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ACC202 MANAGEMENT ACCOUNTING T119 08/03/2019 14:49 Question Topic: Management accounting problem (case study). Background Raven Industries manufactures carpets, furniture and cushions in three separate divisions. The company’s profit statement is presented below: Raven Industries Profit statement for the year ended 31 December Carpet division $ Furniture division $ Cushion division $ Total $ Sales revenue 3,000,000 3,000,000 4,000,000 10,000,000 Cost of goods sold 2,000,000 1,300,000 3,000,000 6,300,000 Gross profit 1,000,000 1,700,000 1,000,000 3,700,000 Operating expenses: Administration 300,000 500,000 400,000 1,200,000 Selling 600,000 600,000 500,000 1,700,000 Total operating expenses 900,000 1,100,000 900,000 2,900,000 Profit from operations before taxes 100,000 600,000 100,000 800,000 Additional information regarding Raven Industries operations is as follows: o Included in the cushion division’s sales revenue is $500,000 that represents sales made to the furniture division. The transfer price for these sales was at variable cost. o The three divisions’ cost of goods sold comprise the following costs: Carpet division $ Furniture division $ Cushion division $ Direct material 500,000 1,000,000 1,000,000 Direct labour 500,000 200,000 1,000,000 Variable overhead 750,000 50,000 1,000,000 Fixed overhead 250,000 50,000 0 Total cost of goods sold 2,000,000 1,300,000 3,000,000 o Administrative expenses include the following: Carpet division $ Furniture division $ Cushion division $ Direct expenses: Variable 85,000 140,000 40,000 Fixed 85,000 210,000 120,000 Head office expenses (all fixed): Directly attributable 100,000 120,000 200,000 General dollars) (allocated based on sales 30,000 30,000 40,000 Total 300,000 500,000 400,000 o All selling expense is incurred at the divisional level. It is 80% variable. Robert Cleveland, the manager of the Cushion Division, is not pleased with the company’s report on operating performance. Cleveland claims: ACC202 ACC202 MANAGEMENT ACCOUNTING T119 08/03/2019 14:49 I believe that the Cushion Division is much more profitable than what has been presented in these management reports. I am required to sell these cushions at cost and therefore based on that cost I earn a certain profit. I can sell these cushions on the outside market at my regular mark-up, but because I am a team player I sell at cost for the benefit of the company as a whole. I believe that my division’s performance should be based on the contribution my division would make if I were to sell at market prices; this should be reflected in a set of revised operating statements for internal reporting purposes. Why are we not including these as part of the reporting and performance packs being sent to the Executive? ;;;;;;;;;;; ACC202 ACC202 MANAGEMENT ACCOUNTING T119 08/03/2019 14:49 Solution: Cushion division External Sales Revenue= (4,000,000-500,000) = 3,500,000 Less: Cost of external sales= (3,000,000-500,000) = (2,500,000) Profit on external sales= 1,000,000 1,000,000/2,500,000 = 0.4=40% mark-up on manufacturing cost Internal company transfer = 500,000 + (40%*500,000) = 500,000 + 200,000 = 700,000 Total sales of Cushion’s division = 3,500,000 + 700,000 = 4,200,000* Raven Industries Business Division Unit Profit Statement For the year ended 31 December ACC202 ACC202 MANAGEMENT ACCOUNTING T119 08/03/2019 14:49 ®Furniture’s Variable Manufacturing Cost of Goods Sold =1,300,000- 50, 000, - 50,000 + 700,000 = 1,450,000® Carpet division Furniture division Cushion division Total Sales Revenue 3,000,000 3,000,000 4,200,000* 10,200,000 Less: Variable manufacturing Cost of Goods Sold ( Direct material+ Direct labour+ Variable overhead) (1,750,000) (1,450,000)® (3,000,000) (6,200,000) Manufacturing contribution margin 1,250,000 1,550,000 1,200,000 4,000,000 Less: Variable selling and administrative expenses • Variable selling expenses (80% of Selling expenses) • Variable administrative expenses Total variable selling and administrative expenses 480,000 85,000 (565,000) 480,000 140,000 (620,000) 400,000 40,000 (440,000) 1,360,000 265,000 (1,625,000) Contribution Margin 685,000 930,000 760,000 2,375,000 Less: Fixed Costs • Manufacturing overhead • Selling expenses (20% of Selling expenses) • Administrative expenses Total Fixed costs 250,000 120,000 85,000 (455,000) 50,000 120,000 210,000 (380,000) - 100,000 120,000 (220,000) 300,000 340,000 415,000 (1,055,000) Contribution controllable by division managers 230,000 550,000 540,000 1,320,000 Less: Attributable head office expenses (100,000) (120,000) (200,000) (420,000) Division unit margin 130,000 430,000 340,000 900,000 Less: General head office expenses (30,000) (30,000) (40,000) (100,000) Profit from operations before tax 100,000 400,000 300,000 800,000 ACC202 ACC202 MANAGEMENT ACCOUNTING T119 08/03/2019 14:49 Required: 1. Based on the above Question and Solution and your own research prepare Discussion and Recomendations to the CEO outlining your recommendations in relation to the transfer pricing and performance measurement approach which would help optimize the performance and efficiency of the company. Clearly outline the benefits and challenges of your suggested approach.