Reference no: EM132308064

Assessment Group Case Study

Purpose: This assessment is designed to assist students to combine the technical skills learned with the theoretical aspects of a variety of management accounting topics. The assessment will allow students to demonstrate their ability to analyse the information provided for a given scenario and present their findings as they relate to the requirements of this assessment.

As this is a team-based assessment, it will also allow students to further develop their team-working and problem-solving skills.

It contributes to subject learning outcomes a, b, and c.

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:

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?

Required:

1. Robert Cleveland believes that the transfers from the Cushion Division to the Furniture Division should be at market price rather than at cost, for performance measurement.

a) Is Cleveland correct? Explain your answer.
b) Describe another approach that the company could use to set transfer prices, other than manufacturing cost and market price.

2. Using transfer prices based on market prices, prepare a revised profit statement, by division, for Raven Industries that will facilitate the evaluation of divisional performance. Use the contribution margin approach.

3. Based on the above analysis and your own research prepare a report to the CEO outlining your recommendations in relation to the transfer pricing and performance measurement approach which would help optimise the performance and efficiency of the company. Clearly outline the benefits and challenges of your suggested approach.

Task Details: Groups are to analyse the information provided, make appropriate calculations, develop recommendations and draw conclusions from their analysis. Submissions are to be in the form of a professional business report and include a title page, executive summary, table of contents, introduction, body, conclusion and reference list.

Style and Format:

1. Report should be typed on single sided pages, using Arial 11 font, double line spaced with 2.5 cm margins all around.

2. Reference and reference list - in text referencing should be in accordance with the Harvard Anglia method. The reference list should be prepared in accordance with the Harvard Anglia method and list only those references cited in the body of the report.

Research requirements: Students need to support their analysis with references from the text and a minimum of six (6) suitable, reliable, current and academically acceptable sources - check with your tutor if unsure of the validity of your sources. Groups seeking higher grades should support their analysis with an increased number of reference sources comparable to the grade they are seeking.