Question

Which of the following statements is true if variable product cost per unit is used under...

Which of the following statements is true if variable product cost per unit is used under the cost price approach to set transfer prices?

a.If variable product cost per unit is used under the cost price approach to set transfer prices, direct materials and direct labor are excluded from transfer price.

b.If variable product cost per unit is used under the cost price approach to set transfer prices, direct materials cost is excluded from transfer price.

c.If variable product cost per unit is used under the cost price approach to set transfer prices, direct labor cost is excluded from transfer price.

d.If variable product cost per unit is used under the cost price approach to set transfer prices, fixed factory overhead cost is excluded from transfer price.

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Answer #1

Option d

If variable product cost per unit is used under the cost price approach to set to transfer, fixed factory overhead cost is excluded from transfer price.

As variable cost means that with the production, total variable cost will vary. But fixed costs will be constant.

So if variable cost approach is used for transfer pricing, all the variable cost shall be included like direct material, direct labour and other variable overhead costs also. But fixed cost shall be excluded.

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