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Solutions Manual, Appendix 11A 69
Case 11A-7 (continued)
Sellin
g
price of the brake units…………………………… $50.00
Less:
T
he cost of the fittin
g
s used in the brakes (i.e. the
lost revenue from sale of fittings to outsiders)…… $ 7.50
3. As shown in part (1) above, the Electrical Division would insist on a
transfer price of at least $7.50 for the fitting. Would the Brake Division
make any money at this price? Again, the fixed costs are not relevant in
Sellin
g
price of the brake units………………………….. $50.00
Less:
Purchased parts (from outside vendors)……………. $22.50
Electrical fittin
g
X52 (assumed transfer price) …….. 7.50
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70 Managerial Accounting, 16th Edition
Case 11A–7 (continued)
4. It is in the best interests of the company and of the divisions to come to
an agreement concerning the transfer price. As demonstrated in part (3)
In this case, top management knows that there should be a transfer and
could step in and force a transfer at some price within the acceptable
Our advice to top management would be to ask the two managers to
meet to discuss the transfer pricing decision. Top management should
not dictate a course of action or what is to happen in the meeting, but
should carefully observe what happens in the meeting. If there is no
agreement, it is important to know why. There are at least three
If the refusal to come to an agreement is the result of uncooperative
attitudes or an inability to correctly analyze the situation, top
management can take some positive steps that are completely
consistent with decentralization. If the problem is uncooperative
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Solutions Manual, Appendix 11B 71
Appendix 11B
Service Department Charges
Exercise 11B-1 (15 minutes)
1. and 2.
Northern
Plant
Southern
Plant Total
V
ariable cost char
g
es:
Fixed cost char
g
es:
3. Part of the $364,000 in total cost will not be charged to the plants, as
follows:
Variable
Cost
Fixed
Cost Total
T
otal actual cost incurred……………….. $54,000 $310,000 $364,000
T
The overall spending variance of $19,000 represents costs incurred in
excess of the budgeted $0.25 per ton variable cost and budgeted
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72 Managerial Accounting, 16th Edition
Exercise 11B-2 (20 minutes)
1.
Restaurants
Rick’s
Harborside
Imperial
Garden
Ginger
Wok Total
2.
T
his year
’
s allocation (above)…………………… $640,000 $1,000,000 $360,000 $2,000,000
’
3. Sales dollars is not ordinarily a good base for allocating fixed costs. The departments with the
greatest sales will be allocated the greatest amount of cost and the costs allocated to a department
will be affected by the sales in
other
departments. In our illustration above, the sales in two
’
A
’
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Solutions Manual, Appendix 11B 73
Exercise 11B-3 (20 minutes)
1.
Long-Run Average
Number of Employees Percentage
Cuttin
g
Department ……. 180 30%
T
Cutting Milling Assembly
V
ariable cost char
g
es:
$80 per employee × 150 employees . $ 12,000
$80 per employee × 80 employees … $ 6,400
2. Part of the total actual cost should not be charged to the operating
departments as shown below:
Variable
Cost
Fixed
Cost Total
T
otal actual costs incurred ………….. $41,000 $408,000 $449,000
The overall spending variance of $9,000 represents costs incurred in
A
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74 Managerial Accounting, 16th Edition
Problem 11B-4 (45 minutes)
1.
Auto
Division
Truck
Division
V
ariable costs:
Fixed costs:
65% × $40,000 ………………….. 26,000
T
The variable costs are charged using the budgeted rate per meal and
the actual meals served. The fixed costs are charged in predetermined,
Variable Fixed
T
otal actual cost for the month ..…………… $128,000 $42,000
T
otal cost char
g
ed above ($60,000 +
—
2.
A
ctual variable cost …………… $128,000
A
T
One-half of the total cost, or $85,000, would be allocated to each
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Solutions Manual, Appendix 11B 75
Problem 11B-4 (continued)
3. This method has two major problems. First, allocating the total actual
cost of the service department to the operating departments essentially
allocates the spending variances to the operating departments. This
forces the inefficiencies of the service department onto the operating
4. Managers may understate their peak-period needs to reduce their
charges for fixed service department costs. Top management can
control such ploys by careful follow-up, with rewards being given to
those managers who estimate accurately, and severe penalties assessed
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76 Managerial Accounting, 16th Edition
Problem 11B-5 (20 minutes)
1.
Forming
Department
Assembly
Department Total
V
ariable costs:
$0.40 per machine-hour ×
Fixed costs:
70% × $150,000 ………………. 105,000
T
2. Any difference between the budgeted and actual variable cost per
machine-hour or between the budgeted and actual total fixed cost
would not be charged to the other departments. The amount not
charged would be:
Variable
Cost
Fixed
Cost Total
A