ACCT2522 Week 7 PDF

Preview

Summary

acct2522 wk7...

Description

UNSW Business School ACCT2522 Management Accounting 1 Term 1, 2019

Topic 5: Transfer Pricing and Managing Quality Week 7: Tutorial Questions Overall Theme

This week we continue to learn how to use management accounting information to manage resources and to create value for the firm. This week we switch our attention to another aspect of management accounting by exploring the concept of responsibility accounting. We look at how management accounting system can be designed to encourage desirable (goal-congruent) managerial behaviour and to reflect the autonomous nature of contemporary, de-centralised organisations. In particular, we examine a control mechanism used in conjunction with the responsibility accounting system, namely, transfer pricing. We will consider how managers determine transfer prices, rationales behind these systems, their benefits and limitations. We also turn our attention to another important dimension of customer value: “Quality”. Many organisations adopt a quality focus in order to improve their performance and obtain a competitive edge. In this tutorial we will discuss the concepts of quality and quality management. The focus is on (a) how to measure or analyse an organisation’s quality performance using COQ and DMOQ; and (b) how such analysis allows us to improve organisational quality management processes. Desired Learning Outcomes and Essential Reading Readings:  Chapter 12  Chapter 16  Managing quality – p.778-785  Chapter 14,  Non-financial measures p.663-669 Note: this reading provides the conceptual background for using non-financial measures. We apply this concept to measuring quality. 

After completing this topic, you should be able to: Part A: Transfer Pricing 1. Explain the benefits of transfer pricing systems 2. Determine transfer prices using various methods 3. Explain the general rule that can be used to set transfer prices 4. Understand the profitability implications of different transfer prices on department’s and corporation’s profit Part B: Managing Quality 1. Explain the meaning of quality 2. Understand the different approaches to measure and manage quality  Financial measure of quality - cost of quality  Non-financial measure of quality – direct measure of quality

Tutorial Questions (must be prepared prior to the tutorial) Question One: Transfer pricing Langfield-Smith Problem 12.38 (Requirements 1 and 2 only) Note: There is an error in the textbook case information relating to the cost of the compressor (1st line, second paragraph, p.612). The cost should be $140 instead of $80 per compressor. This is consistent with the KoolAir Division’s Budgeted Profit Statement. Additional Questions a) Following from P12.38, requirement 2 where KoolAir needs 18,000 units of compressors, use the general transfer pricing rule to calculate the transfer price that Components Division should charge KoolAir for 1 compressor. b) Prepare profit and loss statements to calculate the profit/loss for Components Division, KoolAir Division and Palmer Industries if Components Division: i. Decides to sell 18,000 compressors to KoolAir based the transfer price calculated in (a). ii. Decides not to sell 18,000 compressors to KoolAir. c) If the bonus of the Components Division’s manager is based on divisional profits, given the calculations in part (b), will she/he accept or reject KoolAir’s offer? Is this an “goal congruent” decision? Explain Final Answers: The final answers to calculation questions are presented below, so you can check your own answers. If you have are unable to reach these answers, please raise your questions during the on-line tutorial. Part 1: The KoolAir Division should reduce the price of its air conditioners by 5% because their net profit would increase by $480,000. Part 2: The Components Division should not sell all 18,000 units to the KoolAir Division for $60 each because their net profit will decrease by $86,000. Additional Questions Part A: Transfer price for one compressor = $64.78 (rounded up) Part B: Prepare P&L for the Components and KoolAir Division; and Palmer Industries if: (i) Components Division sells 18,000 to KoolAir Division for $64.78

Net profit

Component Division $1,472,000

KoolAir Division $5,164,000

Palmer Industries $6,636,000

(ii) Components Division do not sell to KoolAir Division

Net profit

Component Division $1,472,000

KoolAir Division $3,810,000

Palmer Industries $5,282,000 2

Question Two: Managing Quality (Note: Copyright Nicole Ang) LY Ltd makes foldable grocery bags (encrusted with jewellery) for fashion-conscious environmentalists. Mandy, the general manager, recently attended a conference on quality and productivity, where she learned that many firms had introduced quality improvement programmes, resulting in significantly increased profitability. Some firms had reduced quality costs from 25% of sales to 2% of sales. Mandy was enthused by the potential for improved quality performance (“If this works, I could get a whopper bonus this year!” she thought). Mandy contacted her management accountant (Angela), and requested an estimate of the total quality costs being incurred by LY, as well as a breakdown of those costs into four categories: Prevention; Appraisal; Internal failure; and External failure. Angela gathered the following information from 2019: i. ii. iii. iv.

Sales revenue is $20,000,000 and net profit is $4,000,000 6,000 bags were returned by customers for repair. Repair costs are $70 per bag. Ten inspectors (who only do final inspections) each receive a salary of $30,000. 30,000 bags are rejected on final inspection each year (on average), due to quality issues. Of these, 80% can be reworked at a cost of $30 per unit. The remaining 20% have to be scrapped, costing $150 per bag on average. v. A customer cancelled an order that would have increased profits by $500,000. The reason given was poor product performance. The marketing department of LY agreed that other customers have felt the same, and that roughly this amount is lost every year for similar reasons. vi. Eight full-time employees are employed in the complaint department, on salaries of $35,000 each. vii. LY gave sales allowances totalling $250,000 due to substandard products being sent to customers. viii. All new employees at LY have to participate in a three-hour quality training programme. The estimated annual cost of the program is $160,000. ix. Inspection of the final product also requires testing equipment, which costs $240,000 every year to operate and maintain. Required: a) Prepare a quality cost report, classifying costs by category. Comment on the quality costs/sales ratio. b) Discuss the distribution of quality costs among the four categories.  Do you think this distribution is ideal?  If not, where would you like to see changes to the distribution and why?  Hint: You may want to compute the ratio of non-conformance to conformance c) Given your answers to (a) and (b), provide at least three specific suggestions as to how LY could improve overall quality and also reduce total quality costs. d) Provide one external direct measure of quality and one internal direct measure of quality to measure the quality of work performed by the customer complaints department at LY. Explain why you have chosen this measure. Remember that a good measure is one that (among other things):  Is based on information you can acquire without too much difficulty!  Is specific and allows comparison i.e. can you put a number to it? (The number of hours vs the amount of time)  Is time bound. 3...