Page 121 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes 1. Cost and selling price per kg of products of machine division for normal sales
Crane shafts Tyre rims
Direct materials 38 30
Direct wages 28 20
Variable overheads
(10  7) 70
(10  5) 50
Total variable cost 136 100
Fixed cost
(8 7), (8  5) 56 40
Total cost 192 140
Add: mark up (25%) 48 35
Selling price 240 175
2. Committed production of tyre rims of 4400 kgs (440  10) would involve labour hours

of 22000 (4400  5). The balance hours are available for production of crane shafts 14000
(36000 – 22000).
Production of crane shafts = 14000/7 = 2000 hrs.

No. of crane shafts transfer to tractor division consume 1500 kgs (75  20) and balance
500 kgs (25 crane shafts) are sold in normal market.
(i) Profitability statement of both division and company as a whole

Machine division ` Tractor division `
Sales: Sales HOCL
Crane shafts 2000 240 480000 75 8000 600000
Tyre rims 4400 175 770000 Variable cost:
Total sales 1250000 Transfer from Machine division 360000
1500 240
Variable cost: Processing of material labour 112500
Crane shafts to tractor divisions 198000 Total variable cost 472500
1500 132
Normal market 500 136 68000 Fixed cost 140000
Tyre rims 4400 100 440000 Total cost 612500
Total variable cost 706000 Loss (12500)
Fixed cost 8 36000 288000
Total cost 994000
Profit 256000

Overall profit of the company ` 256000 – 12500 = 243500
(ii) Transfer price based on total cost after adjustment for selling expenses

Machine division ` Tractor division `
Sales: Sales HOCL
Crane shafts 1500 236 354000 75 8000 600000
Normal market 500 240 120000 Variable cost:
Tyre rims 4400 175 770000 Transfer from machine division 354000
1500 236
Total sales 1244000 Processing of material labour 112500
Variable cost: Total variable cost 466500
Contd...
Crane shafts to tractor divisions
1500*132 198000 Fixed cost 140000
Normal market 500 136 68000 Total cost 606500
116 LOVELY PROFESSIONAL UNIVERSITY
Tyre rims 4400 100 440000 Loss (6500)
Total variable cost 706000
Fixed cost 8 36000 288000
Total cost 994000
Profit 250000