Arizona Ltd. has two divisions: 1) The Machining Division prepares the raw materials into component parts, and 2) Assembly Division assembles the components into finished product. No inventories exist in either division at the beginning of the year. During the year the Machining Division prepared 80,000 square meters of sheet metal at a cost of $480,000. All production was transferred to the Assembly Division where the metal was converted into 80,000 units of finished product at an additional cost of $5 per unit. The 80,000 units were sold for $2,000,000. Required: Determine the operating income for each division if the transfer price from Machining to Assembly is at cost. Determine the operating income for each division if the transfer price is $5/square meter. Since the Machining Division has all of its sales internally to the Assembly Division, does the manager care what price is selected? Why? Should the Machining Division be a cost center or a profit center under the circumstances?
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.
Question 9.2
Arizona Ltd. has two divisions: 1) The Machining Division prepares the raw materials into component parts, and 2) Assembly Division assembles the components into finished product. No inventories exist in either division at the beginning of the year. During the year the Machining Division prepared 80,000 square meters of sheet metal at a cost of $480,000. All production was transferred to the Assembly Division where the metal was converted into 80,000 units of finished product at an additional cost of $5 per unit. The 80,000 units were sold for $2,000,000.
Required:
- Determine the operating income for each division if the transfer price from Machining to Assembly is at cost.
- Determine the operating income for each division if the transfer price is $5/square meter.
- Since the Machining Division has all of its sales internally to the Assembly Division, does the manager care what price is selected? Why? Should the Machining Division be a cost center or a profit center under the circumstances?
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