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Management

Management Accounting assignment

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Management Accounting assignment

Management Accounting

Name

University

Date

 

Question 1

CustomersABCDETotal
Gross profit£18,500£18,500£18,500£18,500£18,500£92,500
Less cost
Number of sales visits357253320120
sales visits cost6,8251,3654,8756,4353,90023,400
% of Total visit cost27.17%5.83%20.83%27.50%16.67%100%
Number of standard deliveries3256420
Kilometers (Km) traveled

per standard delivery

5030553225192
Total KM traveled15060275192100777
Fuel cost1,830.12732.053,355.212,342.551,220.089,480
% of Total fuel cost19.3%7.7%35.4%24.7%12.8%100%
Number of urgent deliveries3203210
Urgent order costs225015000225015007500
% Urgent order costs30%20%00%30%20%
Number of order changes (colour)5386830
Order change costs (colour)1,5009002,4001,8002,4009,000
% Cost of order changes (colour)16.67%10.00%26.67%20.00%26.67%100%
Number of order changes (shape)6226420
Order change costs (shape)2,2507507502,2501,5007,500
% Order change costs (shape30%10%10%30%20%100%
Net profit per each customer3,844.8813,252.957,119.793,422.457,979.9235,620.00

(b) Customer profitability analysis

In the customer profitability analysis, the customers with the least profits are, customer A and D that is because they give only a profit of $ 3844 $ and 3422 consecutively. This was considered to be the lowest profit as compared to other customers.

The two customers become least profitable as a result of heavy sales, a number of deliveries, visit the company, order charges, and urgent order. These factors become high to them thus having low profits.

To reduce this cost, there is need to put in place deliveries of a standard lot police only, restricted order change policy if not implemented, there will be charging for each order change that is because there is plenty of sales visits and deliveries to be taken by customers leading to reduction of cost and sales visits.

Question two

Objectives of a good transfer pricing policy

Profitability

The transfer price should be in line with the company’s profitability objective.  Since the two divisions belong to the same company the goal should maximize the profitability of the company and not the department. The two divisions should agree on the best price for the company. For example, the transfer price can only cover the production cost.

Taxation

A good and a proper transfer pricing is able to offset all the tax liability based on division with an equivalent on the other. The major objective of transfer pricing is aimed at maximizing the overall tax profits of the organization. Since the transaction is not controlled by the open market, it helps in improving the taxation options of the organization.

Goal Congruence

The earning of each division must be in line with the goals of the holding company. The increase in the subdivision profit margin should not affect the profitability of the company negatively. For example, charging high transfer prices may force the division to outsource the product from external sources hence reducing the sale volume of the parent company.

Reduction of Custom duty payments

Since the transfer price is between the two divisions belonging to the same parent organization, therefore it is important to reduce the customs duty payment, since it will help in the reduction of pricing which will allow the products to adapt to the market prices.

Attracting global market

The other objective of transfer price in to penetrate into the global market. For example, a company with a foreign subsidiary may transfer products to its foreign subsidiary at favorable prices.

Required:

Calculate the budgeted annual profit for each division and the company as a whole if the cut leather is transferred to the Stitching Division at a transfer price of £2,000

 

ParticularsCut divisionStitched divisionLeather Ltd
Units500500500
Sale price/ transfer price£2,000£3,500£3,500
Cost: Variable£1,800£ 900£ 2,700
Transfer cost£ 2,000
Fixed cost£100,000£ 50,000£150,000
Budget profit£ 250,000$ 250,000
Budget profit for Division
Cut DivisionNil
Stitched division£ 250,000
The company as a whole£ 250,000

 

Based on the data leather Ltd has been in business for many years making hand-made, high end, leather goods.

As observed above where cut division transfers the unit to a stitched division for £ 2,000 per unit. This helps cut division to recover its production only. If the performance is measured on the basis of profit the divisional manager should first analyze whether there is an available market for the product, if the market price is available the divisional manager will transfer to the other division at the market price only.  If the market rates are not defined, the divisional manager will transfer the unit to the other division at the cost margin price, the most reasonable price of the product. The transfer price should not be too high as the stitched division may purchase the product from the other division.

In this case, the profit for the overall company comes from;

= 3,500 – 900 – 1800 = 800

The transfer price = 1,800 +400 =2,200

This is the transfer price in case the two divisions decide to share the cost of production.

In case there is enough capacity to produce orders that satisfy the need for both external demand and that of stitched division then the cutting division would sell 300 units at  £ 3,000 per unit to external buyers and transfer 500 units to stitched division at a transfer price of £ 2,000.

