transfer pricing and res centers

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Two Part posting: Please ensure you utilize at least 4 references for each assignment. Additionally, the majority of the assignment has been completed (see attachments). Module 3 is missing one critical piece of providing 5 paragraphs in the memo and no short essay. Additionally, please screen the documents for correctness and number formatting and grammar.

Module 3 – Case

TRANSFER PRICING AND RESPONSIBILITY CENTERS

ASSIGNMENT OVERVIEW

Coffee Maker’s Incorporated (CMI)

Three divisions of a CMI are involved in a dispute. Division A purchases Part 101 and Division B purchases Part 201 from a third division, C. Both divisions need the parts for products that they assemble. The intercompany transactions have remained constant for several years.

Recently, outside suppliers have lowered their prices, but Division C refuses to do so. In addition, all division managers are feeling the pressure to increase profit. Managers of divisions A and B would like the flexibility to purchase the parts they need from external parties at a lower cost and increase profitability.

The current pattern is that

  • Division A purchases 2,700 units of product part 101 from Division C (the supplying division) and another 1,300 units from an external supplier.
  • Division B purchases 1,100 units of Part 201 from Division C and another 700 units from an external supplier.
  • Note that both divisions A and B purchase the needed supplies from both the internal source and an external source at the same time.

The managers for divisions A and B are preparing a new proposal for consideration.

  • Division C will continue to produce Parts 101 and 201. All of its production will be sold to Divisions A and B. No other customers are likely to be found for these products in the short term, given that supply is greater than demand in the market.
  • Division A will buy 2,000 units of Part 101 from Division C at the existing transfer price; and
  • 2,000 units from an external supplier at the market price of $900 per unit.
  • Division B will buy 900 units of Part 201 from Division C at the existing transfer price; and
  • 900 units from an external supplier at $1,800 per unit.

Division C Data Based on the Current Agreement

Part 101 201
Annual volume (units) 2,700 1,100
Transfer price/unit $1,000 $2,000
Variable expenses/unit $700 $1,200

The fixed overhead for Division C is $1,200,000.

CASE ASSIGNMENT

Required:

Computations (use Excel)

  • Set up a table similar the one below to compute the difference between the current situation and the proposal for Divisions A and B.
Division A
Current Situation Proposal
No. of Units Purchase Price Total Purchases No. of Units Purchase Price Total Purchases
Internal purchases 2,700 $ 2,000 $
External purchases 1,300 2,000
Total cost for Part 101 $ $
Savings to Div. A $
  • Compute the operating income for Division C under the current agreement and the proposed agreement.
  • Is the revised agreement a good idea? Support your answer with computations.

Memo (use Word)

Write a 4- or 5-paragraph memo to the division manager explaining the analysis performed. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.

Short Essay (use Word)

Start with an introduction and end with a summary or conclusion. Use headings.

Evaluate and discuss the implications of the following transfer pricing policies:

  • Transfer price = cost plus a mark-up for the selling division
  • Transfer price = fair market value
  • Transfer price = price negotiated by the managers

Why is transfer pricing such a significant issue both from a financial and managerial perspective?

ASSIGNMENT EXPECTATIONS

Each submission should include two files: (1) An Excel file and (2) a Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.

Module 3 – Background

TRANSFER PRICING AND RESPONSIBILITY CENTERS

MODULAR LEARNING OBJECTIVES

Keep the following objectives in mind as you work through the material in this module:

  • Define the role of responsibility accounting.
  • Differentiate between controllable and uncontrollable costs.
  • Analyze structure of a decentralized organization.
  • Define profit centers, cost centers, and investment centers.
  • Compute transfer prices.
  • Identify three main transfer pricing approaches.

REQUIRED READING

This module covers the role of responsibility accounting and responsibility centers. Explore these topics further while keeping the above six objectives in mind. Click on the three arrows to explore each topic in more detail:

Responsibility Accounting

Responsibility Centers

Transfer Pricing

CHECK YOUR UNDERSTANDING

Check your understanding to make sure that you have a good grasp of the background material. If you are not comfortable with the concepts, review some of the material again or go to the optional resource for more examples.

Click on the quiz icon for an ungraded, 20-question true-or-false self-study quiz to check your progress. If you are not satisfied with the score, review some of the material again. For more in-depth information, review materials listed under optional reading at the bottom of this page.

Final Thoughts

A responsibility center is a part or subunit of a company for which a manager has authority and responsibility. The company’s detailed organization chart is a logical source for determining responsibility centers. The most common responsibility centers are the departments within a company.
When the manager of a responsibility center can control only costs, the responsibility center is referred to as a cost center. If a manager can control both costs and revenues, the responsibility center is known as a profit center. If a manager has authority and responsibility for costs, revenues, and investments the responsibility center is referred to as an investment center.

