SQU Motors LLC has two divisions producing engine parts (Division A) and the assembly (Division B). Division A produces two different engine parts of Khoud 5 and Khoud 6 which are being used by Division B. The following details are available (All in OMR). Khoud 5 Khoud 6 Production Capacity 108,000 205,000 Current Demand Khoud 5 Khoud 6 107,000 215,000 Variable Cost per unit Fixed Costs (for full capacity) 130,000 8.80 15.10 30,000 Selling Price per unit Outside Supplier's price per unit 12.80 15.60 10.50 15.80 (a) Assuming that the required units by Division B is 5,000 and 8,000 units for each component of Khoud 5 and Khoud 6 respectively, compute the minimum Transfer Price for both products if SQU's costing policy is "full absorption". (b) Explain for each product, whether the Transfer Price in (a) above would be agreeable to both Divisions and whether it would help SQU Motors LLC to maximize its shareholder's wealth. (Note: Please provide relevant numerical justifications to support your answers) (c) Compare and contrast the different approaches available for SQU Motors LLC in setting the Transfer Prices.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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