assignment 1076

Management Accounting Case: West Island Products

 

 

 

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 (100 points)

 

The specific course learning outcomes associated with this assignment are:

 

 

 


Apply key techniques and concepts in measuring the cost of producing goods and

 

services.

 

 

 

 

 


Apply management accounting concepts to identify and process relevant financial

 

information for decision-making purposes.

 

 

 

 

 


Use technology and information resources to research issues in financial management.

 


Write clearly and concisely about financial management using proper writing mechanics.

 

Assignment:

 

West Island Products (WIP) is a divisionalized furniture manufacturer. The divisions are

 

autonomous segments with each division responsible for its own sales, cost of operations, and

 

equipment acquisition. Divisional performance is evaluated annually based on ROI. Each division

 

serves a different market in the furniture industry. Because the markets and products of the

 

divisions are so different, there have never been any transfers between divisions.

 

The Commercial Division of WIP, manufacturers furniture for the restaurant industry. The

 

Commercial Division plans to introduce a new line of counter chair units featuring a cushioned

 

seat. Roberta Katz, the Commercial Division manager, has discussed the manufacturing of the

 

cushioned seats with Nathan Danielson of the Office Division. They both believe a cushioned

 

seat currently made by the Office Division for use on its deluxe office stool could be modified for

 

use on the new counter chair. Consequently, Katz asked Danielson for a price for 100-unit lots of

 

the cushioned seats. The following conversation took place about the price to be charged for the

 

cushioned seats.

 

 

 

Danielson:
“Roberta, we can make the necessary modifications to the cushioned seat easily.

 

The raw materials used in the new counter chair seat are slightly different and

 

should cost about 10 percent more than those used in our deluxe office stool.

 

However, the labor time should be the same because the seat fabrication

 

process is the same. I would price the cushioned seat at our regular rate: full cost

 

plus a 30 percent mark-up. According to my calculations, that would be $2,053

 

per lot of 100 seats.”

 

 

 

Katz:
“That’s higher than I expected, Nathan. I was thinking that a good price would be

 

your variable manufacturing cost. After all, your fixed costs will be incurred

 

regardless of this job. In addition, I have received a quote from one of the

 

Commercial Division’s regular suppliers to provide us with the counter seats at

 

$1,900 per lot of 100 seats.”

 

 

 

Danielson:
“Roberta, I am at full capacity. By making the cushioned seats for you, I have to

 

cut my production of deluxe office stools. The labor time freed by not having to

 

fabricate the frame and assemble the deluxe stool can be shifted to the

 

production of the economy stool. I’d like to sell the cushioned seats to you at my

 

variable cost, but I have excess demand for both products. I don’t mind changing

 

my product mix to the economy model and producing the cushioned seats for

 

you as long as I don’t change my division’s overall profitability. Here are my

 

standard costs for the two stools and a schedule of my manufacturing overhead.”

 

(See Exhibits 1 and 2.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Academic Submissions and Evaluations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Katz:
“I guess I see your point, Nathan, but I don’t want to price myself out of the

 

market. In addition to pricing, I am also concerned about delivery. We’ll need the

 

counter seats within two weeks of placing our order or we risk losing some

 

important potential customers. Our outside supplier claims that they can meet our

 

timing needs.”

 

 

 

Danielson:
“Oh-oh. That lead-time is a bit short considering the production re-scheduling we

 

need to do. I can’t promise you a lead-time shorter than four weeks at the

 

moment.”

 

 

 

Katz:
“There’s quite a few issues that need to be addressed here, Nathan. As we have

 

no previous experience in transferring goods between our divisions, I think we

 

should speak with the controller at corporate headquarters before we can agree

 

on a transfer price.”

 

 

 

 

 

 

 

 

 

Exhibit 1 – Office Division Standard Costs and Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

Deluxe

 

Office Stool

 

Economy

 

Office Stool

 

 

 

 

 

 

 

 

 

 

Direct materials:

 

Framing ……………………………………………………………………….. $ 7.35 …………………….$.. .6….5..0.. ……………………………………………………………………………………………..

 

Cushioned seat …………………………………………………………….. 6.40 —

 

Molded seat (purchased) ……………………………………………….. — ……………………….6….0..0.. ……………………………………………………………………………………………..

 

Direct Labor:

 

Frame fabrication (0.5 hrs. @ $7.50/hr.) …………………………… 3.75 ……………………….3….7..5.. ……………………………………………………………………………………………..

 

Cushion fabrication (0.5 hrs. @ $7.50/hr.) ………………………… 3.75 …………………………..—… ……………………………………………………………………………………………..

 

Assembly (0.5 hrs. @ $7.50/hr.) ……………………………………… 3.75 ……………………….3….7..5.. ……………………………………………………………………………………………..

 

Manufacturing overhead ($10.00/DLH) ………………………………….. 15.00 ……………………..1..0….0..0.. ……………………………………………………………………………………………..

 

Total standard cost ……………………………………………………………… $ 40.00 …………………..$.. .3..0….0..0.. ……………………………………………………………………………………………..

 

Selling price (including 30% mark-up) ……………………………………. $ 52.00 …………………..$.. .3..9….0..0.. ……………………………………………………………………………………………..

 

 

 

 

 

 

 

 

 

Exhibit 2 – Office Division Manufacturing Overhead Budget

 

 

 

 

 

 

 

 

 

 

 

 

 

Overhead Item Description Amount

 

 

 

 

 

 

 

 

 

 

 

 

Supplies ………………………………. Variable …………………………………………………………………..$.. .3..7..0..,.0..0..0.. ……………………………..

