Assessment
Management accounting - application of internal accounting approaches and critical analysis of the results of the same in order to impact on performance, as well as analysis of the techniques themselves .
Brady Ltd. has within it a division called Ostweiler which produces widget oil and sells it to an internal refining division called Brees at the market price as of the start of the year.
The production capacity for Ostweiler is 3000 tonnes per month with a variable cost per tonne of £90 and a fixed cost of £160,000 per month but only produces 2,400 tonnes as this is all Brees can use and no sales are made to any external markets.
Ostweiler sells 2,400 tonnes to the Brees at £300 per tonne which was the market price at the start of the year 1 January.
Brees make 100 bottles of pure oil per tonne and sell it for £6 per bottle. In addition to the transfer price from Ostweiler division the variable cost of production is £80 per 100 bottles made and £100,000 in fixed costs per month.
As from 1 June competitive pressure has forced the wholesale trade price down to £270 per tonne. Brees contend that the transfer price to them should be the same as the new market price. Ostweiler refutes the argument on the basis that the original budget established the price for the whole budget year.
Brees say that they would be able to sell enough bottles to use up all of Ostweilers capacity of 3,000 tonnes and sell 300,000 bottles if they dropped the price to £5.40 a bottle and would do this if the price from Ostweiler dropped to £270 per tonne.
Required:
(a) Prepare estimated profit statements for the month of June for each division based on:
i. transfer prices of £300 per tonne and sales from Ostweiler to Brees of 2,400 tonnes who then sell 240,000 bottles at £6 per bottle.
ii. transfer prices of £270 per tonne and sales from Ostweiler to Brees of 3,000 tonnes who then sell 300,000 bottles at £5.40 per bottle.
(b) Critically evaluate the need for effective transfer pricing and discuss two methods which may be adopted to achieve this.
(c) Discuss how non-financial measures might be of use in the evaluation of organisational performance