TUTORIAL

1. Window Elements Sdn. Bhd. (WESB) manufactures aluminium windows and

doors for residential homes. The aluminium window frames are produced in the
Frame Division. The frames are then transferred to the Glass Division, where the
glass and hardware are installed. The company’s best-selling product is the fixed-
glass window. The standard cost of the window is detailed as follows:

Frame Division (RM) Glass Division (RM)

Direct material 30 60*
Direct Labour 40 30
Variable overhead 60 60
Total standard cost 130 150
*Not including the transfer price for the frame.

The Frame Division can also sell frames directly to custom home builders, who
install the glass and hardware. The sales price for a frame is RM160. The Glass
Division sells its finished windows for RM380.

Required:
(a) Assume that there is no spare capacity in the Frame Division,
(i) use the general rule to calculate the transfer price for window
frames.
Formula:
=Outlay cost/Variable cost + opportunity cost/contribution margin
=RM130+(RM160-RM130)
=RM130+RM30
Transfer price=RM160

(ii) calculate the transfer price if it is based on standard variable cost

with a 10 percent mark-up.
=RM130+(10% X RM130)
Transfer price=RM143
1
(b) Assume that there is spare capacity in the Frame Division,
(i) Use the general rule to calculate the transfer price for window
frames.
Formula: =Outlay cost/Variable cost + opportunity
cost/contribution margin
=RM130+RM0
Transfer Price=RM130

(c) Suppose that the predetermined fixed overhead rate in the Frame Division
is 125 percent of direct labour cost. Calculate the transfer price if it is based
on standard absorption cost plus a 10 percent mark-up.

Fixed overhead cost=125% X RM40 (Direct labour cost) =RM50

=RM130 (Variable cost) +RM50 (Fixed cost) +(10% X (RM180-

fixed cost and variable cost)

=RM180+RM18

Transfer Price=RM198