 

Indirect labor ………………………… Variable ……………………………………………………………………..3..7..5..,.0..0..0.. ……………………………..

 

Supervision ………………………….. Fixed …………………………………………………………………………1..5..0..,.0..0..0.. ……………………………..

 

Power …………………………………. Variable ……………………………………………………………………..1..8..0..,.0..0..0.. ……………………………..

 

Heat and light ………………………. Fixed …………………………………………………………………………1..2..0..,.0..0..0.. ……………………………..

 

Property tax & insurance ……….. Fixed …………………………………………………………………………1..3..0..,.0..0..0.. ……………………………..

 

Depreciation ………………………… Fixed ………………………………………………………………………1..,.1..0..0..,.0..0..0.. ……………………………..

 

Employee benefits ………………… Variable ……………………………………………………………………..5..7..5..,.0..0..0.. ……………………………..

 

Total overhead ………………………………………………………$.. .3..,.0..0..0..,.0..0..0.. ……………………………..

 

Capacity in direct labor hours (DLH) ………………………………3..0..0..,.0..0..0.. ……………………………..

 

Overhead rate per direct labor hour ………………………………..$.. .1..0….0..0.. ……………………………..

 

Required:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Academic Submissions and Evaluattion

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Your goal is to examine this situation and recommend a course of action for Roberta Katz and

 

Nathan Danielson.

 

1. Re-examine Nathan Danielson’s calculation of a transfer (selling) price for the cushioned

 

seats to the Commercial Division. Based on the information provided, determine/confirm

 

the transfer price that would meet Danielson’s objective regarding the profitability of the

 

Office Division.

 

2. Discuss the pros and cons of each option (i.e., in-sourcing and out-sourcing). Include in

 

your analysis what you believe the corporate controller is likely to recommend and why.

 

3. How would you suggest that the company handles such transfer disputes in the future

 

(i.e., what policies would you suggest putting in place)? Make sure your recommendation

 

includes financial policies around setting a transfer price range. Support your suggestion

 

by examining the advantages and disadvantages of its adoption.

 

Grading:

 

Grades for this assignment will be based on answer quality, logic/organization of the paper, and

 

language and writing skills, using the following rubric:

 

 

 

 

 

 

 

 

 

Assignment Points Percentage Grade

 

 

 

 

 

 

 

 

 

 

 

 

90 – 100 90% – 100% A

 

80 – 89 80% – 89% B

 

70 – 79 70% – 79% C

 

0 – 69 0% – 69% F

 

 

 

 

 

 

 

 

 

Points: 100 Assignment 3: Management Accounting Case: West Island Products

 

Criteria

 

Unacceptable

 

0-69% F

 

Fair

 

70-79% C

 

Proficient

 

80-89% B

 

Exemplary

 

90-100% A

 

 

 

 

 

 

 

 

 

 

1. Re-examine Nathan Danielson’s

 

calculation of a transfer (selling) price for

 

the cushioned seats to the Commercial

 

Division. Based on the information

 

provided, determine/confirm the transfer

 

price that would meet Danielson’s objective

 

regarding the profitability of the Office

 

Division.

 

Weight: 50%

 

Did not submit or

 

incompletely

 

analyzed the

 

transfer (selling)

 

price.

 

Partially analyzed

 

the transfer

 

(selling) price.

 

Satisfactorily

 

analyzed the

 

transfer (selling)

 

price.

 

Thoroughly

 

analyzed the

 

transfer (selling)

 

price.

 

2. Discuss the pros and cons of each

 

option (i.e., in-sourcing and out-sourcing).

 

Include in your analysis what you believe

 

the corporate controller is likely to

 

recommend and why.

 

Weight: 20%

 

Did not submit or

 

incompletely

 

analyzed the pro’s

 

and con’s of each

 

option.

 

Partially analyzed

 

the pro’s and con’s

 

of each option.

 

Satisfactorily

 

analyzed the pro’s

 

and con’s of each

 

option.

 

Thoroughly

 

analyzed the pro’s

 

and con’s of each

 

option.

 

3. How would you suggest that the

 

company handles such transfer disputes in

 

the future (i.e., what policies would you

 

suggest putting in place)? Make your

 

Did not submit or

 

incompletely

 

analyzed

 

recommendations

 

Partially analyzed

 

recommendations

 

for handling the

 

transfer pricing

 

Satisfactorily

 

analyzed

 

recommendations

 

for handling the

 

Thoroughly

 

analyzed

 

recommendations

 

for handling the

 

 

 

 

 

 

 

 

recommendations and include financial

 

policies around setting a transfer price

 

range. Support your suggestion by

 

examining the advantages and

 

disadvantages of its adoption.

 

Weight: 20%

 

for handling the

 

transfer pricing

 

process.

 

process. transfer pricing

 

process.

 

transfer pricing

 

process.

 

4. Clarity, writing mechanics, and

 

formatting requirements.

 

Weight: 10%

 

 

 

 

 

 

 

 

 

 

Multiple

 

mechanics errors

 

or much of the text

 

is difficult to

 

understand and

 

fails to follow

 

formatting

 

instructions. The

 

text does not flow.

 

Several

 

mechanics errors

 

make parts of the

 

text difficult to

 

understand; the

 

text does not flow

 

or the discussion

 

fails to justify

 

conclusions and

 

assertions.

 

More than a few

 

mechanics errors

 

or text flows but

 

lacks conciseness

 

or clarity;

 

assertions and

 

conclusions are

 

generally justified

 

and explained.

 

Few mechanics

 

errors; text flows

 

and concisely and

 

clearly expresses

 

the student’s

 

position in a

 

manner that

 

rationally and

 

logically develops

 

the topics.