Question

Question 2 Alliance Consulting is a Windhoek based company that specializes in providing marketing data collection, data processing and consulting services. For the purpose of performance measurement, the company is divisionalized so that other divisions provide services internally and other externally. The profits generated by each division is used to measure the performance of the divisional managers. In May 2018, the Consulting Division (D) did work for Afrox Limited for an agreed fee of N$15 500. The costs associated with this work excluding data processing were N$2 600. The data processing, which required 200 hours of processing time, was done by the Processing Division (P). The data processing could have been outsourced from an external agency, but Division P had 200 chargeable skilled hours available in May. Division P provides data processing services internally as well as to external customers. The budgeted costs of the Division P for the year ending 31 July, which is divided into 12 equal monthly periods, are as follows: N$ Variable costs Skilled labour (6 000 hours worked ) 120 000 Semi-skilled labour 96 000 Other processing costs 60 000 Fixed costs 240 000 The cost above are recovered (absorbed) on the basis of chargeable skilled data processing labour hours which are budgeted to be 90% of skilled labour hours worked. Division P’s external pricing policy is to add a 40% mark-up to its total budgeted cost per chargeable hour. In the month of May, actual labour costs incurred by the Division P were 10% higher than expected, but other costs were 5% lower than expected. Requirement: (a) Determine the total transfer price that would have been charged by Division P to Division C for the 200 hours worked on the Afrox Limited job, if the transfer price was based on the following bases: (i) Actual variable cost; (ii) Standard variable cost plus 40% mark-up; (iii) Market price. (b) Using your answers to requirement (a) above, and with reference to the performance measurement of divisional managers, prepare profit statements to show the effect of the three different transfer prices above on the performance of Division P and Division C. (Note that your profit statements should be in columnar format). (c) Recommend with reasons and appropriate calculations, the transfer price that should be used for the 200 hours worked on the Afrox Limited job.

Answer 1

		(i) Transfer Price Based on Actual variable cost
		Annual Budgeted variable Cost :of skilled labor
	A	Skilled labor	$120,000
	B	Semi skilled labor	$96,000
	C	Other processing costs	$60,000
	D=A+BC	Total AnnualBudgeted variable costs	$276,000
	E	Budgeted skilled labor hours	6,000
	F=D/(0.9*E)	Budgeted Variable cost rate($/hour)	$51.11
		Actual Variable Cost in May:
	G=(A/12)*1.1	Skilled labor	$        11,000
	H=(B/12)*1.1	Semi skilled labor	$          8,800
	I=(C/12)*(1-0.05)	Other processing costs	$          4,750	(60000/12)*0.95
	J	Total variable costs in May	$        24,550
	K=(E/12)*1.1	Skilled labor hours in May	550
		ACTUAL VARIABLE COST FOR 200 HOURS	$          8,927	(24550/550)*200
		(i) Transfer Price Based on Actual variable cost	$          8,927
		(ii) Transfer Price Based on Standard variable cost+40% mark up
	F	Standard Variable cost Rate($/hour)	$51.11
	L	Number of skilled labor hour worked for the job	200
	M=F*L	Standard Variable Cost	$10,222
	N=M*1.4	(ii)Transfer Price Based on Standard variable cost+40% mark up	$14,311
		(iii) Transfer Price Based on market price
	F	Budgeted Variable cost rate($/hour)	$51.11
	P	Annual Fixed Costs	$240,000
	E	Budgeted skilled labor hours	6,000
	Q=P/(E*0.9)	Budgeted Fixed cost Rate($/hour)	$          44.44
	R=F+Q	Budgeted Total cost Rate($/hour)	$95.56
	S=200*R	Chargeable Cost	$19,111
	T=S*1.4	(iii)Transfer Price based on Market Price	$26,756
		Profit For Division D
		Sales revenue		$15,500
		Cost excluding data processing	$2,600
		(i) Transfer Price Based on Actual variable cost	$          8,927
		Total Cost		$11,527
		Profit For Division D		$3,973
		Sales revenue		$15,500
		Cost excluding data processing	$2,600
		(ii)Transfer Price Based on Standard variable cost+40% mark up	$        14,311
		Total Cost		$16,911
		Profit For Division D		($1,411)
		Sales revenue		$15,500
		Cost excluding data processing	$2,600
		(iii)Transfer Price based on Market Price	$        26,756
		Total Cost		$29,356
		Profit For Division D		($13,856)
		PROFIT FOR DIVISION P
		(i) Transfer Price Based on Actual variable cost	$          8,927
		Actual marginal cost for the oprder	$          8,927
		Profit for Divisiopn P	0
		(ii)Transfer Price Based on Standard variable cost+40% mark up	$        14,311
		Actual marginal cost for the oprder	$          8,927
		Profit for Divisiopn P	$          5,384
		(iii)Transfer Price based on Market Price	$        26,756
		Actual marginal cost for the oprder	$          8,927
		Profit for Divisiopn P	$        17,828