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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
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®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
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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.
