Question

Company La Estrella de Belén obtains the following information from its accounting records related to its...

Company La Estrella de Belén obtains the following information from its accounting records related to its product:

Finished product Direct Labor $ 8.00 / unit

Direct Materials $ 15.00 / unit

Indirect Fixed Costs $ 6.00 / unit

Indirect Variable Costs $ 8.00 / unit

The company internally transfers this product to another of its divisions. It also sells this product to external customers for $ 35. What will be the transfer price if the company uses the variable cost method?

a.$ 31

b. $ 23

c. $ 35

d. $ 25

Business   Accounting   
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Answer #1

Correct answer---(a) $31

Per unit

Direct Material

$   15.00

Direct labor

$      8.00

Variable overheads

$      8.00

Minimum transfer price

$   31.00

Transfer price will be equal to relevant cost of product. Relevant cost will be the cost that is actually required to make a product. Variable cost is relevant cost as this cost is avoided if no production is done.

Fixed cost will not be taken for consideration as it will remain same no matter how many units of product are produced and sold.

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