Absorption cost-variable cost-transfer pricing methods, Managerial Accounting

Assignment Help:

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.


Related Discussions:- Absorption cost-variable cost-transfer pricing methods

Marginal and absorption costing, How marginal costing would improve the pro...

How marginal costing would improve the problems faced in absorption costing on manipulation of profits.

Explain the investment versus speculation, Explain the Investment versus Sp...

Explain the Investment versus Speculation? In brief describes the following terms: a) Investment versus Speculation. b) Active and Passive Equity Management c) Systematic v

Seasonal variations and size of business, Seasonal Variations : Commodities...

Seasonal Variations : Commodities along with seasonal demand results in raised level of working capital requirement. It could be offset through scaling down operations throughout t

Operating cycle concepts, Operating cycle considers to the average time lap...

Operating cycle considers to the average time lapse among the acquisition of raw material and the final cash realization. This notion is used to determine the needs of cash working

What is fixed budget, What is Fixed budget The fixed budget is prepare...

What is Fixed budget The fixed budget is prepared for a given level of activity the budget is prepared before the beginning of the financial year. If the financial year starts

Explain activity based costing versus traditional costing, Activity based c...

Activity based costing versus traditional costing Following are the main differences between activity based costing system and traditional costing system: Explain  1) Und

What is the flexible budgets, What is the Flexible budgets  A flexible ...

What is the Flexible budgets  A flexible budget consists of a series of budgets for different level of activity. It therefore varies with the level of activity attained. A flex

Correlation coefficient, Correlation coefficient (r) Correlation coeffi...

Correlation coefficient (r) Correlation coefficient measures the degree of association between two variables such as the cost and the activity level. r = nΣxy   -  Σx  Σy

The f–test , The F–test    The significance of the regression results...

The F–test    The significance of the regression results can be tested by using the F- statistics. The F-statistics is a ratio which compares the explained sum of squares and t

What is pricing decision, Introduction to pricing decision A pricing d...

Introduction to pricing decision A pricing decision is one of the most crucial and difficult decision that a firm has to make. It is one of the most difficult decisions. Such

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd