Bernie Manufacturing Company Has Two Divisions, X and Y

question 40

Essay

Bernie Manufacturing Company has two divisions, X and Y. Division X prepares the steel for processing. Division Y processes the steel into the final product. No inventories exist in either division at the beginning or end of 2011. During the year, Division X prepared 80,000 kgs. of steel at a cost of £800,000. All the steel was transferred to Division Y where additional operating costs of £5 per kg. were incurred. The final product was sold for £3,000,000.
a.Determine the gross profit for each division and for the company as a whole if the transfer price is £8 per kg.
b.Determine the gross profit for each division and for the company as a whole if the transfer price is £12 per kg.

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Definitions:

Machine Hours

A measure of production time used in cost accounting to allocate costs to products or services based on the time they spend being processed on a machine.

Factory Overhead

All indirect costs associated with manufacturing, excluding direct materials and direct labor, such as utilities, depreciation, and maintenance of equipment.

First-in, First-out Method

An inventory valuation method where goods first received are the first ones sold, assuming that inventory costs rise over time.

Conversion Costs

The costs incurred to convert raw materials into finished products, including labor and overhead.