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Question ID : 28408

Divisional cost restatement, in consolidation

A company makes Product X and sells to customers. The per unit cost profit structure is as below. Material cost Rs. 35 Add Labour and other direct costs (Process A) Rs. 15 - Cost of Process A output Rs. 50 Add Labour and other direct costs (Process B) Rs. 20 Add Overhead costs and profit Rs. 30 - Selling price of finished product X Rs. 100 - The company creates a new Division Z to cater to a certain geographical segment, and to save on outward transport cost. The company transfers a part of its Process A output to Division Z at ten percent profit on cost, i.e., Rs. 50 + 10 Rs. 55 Division Zs consequential per unit cost profit structure is as below. Material cost, transferred by Head office Rs. 55 Add Labour and other direct costs (Process B) Rs. 20 Add Overhead costs and profit Rs. 25 - Selling price of finished product X Rs. 100 - In consolidated profit and loss statement (and MIS), inter-unit transfer out in are set-off. Unrealised profit in inventory carried by Division Z at end-of-period is also eliminated. In standalone mode, Division Zs accounts should reflect material cost at Rs. 55. However, my question is "in consolidation, should the material cost in Division Zs accounts be restated to have parity with true cost at company level"? To elaborate, the companys material cost is 35 of selling price, whereas Division Z reports material cost as 55 of selling price (for same finished product X). In other words, should Division Zs "material cost" be split into "true company material cost Rs. 35", "labour and other direct costs Rs. 15", and "profit kept by company Rs. 5"? This would show the correct revenue components at company level. Please provide your views, for and against.

Posted by A. Banerji on Jan 13, 2018

Filed Under MISC.