Accounting for Managers: Interpreting accounting information for decision-making

202 ACCOUNTING FOR MANAGERS

Table 13.5 Divisional financial results

Activity 10,000 12,000 15,000

Division A

10,000 units 100,000 100,000 100,000

2,000 units @ £5 10,000

5,000 units @ £5 25,000

Total cost 100,000 110,000 125,000

Transfer price @ £13 130,000 156,000 195,000

Division profit 30,000 46,000 70,000

Division B

Transfer from Division A 130,000 156,000 195,000

Conversion cost

10,000 units 300,000 300,000 300,000

2,000 units @ £15 30,000

5,000 units @ £15 75,000

Total cost 430,000 486,000 570,000

Selling price @ 50 46 39

Sales revenue 500,000 552,000 585,000

Division profit 70,000 66,000 15,000

Company

Sales revenue 500,000 552,000 585,000

Division A cost −100,000 −110,000 −125,000

Division B cost −300,000 −330,000 −375,000

Company profit 100,000 112,000 85,000

Table 13.6 Division A costs

10,000 12,000 15,000

Division A total costs 100,000 110,000 125,000

Average per unit 10.00 9.17 8.33

as both will see it as disadvantaging them in terms of divisional profits, against
which divisional managers are evaluated.
For Division A, variable costs over 10,000 units are £5, but its transfer price is
£13, so additional units contribute £8 each to divisional profitability. A’s average
costs reduce as volume increases, as Table 13.6 shows.
However for Division B, its variable costs over 10,000 units are £28 (transfer
price of £13 plus conversion costs of £15). The reduction in average costs of £2.50
per unit is more than offset by the fall in selling price (net of variable selling costs),
as Table 13.7 shows.