Module 5 - Case



Module 5 - Case

Overview of the topic

The topic is based on the company known as Coffee Maker's Incorporated. The main focus is on the intercompany transaction that has taken place for the production of goods. The option for the different types of Production Division is that they can buy products from the Internal Source but also from the external source. In fact, the external source is giving a cost benefit to the companies that can help the other divisions in increasing their profits. Therefore, all the issues related to accounting transactions will be discussed in detail.

Discussion of the Accounting transactions

In the first case, it is important to understand the purchase pattern of the Internal Department Division. The details related to the sales and purchase of the Division A and B was mentioned in the attachment. All the important information was included in the topic that had a lot of value for the assessment of the accounting transactions conducted among the different departments. The managers of the Division A, B and C have prepared an agreement in order to set a suitable pattern for the purchase and sales transactions. The Division C data based on the Current Agreement is:

Part

101

201

Direct materials

$200

$300

Direct labor

$200

$300

Variable overhead

$300

$600

Transfer price

$1,000

$2,000

Annual Volume

3,000 units

1,000 units

Required:

Part 1

 

Division A

Division B

Division C (Part 101)

Division C (Part 201)

Sales Revenue

1800000

950000

2700000

1900000

Less Costs:

 

 

 

 

Direct Material

400000

570000

600000

300000

Direct Labor

400000

570000

600000

300000

Variable Overhead

600000

300000

900000

600000

Total Profit

400000

-490000

600000

700000

The calculations are based on the agreement for all the three divisions. The Division A is getting benefit from the purchase of parts from Division C as they are in a position to earn profits. However, the Division B is incurring a loss which is certainly a worrisome aspect for them. In the last section, the data of Division C based on their Current Agreement demonstrates their ability to earn profits after selling all their parts to Division A and Division C. Therefore, this is the overall evaluation of the financial data.

Part 2

Transfer price = cost plus a mark-up for the selling division

The transfer pricing policy also matters for the Selling Division. This is going to affect the sales operations of both Division A and Division B. The transfer price of the Part 101 is $1000. This can certainly affect the profitability of the Division A. The main reason is that it is basically a mark up cost and if it is applied on every unit, the Division A is going to ...