DVR Limited has two profit centres, Division Red and Division Blue. Division Red supplies Division Blue with a part finished product. Division Blue finishes the product and sells the finished units in the market place at £70/unit. Currently Division Red is working at full capacity and there is no external market for the part finished product. Budgeted data for the year is: Division Red Division Blue Number of units transferred/sold 25,000 25,000 Material cost per unit £12.00 £20.00 Other variable costs per unit £5.00 £10.00 Annual fixed costs £35,000 £40,000 Currently Division Red transfer the part finished item to Division Blue at marginal cost plus 20%. The transfer cost is not included in the Division Blue figures above. Required: Calculate the budgeted annual profit for Division Red, Division Blue and DVR Limited and comment on whether the current arrangement would be deemed fair to both divisions.
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.
DVR Limited has two profit centres, Division Red and Division Blue. Division Red supplies Division Blue with a part finished product. Division Blue finishes the product and sells the finished units in the market place at £70/unit. Currently Division Red is working at full capacity and there is no external market for the part finished product.
Budgeted data for the year is:
|
|
Division Red |
Division Blue |
|
Number of units transferred/sold |
25,000 |
25,000 |
|
Material cost per unit |
£12.00 |
£20.00 |
|
Other variable costs per unit |
£5.00 |
£10.00 |
|
Annual fixed costs |
£35,000 |
£40,000 |
Currently Division Red transfer the part finished item to Division Blue at marginal cost plus 20%. The transfer cost is not included in the Division Blue figures above.
Required:
Calculate the budgeted annual profit for Division Red, Division Blue and DVR Limited and comment on whether the current arrangement would be deemed fair to both divisions.
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