centre and then compare their efficiency. Some transfer pricing criterias according to UOS notes (2008) are: Market based transfer pricing – In this case Country A charges Country B according to the market price. Therefore, the manager’s performance is comparable as both have opportunity to make profit. Negotiated Transfer Pricing – Here the prices are negotiated, keeping profit margin for each of them. In this case they are also comparable. Full cost transfer pricing – In this case, the suppliers do not keep profit for their division, instead full cost is transferred to another department and the final profit is made by the last department. Thus, the profit centres are not comparable to each other. International transfer pricing – …show more content…
b) Loss of overall central control of the company: Since each profit centre operates separately, there is less or no central control from the senior management or headquarters. This may loosen the strategic objective of the entire organisation. c) Unfair evaluation to divisional managers in case of Full cost transfer pricing: In case of full cost transfer pricing, the supplier profit centre do not keep profit for themselves, instead they sell goods at the cost of production price. Therefore, the supplier profit centre manager is unable to generate profit. At the end of financial year, if this is not taken into consideration, the evaluation becomes unfair. 7. Investment Centre Managers for the MNC As illustrated in the diagram, the author recommends making African region as an investment centre. According to a recent survey by mergermarket.com, (Sep 08), African countries such as Ghana, Tanzania, Kenya, Uganda, South Africa and North African region- all offer good opportunities for investors, as they are opening up for Foreign Direct Investments …show more content…
There are a number of decision making situations such as setting price on special orders, optimal sales mix, adding/dropping to the product line, etc where marginal/variable costing is taken into consideration. The author has taken the initiative to identify two managerial decision making situations where marginal/variable costing is most appropriate. 1.1 Make or Buy decisions: An organisation often needs to decide whether it should manufacture a component or buy it from outsiders; in this case, marginal/variable costing is the most appropriate approach to help the manager decide what to be done. Here, the relevant cost is the differential cost between the two options. This situation is explained below with an example of a fictitious organisation supported by Khan M.Y &Jain P. K (1993). (Please refer to Appendix 5 for relating the facts and figures of the analysis below) Answer and Discussion A B C
Cost management plays a major role when maintaining profit margins. Management must be able to find in which areas of a business costs must be reduced and the consequences that such reductions have in the overall company. In some situations management must change the way the work is being done in order to decrease costs while in other cases changing one supplier for another might be enough, in both situations a tradeoff will occur and the consequences will impact the company as a whole.
[6] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 8, Cost-volume-profit analysis, p. 165-173
If adding the budget for transportation cost is ignored, and even if the Merseyside project can add total throughput, the transportation division still cannot transfer the spared throughput due to the throughput is over the ability of the original transferring utility. Therefore, there will be a charge of ₤2millions which will be added to the project.
Cost-plus pricing, it the industry pricing standard, and is a method to determine a price of the product by finding the cost per unit and then including a mark-up
It was the year 1987 when the Gartner Group popularized the form of full cost accounting named Total Cost of Ownership (TCO)(author, Gartner Total Cost of Ownership). Originally TCO was mainly used in the IT business sector. This changed in the 1980’s when it became clear to many organizations that there is a distinct difference between purchase price and full costs of a products ownership. This brings us towards the main strength of conducting a TCO analysis, besides taking the purchase costs into account, which consist of the amount a money an organization pays for the required service, product or capital outlay. It also considers 1. Acquisition costs; these can consist of sourcing, administration, freight, and taxes. 2. Usage costs, which consists of the costs associated with converting the given product or service into a finished product. And finally 3. End of life cycle costs; the costs or profits incurred when disposing of a product. TCO can be seen as a form of full cost accounting; it systematically collects and presents all the data for each proposed alternative.
If done right, I believe that all of the costs can be allocated to each of the three products through both direct and overhead costs. The only direct costs that are being included currently are labor and manufacturing costs. I broke up overhead into overhead based off direct labor and overhead based on units sold.
