managment accounting
Requirement 1
(a) Johnson’s believes that the transfer from the Cushion Division to the Furniture Division should be at market price rather than at cost however this depends on the capacity of the Cushion Division.
Johnson’s believes that the transfer from the Cushion Division to the Furniture Division should be at market price rather than at cost however, if there is no idle or spare capacity in Cushion Division the market price minus the corresponding variable selling expense would be the minimum transfer price for the Cushion Division. Any price above that is acceptable for Cushion Division. Hence, Johnson's idea of selling at the market price would be incorrect.
If there is spare capacity in the Cushion Division, a variable cost as the transfer price is acceptable. Therefore, Johnson’s belief would be incorrect because using the market price as the transfer price can lead to incorrect decisions. This is because when the Cushion Division has spare or idle capacity, the cost to the company of the transfer is just the variable cost of the item transferred (variable cost of producing the item). However, if the market price were to be used as the transfer price, the manager of the buying division (Furniture Division) would regard the market price as the cost to its division rather than real cost to the company, which is just the variable cost. This can lead to suboptimal pricing and wrong cost information for making decisions.
(b) A better approach is that the company could use to set the transfer rices is the negotiating transfer price. The negotiated transfer price allows for the Cushion Division manager and the Furniture Division manager to negotiate a price that is acceptable for both of them. The negotiate price is between the market price (maximum price buyer is willing to pay) and the variable costs price (minimum price seller is going to sell). Hence, this allows the manager to play within the range and the final price in most circumstances
(a) Johnson’s believes that the transfer from the Cushion Division to the Furniture Division should be at market price rather than at cost however this depends on the capacity of the Cushion Division.
Johnson’s believes that the transfer from the Cushion Division to the Furniture Division should be at market price rather than at cost however, if there is no idle or spare capacity in Cushion Division the market price minus the corresponding variable selling expense would be the minimum transfer price for the Cushion Division. Any price above that is acceptable for Cushion Division. Hence, Johnson's idea of selling at the market price would be incorrect.
If there is spare capacity in the Cushion Division, a variable cost as the transfer price is acceptable. Therefore, Johnson’s belief would be incorrect because using the market price as the transfer price can lead to incorrect decisions. This is because when the Cushion Division has spare or idle capacity, the cost to the company of the transfer is just the variable cost of the item transferred (variable cost of producing the item). However, if the market price were to be used as the transfer price, the manager of the buying division (Furniture Division) would regard the market price as the cost to its division rather than real cost to the company, which is just the variable cost. This can lead to suboptimal pricing and wrong cost information for making decisions.
(b) A better approach is that the company could use to set the transfer rices is the negotiating transfer price. The negotiated transfer price allows for the Cushion Division manager and the Furniture Division manager to negotiate a price that is acceptable for both of them. The negotiate price is between the market price (maximum price buyer is willing to pay) and the variable costs price (minimum price seller is going to sell). Hence, this allows the manager to play within the range and the final price in most circumstances