Case 12A–7 (60 minutes)
1. The Electronics Division is presently operating at capacity; therefore,
any sales of the XL5 circuit board to the Clock Division will require that
the Electronics Division give up an equal number of sales to outside
customers. Using the transfer pricing formula, we get a minimum
per unit Number of units transferred
$8.25 + ($12.50 – $8.25)³Transfer price
$8.25 + $4.25³Transfer price
$12.50³Transfer price
Thus, the Electronics Division should not supply the circuit board to the
Clock Division for $9 each. The Electronics Division must give up
costs contained in the Clock Division’s $69.75 cost per timing device is
not relevant. There is no indication that winning this contract would
actually affect any of the fixed costs. If these costs would be incurred
regardless of whether or not the Clock Division gets the oven timing
device contract, they should be ignored when determining the effects of
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642 Managerial Accounting for Managers, 3rd Edition
Exercise 12B-1 (20 minutes)
1.
Long-Run Average
Number of
Employees
Percentage
Cutting Department ……
600
30%
Milling Department …….
400
20%
Assembly Department …
1,000
50%
Total ……….………………
2,000
100%
Cutting
Milling
Assembly
Variable cost charges:
$60 per employee × 500 employees .
$ 30,000
$60 per employee × 400 employees .
$ 24,000
$60 per employee × 800 employees .
$ 48,000
Fixed cost charges:
30% × $600,000 ………………………..
180,000
20% × $600,000 ………………………..
120,000
50% × $600,000 ………………………..
300,000
Total charges ……………………………….
$210,000
$144,000
$348,000
2. Part of the total actual cost is not charged to the operating departments
as shown below:
Variable
Cost
Fixed
Cost
Total
Total actual costs incurred ……………
$105,400
$605,000
$710,400
Total charges …………………………...
102,000
600,000
702,000
Spending variance ……………………..
$ 3,400
$ 5,000
$ 8,400
The overall spending variance of $8,400 represents costs incurred in
excess of the budgeted variable cost of $60 per employee and the
budgeted fixed cost of $600,000. This $8,400 in uncharged costs is the
responsibility of the Medical Services Department.
Exercise 12B-3 (15 minutes)
1. and 2.
Arbon
Refinery
Beck
Refinery
Total
Variable cost charges:
$0.30 per gallon × 260,000 gallons …
$ 78,000
$0.30 per gallon × 140,000 gallons …
$ 42,000
$120,000
Fixed cost charges:
60% × $200,000 ………………………..
120,000
40% × $200,000 ………………………..
80,000
200,000
Total charges ……………………………….
$198,000
$122,000
$320,000
3. Part of the $365,000 in total actual cost will not be allocated to the
refineries, as follows:
Variable
Cost
Fixed
Cost
Total
Total actual costs incurred ……………….
$148,000
$217,000
$365,000
Total charges (above) …………………….
120,000
200,000
320,000
Spending variance …………………………
$ 28,000
$ 17,000
$ 45,000
The overall spending variance of $45,000 represents costs incurred in
excess of the budgeted $0.30 per gallon variable cost and budgeted
$200,000 in fixed costs. This $45,000 in unallocated cost is the
responsibility of the Transport Services Department.
