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ACC202 MANAGEMENT ACCOUNTINGT119 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:

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ACC202 MANAGEMENT ACCOUNTINGT119 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 theExecutive?

;;;;;;;;;;;

ACC202

ACC202 MANAGEMENT ACCOUNTINGT119 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 ACCOUNTINGT119 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 ACCOUNTINGT119 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.

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