The existence of responsibility centers necessitates the setting of an internal price for the transfer of parts, goods, and services among units and responsibility centers. Transfer prices are contentious because management intervenes by creating policies which have an effect on the income of a responsibility center or unit.

Transfers among international jurisdictions involve additional considerations. Not only accounting rules, but income taxation and duties affect pricing strategies. Most countries have regulations to help prevent the use of this pricing method as a means of evading taxes or similar unethical and illegal activities.

OPTIONAL READING

For further detail refer to Dr. Walther’s accounting text and videos.

Walther, L. (2017). Chapter 23: Reporting to Support Managerial Decisions.

Part 2:

Module 4 – Case

BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS

ASSIGNMENT OVERVIEW

T&P Fashion Shops

T&P Fashion Shops is a new chain that operates 10 stores in major malls throughout the United States. Each store manager is responsible for preparing a flexible budget for the store. T&P headquarters accumulates and analyzes the information for each store and in the aggregate.

Below is the forecast (budgeted income statement) for the Houston store showing the breakdown of fixed and variable expenses in columns two through four. The last column shows the actual results.

T&P Fashions – Houston Store
Breakdown of Expenses (Forecast)
Forecast Fixed Variable Actual
Revenues $1,400,000 $1,260,000
Cost of Sales 790,000 790,000 760,000
Gross Profit $610,000 $500,000
Management 182,000 154,700 27,300 182,000
Shop assistants 258,000 154,800 103,200 262,000
Rent 23,200 18,560 4,640 22,000
Utilities 34,800 34,800 31,000
Misc. expenses 24,500 12,250 12,250 29,000
Total expenses $522,500 $526,000
Net income $87,500 $(26,000)
========= =========

Additional Information

  • Variable expenses are based on revenues and we assume that the percentage remains constant for flexible budgeting purposes.
  • Fixed costs are all within the relevant range.
  • Other expenses are all specific to this store. Headquarters pay for marketing and corporate overhead expenses.

CASE ASSIGNMENT

Required:

Computations (use Excel)

  1. Prepare a flexible budget and show variances for the year that passed. Indicate whether the flexible budget variances are favorable or unfavorable.
  2. Headquarters are contemplating charging each store a 5% marketing expense based on sales. How will that affect the operating profit of the store and the money available for managerial bonuses based on actual results for the past year? Summarize the information in a table.

Memo (use Word)

Write a 4- or 5-paragraph memo to the division manager explaining the flexible budget variances; how to interpret the information and what action, if any to take. Comment on the 5% marketing proposal too. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.

Short Essay (use Word)

Start with an introduction and end with a summary or conclusion. Use headings.

  • Discuss how to interpret static and flexible budget variances.
  • What are the benefits of variance analysis? How can such analysis be detrimental rather than beneficial to the organization?

ASSIGNMENT EXPECTATIONS

Each submission should include two files: (1) An Excel file and (2) a Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.

Module 4 – Background

BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS

MODULAR LEARNING OBJECTIVES

Keep the following objectives in mind as you work through the material in this module:

  • Define the role of budgeting in an organization.
  • Identify the use of budgets.
  • Recognize different types of budgets.
  • Prepare and analyze budgets.
  • Differentiate between a static budget and a flexible budget.
  • Apply variance analysis.

REQUIRED READING

This module covers budgeting and variance analysis. Explore these topics further while keeping the above six objectives in mind. Click on the three arrows to explore each topic in more detail.

The Role of Budgeting

Types of Budgets

Flexible Budgets and Variance Analysis

CHECK YOUR UNDERSTANDING

Check your understanding to make sure that you have a good grasp of the background material. If you are not comfortable with the concepts, review some of the material again or go to the optional resource for more examples.

Click on the quiz icon for an ungraded, 20-question true-or-false self-study quiz to check your progress. If you are not satisfied with the score, review some of the material again. For more in-depth information, review materials listed under optional reading at the bottom of this page.

Final Thoughts

Key aspects of budgeting are planning and control. Budgets also serve as tools of communication.

Planning is crucial to an organization. It provides a framework for making decisions by establishing goals, objectives, and strategies. It is oriented toward the future and involves an awareness of how today’s decisions will affect tomorrow’s opportunities. Planning is essential for achieving both short- and long-run organizational goals, and successful managers are continuously planning.

Budgets are objective and are measurable. Results-oriented objectives are the foundation for controlling operations. Controls also involve the monitoring of the implementation of plans through performance reviews. They are used to compare actual results with objectives.

A flexible budget can be adjusted for changes in assumptions or variations in the level of operations. A budget can be adjusted for changes in assumptions or variations in the level of operations. Variance analysis based on flexible budgets are therefore more meaningful than those based on a static budget.

OPTIONAL READING

For further detail refer to Dr. Walther’s accounting text and videos.

Walther, L. (2017). Chapter 21: Budgeting—Planning for Success.

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