Sales Price Variance

(Actual Sales Price - Master Budget Sales Price) × Actual Unit Sales

The Variance shows how much of the difference between

actual and budgeted contribution margin is caused by the
difference between actual and budgeted sales prices.
 
Sales Volume Variance
(𝐴𝑐𝑡𝑢𝑎𝑙 𝑈𝑛𝑖𝑡 𝑠𝑎𝑙𝑒−𝑀𝑎𝑠𝑡𝑒𝑟 𝐵𝑢𝑑𝑔𝑒𝑡-𝑈𝑛𝑖𝑡 𝑆𝑎𝑙𝑒) ×𝑀𝑎𝑠𝑡𝑒𝑟 𝐵𝑢𝑑𝑔𝑒𝑡 𝐴𝑣𝑒𝑟𝑎𝑔𝑒-𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 .
(Actual Unit Sales - Master Budget Unit Sales) x Master Budgeted Average Contribution margin per unit*
*:
APPLICATION:
Karen Company’s actual and budgeted sales and expense data for April are as follows:

Actual Budgeted

Product Product Product Product

Zim Zoom Zim Zoom

Sales in units 4800 5300 5000 5000

Selling price per unit P 12.50 P 10.00 P 13.00 P 10.00

Variable expenses per unit P 6.90 P 5.65 P 7.00 P 5.50

Contribution Margin per unit P 5.60 P 4.35 P 6.00 P 4.50

Fixed expenses for the month for both products

P 40,360.00 P 40,000.00
Required:
Determine the following variances and indicated whether they are favorable and unfavorable

Sales Price Variance

Sales Volumes Variance
Sales Mix Variance
 Solution: Karen Company
Sales Price Variance
Product Zim =
= 2,400 unfavorable

Product Zoom = (P10-P10) x 5300 units

=P0
Total Sales Price Variance
Zim P2,400 unfavorable
Zoom 0
P2,400 unfavorable
Karen’s management may have a pricing problem
with Product Zim as shown in the computation of
sales price variance.
 Sales Volume Variance

= (10,100 units – 10,000 units) x P5.25 per unit

= P525 favorable

Master budget average = (5,000 x P6) + (5,000 x P4.50)

10,100 units
= P5.25
 Sales Mix Variance
= (5.21287 – P5.25) x 10,100 units
= P375 unfavorable

Flexible budget average = 4800 x P6 + (53000 x P4.50)

contribution margin per unit 10,100 units
= P5.21287
Transfer Pricing
Rationale
When goods or services are transferred from one unit of an
organization to another, the transaction is recorded in the
accounting records. In the days when all companies were small
and management was centralized, accountants transferred
goods and services from one cost center to another at the cost
of production. Simply transferring goods and services at cost
no longer serves the needs of these decentralized organizations.
TRANSFER PRICE

is the price charged when one segment of a

company provides goods or services to another
segment of the company. It is the value assigned
to goods and services transferred between
segments within the company
 The Need to Transfer Price:

The Department selling goods and services the transfer

price is the REVENUE

The Department buying goods and services the transfer

price is the COST

Therefore, transfer prices have a direct bearing on

segment margin.
A particular transfer pricing basis may also be an excellent
management tool:

For motivating division managers

For establishing and maintaining cost control

systems

For measuring internal performance

COST-BASED TRANSFER
PRICE
Variable cost Transfer Price
The transfer price is based only on variable or
differential costs. The advantage of using basis is
that it ensures in the short-run the best use of
total corporate facilities because it focuses
attention on the contribution margin a transfer
generates and on how it increases short-run
profitability
DISADVANGE OF USING VARIABLE COSTS OR
DIFFERENTIAL COSTS BASIS IN SETTING TRANFER PRICE:

A company must cover all costs before earning a profit

It allows one segment manager because the receiving
segment receives all the profit
The use of this method could lead to dysfunctional
decisions If a segment must forego outside sales to
make products for other internal segment

Transfer prices based on differential costs dismissals the

autonomy in decision-making of the profit centers.
Full Cost Transfer Price

Full Cost includes actual manufacturing costs

(Variable and fixed) plus positions of marketing
and administrative costs. Many companies use
full cost because of the following reasons:
 Reasons:
It is easy and convenient to apply.
It leaves no intercompany profits in inventory to
eliminate when pricing consolidated statement.
It allows simple and adequate end-product costing for
profit analysis by product lens.
 This approach however is not suitable for
companies with decentralized structures that
measure the profitability of autonomies units.
 GOAL CONGRUENCE
means the correspondence or consistency of
individual manager’s sub goals with the
company’s overall goals.
 Standard Full cost may also be used instead of
the historical average cost because it eliminates the
negative effect of fluctuations in production efficiency
in one division on the reports income of another
division. Division managers determine in advance
what price that will receive or what price they will pay
for transferred goods.
 Alternative Costs Measure

Full Absorption Cost-Based Transfer price

 Many manufacturing firms are Full-absorption
costs basis because of the difficulty in determining
the opportunity cost to the company of making
internal transfer. It must be noted that only the
manufacturing costs, variable and fixed, should be
included in full absorption cost, some advantages
of this approach are:
Costs are available in the company’s records.
They provide the selling division with a contribution
equal to the excess of full-absorption costs over variable
costs, which gives the selling division an incentive to
transfer internally.
This may be a better measure of the differential costs of
transferring internally than the variable costs because
other costs such as unknown engineering and design
cost are included
 Cost-Plus transfer
Some companies use cost-plus transfer
pricing based on either variable cots or full
absorption cost.
Negotiated Transfer PRICE

It is an attempt to stimulate an arms-length transaction

between supplying and buying segment. If companies
give segment managers autonomous authority to buy
and sell as they think necessary and if they bargain in
good faith, the result of this beginning is the
equivalent of a market price.
 Advantage:

They preserve the autonomy of the division

of the managers.
 Negotiated prices eliminate the objectivity
necessary to ensure maximization of
companywide profits. As a results the
negotiated price may distort segment financial
statement and mislead decisions.
ALTERNATIVE TRANSFER PRICING SCHEME
 
MINIMUM TRANSFER PRICE
A general rule for making transfers to maximize a
company’s profit in either perfect or imperfect market
uses the formula.
 It represent the lower limit since the selling division must
receive at least the amount shown by the formula in order to be
as well of as if it sold only to outside customers.

If the selling division has sufficient idle capacity to meet the

demand of another division without counting into the sales of its
regular costumers then it does not have opportunity cost. Hence,
it will be equal to the differential or variable costs per unit.
MARKET-BASED TRANFER APPROACH

Under this approach, the transfer price Is the price at which the
goods are sold on the open market.
The market price approach it is where the product or service is sold it
its present form to outside customers, if the selling division has no
idle capacity, the market price in the outside market is the perfect
choice for the transfer price. Whether the item is transferred
internally or sold on the outside market the production cost are
exactly the same.
 By using market prices it can control transfers, all
divisions and segments are able to show profits for
their efforts.
This market price approach is particularly useful in
highly decentralize organizations. As a general rule,
this policy should contain the following guidelines:
 Guidelines:

The buying division must purchase internally so long as the selling

meets all bona fide outside prices and wants to sell internally.
The selling division must be free to reject internal business if it
prefers to sell outside
If the selling division does not meet all the bona fide outside
prices, then the buying division is free to purchase outside.
As independent and impartial body must be established to settle
disagreements between divisions over transfer prices.