Signode Industries Inc. - Providing Packaging Solutions Executive Summary SIGNODE INDUSTRY: DILEMMA AT HAND: Mr. Gary Reed, President of Signode Industries packaging division, is in a dilemma as what he should be his course of action to meet the 6.8% increase in price of cold rolled steel- the raw material used in manufacture of Signode’s primary product, steel strapping. There are few options given in the case: Increase Signode’s strapping prices to offset the increased price of cold – rolled steel. Maintain Signode’s current book prices as increasing prices would affect sales force morale. Introduce price-flex model as proposed by Jack Davis i.e. a kind of selective discounting or premium charging for customized services. Recommendations Reason: (All data in accordance to 1983) In accordance to Exhibit 1: Sales of Packaging Division of the company = $285,950 In accordance to Table A: Sales of Apex = 33.3% of $285,950 Sales of BBM = 26.8% of $285,950 Sales of HDM = 33.4% of $285,950 Sales of Customized Products = 6.5% of $285,950 In accordance to Exhibit 4: Similarly, For Apex: As it has a capacity utilization of 71% now, Suppose a sale is $100. Then contribution is $39.15 Therefore variable cost is $60.85. Now if we increase the capacity utilization to 100%, Sales becomes $ 141 since production increases by [(100-71)/71] * 100 = 41% Variable Cost = 141% of 60.85 = $85.8 Fixed Cost = 69.38% * 12.3 = $8.53 Total Cost = 85.8+8.53 = $94.33 EBIT = Sales – Variable cost – Fixed Cost = $46.67 % of EBIT = [(46.67/141) * 100] = 33.09% Suppose the company sales 100x units, the total cost was 69.38. Thus per unit cost was .6938. Now the company sells 141x units, the total cost...
Term “marginal” is extensively used and known with reference to the economics which means “extra”, whereas with economic view point the marginal cost is the cost of producing every extra unit; however the accounting terminology of “marginal” defines the cost incurred on production other than its fixed cost is the marginal cost. Simply, none of the technique is applied unless it serves the benefits and the marginal costing is used by the firms for its registered benefits. Among all its benefits the primary advantage it serves is its attempt to distinguish the fixed and variable costs, and the method only considers the related variable costs to be included in production cost and the fixed costs are thus later deducted out for ascertaining net profit. The inventory at the year-end is also valued on the bases of variable cost. With all these beneficial characteristics of the said system firms using marginal costing are clearly aware of its ...
BASF’s product which is under business case evaluation comes from a business unit called EV and EV is not producing the chemicals needed for BASF’s innovation chemistry by its own. Hence EV will need to source the chemical from another business unit called EM. During this the product will be charged at transfer price as per BASF transfer price guidelines. Using the ‘Transfer Price calculation method selection’ (proposed my BASF’s ZZ) we can conclude that EV will qualify for cost plus transfer pricing. Referring BASF’s recent cost plus methodology (applicable from January 2014) and adapting it to our situation it can be said ...
As such, there is material cost regulator, manufacturing control, labor cost regulator, excellence control and so on. Conversely, control over the price is implemented through the methods of financial control and typical costing (Meigs, 1998). The control methods aid the management in understanding the operating competence of a firm. Cost accounting also determines the selling price. The intention of all business firms is minimizing costs and maximizing profits. The costs incurred in producing goods and services may be reduced through incorporating alternate but cheaper resources of
Cost allocation is the process of identifying, aggregating, and assigning of cost to various separate activities. There is no overly precise method of charging cost to objects, hence resulting to approximate methods being used to do so. Amongst the approximation basis used includes square footage, headcount, cost of assets employed, and electricity usage amongst others. The main aim of cost allocation is to spread cost in the fairest possible method and also to impact the behavior pattern of the cost.
One of the benefits of using ABC system is product and price mix decisions; one of the
Job costing involves usage of situations where every job is done cost differently, consumers specifications play a bigger picture in this case. Direct and indirect costs are encountered. It is believed that job costing has lots of costs accrued from the production to the consumers (REEVE, J. M., WARREN, C. S., & DUCHAC, J. E. 2012). This involves labor, running of machines, and all the individuals who are involved in the production of a product from raw to the final product, indirect costs are applied in this order. Job costing order is best showcased in a manufacturing company, let’s take coca cola company, company specialized in beverages manufacturing and distribution, usually customers have no say in the final products of this company, but as the trends for consumption of a certain flavor, according to their statistics they will conform with the demands. The special requirements, like name branding on the bottles of the beverages, customization of the containers have had a significant impact in the consumption of coca cola products (Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. 2010).
...h the full expenses included. Challenge overseeing and incorporating over a huge supply change and developing patterns.
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.