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(a) Actual manufacturing cost:
In this method goods or services are transferred at their actual cost of production. It is useful for those units where the responsibility of profit performance is centralised. Under this method, it is difficult to measure the performance of each profit centre.
In this method goods or services are transferred at their actual cost of production. It is useful for those units where the responsibility of profit performance is centralised. Under this method, it is difficult to measure the performance of each profit centre.
(b) Standard cost:
Under this method all transfers of goods and services are made at their standard cost. Any difference between actual and standard cost viz., variances are usually absorbed by the supplying unit. In some cases, variances are transferred to the user unit as well. This will result in the inventory being carried at identical standard cost by both the supplying and receiving units. Here also the profit performance responsibility is centralised and thus it cannot be measured for individual units involved.
(c) Full cost:
Full cost means cost of production plus expenses like selling and distribution, administration, research and development cost etc. In this method, the supplying unit is not allowed to make any profit on transfers to other units. But it is free to earn profit on outside sale. One good thing about this method is that the supplying unit is allowed to recover the full cost of the goods/services transferred.
(d) Full cost plus mark up:
Under this method the supplying unit transfers goods and services at full cost plus some mark-up. The markup added to full cost is either expressed as a percentage of full cost or of capital employed. Selling expenses here are recovered by the supplying unit without incurring them, especially when the goods/services are transferred internally. Due to this defect the use of full cost plus method is not appreciated by the internal receiving units.
To overcome this defect either the use of standard cost plus or actual cost plus are preferred. Use of either of the preceding method facilitates the task of measuring profit performance and efficiency of the units involved.
