Question

Assigning manufacturing overhead cost to activity pools is referred to as first-stage allocation because costs are assigned first to the activity pools before being assigned to

	a.	cost objects.
	b.	activity objects.
	c.	activity drivers.
	d.	cost drivers.

Omer Limited produces and sells electronic sound equipment. The company has production capacity of 20,000 units and currently production schedule is for 18,000 units. Each unit has a selling price of $25, variable product cost of $15, and variable selling cost of $2. Another division wishes to purchase 500 units. If Omer sells the units to the other division, it will avoid $1 of the variable selling costs. What is the minimum transfer price that will maximize corporate profits?

	a.	$16
	b.	$15
	c.	$17
	d.	$25

Answer 1

Question 1: The correct answer is cost objects - option a.

Cost objects are products for which the costs have been incurred. For example, direct materials, direct labor and manufacturing costs are incurred for the manufacture of products.

When the manufacturing overheads are assigned to activity pools, the activity rates are determined which are then allocated/assigned to the respective products. Hence, option a is the correct answer.

Question 2: Omer Limited has a production capacity of 20,000 units. Out of this, it is currently producing 18,000 units. Hence, it has a spare capacity of 2,000 units. Now, another division wishes to purchase 500 units. Since the spare capacity exists for such number of units, no outside sales have to be sacrificed for this transfer. Hence, the minimum transfer price for maximizing the corporate profits will be the variable cost to be incurred per unit for the transfer which is calculated as follows:

Minimum transfer price = Variable product cost + Variable selling cost

=> Minimum transfer price = $15 + $1 = $16 per unit

Hence, option a is the correctt answer.