Scenario 1: The Cutting Centre capacity is sufficient to supply both the external customer and the Stitching Division.

If the scenario happens then the profit of the company would be enhanced by:

300 x (3000-1800) =£360,000

If there is a bar on production capacity then the cutting department would sell 300 units to external buyers and 200 units to stitched division. In case the stitched division buys the products from outside sellers the cost would range between (2,000 -3,000). In this case, only the profit of leather would be enhanced.

Scenario 2: A restricted supply of skilled labor means that the Cutting Centre has a maximum production capacity of 500 units.

Assuming that the maximum capacity of 500 units is produced, the stitched division will not buy from an external supplier or the price of the product is more than £ 3000 for both cases, cutting division transfer price to the leather department should include 200 for £ 2000 and 300units for £ 3000. In this scenario, the profit for leather Ltd would not change.

  1. The minimum transfer price that the Cutting Centre would charge

If cutting center demand from external customers reaches the maximum capacity, the transfer price would be @ £3000 per unit. In case they charge less than £3000 the profit for the division would fall and performance hampered. The recommended transfer price should be at £ 3000 per unit.

Question 3 – Phones UK Ltd

Calculate the total budgeted contribution and the total actual contribution to Phones UK Ltd.

Budgeted contribution

Y phoneZ  phone
Standard selling price£250£ 500
Standard variable cost£85£ 220
Standard contribution / unit£165£ 280
Budgeted units 80,000325,000
Budgeted contribution13,200,00091,000,000

Total budgeted contribution = £104.2Million

 

 

 

 

Actual contribution

Y phoneZ  phone
Actual selling price£290£600
Actual variable cost£86£250
Actual contribution / unit£204£350
Actual  units50,000320,000
Actual contribution£10,200,000£112,000,000
Actual units

Total act contribution = £122.2 Million

  • Sales price variance

Y phone

50,000 units should have sold for £250each  = £12,500,000

Did sell for £290 each                                                 = £14,500,000

Variance                                                                                              = £2000,000 U

Z phone

320,000 units should have sold for £600each            = £ 192,000,000

Did sell for £500 each                                                 =£ 160,000,000

Variance                                                                                  = £32.000,000F

  • Sales volume variance

Y phone

Budgeted units                                   80,000

Actual units                             50,000

30,000 units U

@ std contribution                  £165

4,950,000 U

Z phone

Budgeted units                                   325,000

Actual units                             320,00

5,000 units U

@ std contribution                  £280

£ 1,400,000 U

Total sales volume variance =£ 6,350,000 U

  • Sales mix variance

 

ProductBudgeted unitsStd mixActual sale @ std mixAct

units

Variance unitsStd contVariance £
Y phone

 

80,00019.75%73,07550,00023,075U£1653,807,375u
Z phone

 

325,00080.25%296,925320,00023,075 F£2806,461,000 F
Total405,000370,000370,00002,653,625F

 

  • Sales quantity variance

 

 

 

 

ProductBudgeted unitsActual sale @ std mixVariance

(units)

Std contVariance £
Y phone

 

80,00073,0756,925U£1651,142,625U
Z phone

 

325,000296,92528,075F£28078,421,000F
Total405,000370,00035,00077,278,375F

Sales volume variance check 2,653,625F + 77,278,375F = 79,932,000F

  • Assess the impact of the selling price decisions made in April 2020 on the company’s overall results.

The standard price of Phone Y and Z were £250 and £500 respectively while the actual price for the two phones Y and Z were £290 and £ 600 respectively. The increase in price for phone Y resulted in a variance between the budgeted sale volume and the actual sale volume. The same was observed for phone Z. The increased price resulted in a decrease in the quantity demanded.

The reduction in the price also affected the overall profit of the company. The contribution margin for both products increased hence increasing the profitability of the two products. The price set by the company affected the consumer purchasing buying behavior hence reducing the number of budgeted sales.

 

  • Critically appraise the decision made by Phones UK Ltd in April 2020 in the light of their social responsibility to provide lower-priced phones

As Phones UK Ltd strive to maximize its profit it is good to recognize that it has a social responsibility to its customer. The company has the social responsibility of not exploiting its customers by ensuring their products are not overpriced. However, charging lower prices should be done at the expense of the product quality. The company should not comprise the product quality so as to charge low to its customers. As a socially responsible company Phones UK Ltd should be cognizant of the customer social status when setting the prices of the products hence the management should the prices are favorable to the customers.

 

 

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