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Absorption cost
Absorption, or full cost systems, transfer the full cost of the supplying department to the receiving department. Where a profit is to be allowed to the supplying division, it is necessary to determine a policy which can be consistently applied. Typical systems may allow a profit based on cost, sales or investment.
Variable cost
Variable cost based systems overcome the decision-making problem of full cost system. Transfers from one division to another are made at variable cost. Standard variable cost overcomes the problem of passing on inefficiencies and diseconomies from division to division.
There are two ways by which profits can be created at a divisional level. The first approach is to apply the principles illustrated in A to marginal costing. Transfer pricing schemes would allow a suitable level of contribution, as measured in terms of contribution on sales ratio. An alternative approach is to create a two-part charging system. One part of the scheme would transfer a lump sum, representing an allowance for divisional fixed cost once a year to allow each division the chance of creating a final profit. The second part of the scheme would value transfers at variable cost.
So as to makes sure that the receivables are collected in occupied and on due date by the customers, prior information of their credit worthiness must be obtainable. This informati
Outline Five characteristics of relevant cost
1. A firm's independent auditors have the responsibility to: a. assess the firm's accounting policies. b. ascertain the firm's profit potential. c. uncover all fraudulent
Illustration: ABC analysis Combine items on the basis of their relative value to form three categories—A, B and C. The data in the table below illustrates the ABC analysis.
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Explain the Break-Even Analysis The study of cost volume profit analysis is often referred to as break-even analysis and the two terms are used interchangeably by many. This i
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Marketing refers to the promotion of products, especially advertising and branding. But marketing includes product management, pricing, prom
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