispute, and one that keeps many managerial accountants quite busy. In the main, the applicable rules attempt to require the use of fair and equitable job costing, and require that transfers be based on “arms length” transaction pricing. But, the devil is in the details of implementation. A recent look on an internet search engine turned up almost five million hits for “transfer pricing rules!” The above transfer pricing issues are not limited to global companies. Similar issues can arise when products are shipped between affiliated companies in different states or provinces. Also, affiliated companies may have divisional profit sharing, causing managers working for the same corporate parent to debate the costs assigned to products produced by their respective unit. As you can see, there is a lot more to job costing than just adding up costs! 14.8 Global Trade and Transfers Companies engaged in international commerce often establish separate operating units around the globe. For instance, a company may establish a manufacturing facility in a country with lower wages and costs of production. This trend has introduced a myriad of complex costing issues which generally fall under the heading of “transfer pricing.”
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Managerial and Cost Accounting 85 Job Costing and Modern Cost Management Systems 15. Accounting for Actual and Applied Overhead A lot of this chapter has been devoted to discussing the application of overhead to production. Overhead is applied based on a predetermined formula, and considerable thought needs to be put into the appropriate basis (cost drivers) for making this allocation. An account called “Factory Overhead” is credited to reflect this overhead application to work in process. But, what is the source of the debits to Factory Overhead? * 15.1 The Factory Overhead Account The Factory Overhead account is not a typical account. It does not represent an asset, liability, expense, or any other element of financial statements. Instead, it is a “suspense” or “clearing” account. Amounts go into the account and are then transferred out to other accounts. In this case, actual overhead goes in, and applied overhead goes out! The credits to this account are generated when overhead is applied to production; now focus on the debits which represent the actual amounts being spent on overhead.
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