(a) Transfers between processes in a manufacturing company can be made at (i) cost or (ii) sales value at the point of transfer.

Discuss how each of the above methods might be compatible with the operation of a responsibility accounting system. (8 marks)

(b) Shadow prices (net opportunity costs or dual prices) may be used in the setting of transfer prices between divisions in a group of companies, where the intermediate products being transferred are in short supply.

Explain why the transfer prices thus calculated are more likely to be favoured by the management of the divisions supplying the intermediate products rather than the management of the divisions receiving the intermediate products.