Section A)

Question 1)

a)

(i) When the transfer pricing arrangement is £190 per unit

Mayfair Ltd
Profit statement for the month
Division A
Particulars	Amount (£)
Revenue
Sales (6500 * £ 190)	1235000
Total Revenue	1235000
Expenses
Allocated head office costs	12000
Annual fixed costs	30000
Material costs (6500* £  65)	422500
Labor costs ( 6500* £ 45)	292500
Other variable costs ( 6500* £ 15)	97500
Total expenses	854500
Net profit	380500

 

Mayfair Ltd
Profit statement for the month
Division B
Particulars	Amount (£)
Revenue
Sales (6500 * £ 190)	1235000
Total Revenue	1235000
Expenses
Allocated head office costs	22000
Annual fixed costs	40000
Material costs (6500* £  40)	260000
Labor costs ( 6500* £ 25)	162500
Other variable costs ( 6500* £ 12)	78000
Total expenses	562500
Net profit	672500

 

The company as a whole

Mayfair Ltd
Profit statement for the month
Particulars	Amount (£)
Revenue
Sales (13000 * £ 190)	2470000
Total Revenue	2470000
Expenses
Allocated head office costs	34000
Annual fixed costs	70000
Material costs (13000* £ 105)	1365000
Labor costs ( 13000* £ 70)	910000
Other variable costs ( 13000* £ 27)	351000
Total expenses	2730000
Net profit	-260000

 

(ii) When the transfer pricing arrangement is £250 per unit

 

Mayfair Ltd
Profit statement for the month
Division A
Particulars	Amount (£)
Revenue
Sales (6500 * £ 250)	1625000
Total Revenue	1625000
Expenses
Allocated head office costs	12000
Annual fixed costs	30000
Material costs (6500* £  65)	422500
Labor costs ( 6500* £ 45)	292500
Other variable costs ( 6500* £ 15)	97500
Total expenses	854500
Net profit	770500

 

 

 

 

 

 

 

 

 

 

 

 

 

Mayfair Ltd
Profit statement for the month
Division B
Particulars	Amount (£)
Revenue
Sales (6500 * £ 250)	1625000
Total Revenue	1625000
Expenses
Allocated head office costs	22000
Annual fixed costs	40000
Material costs (6500* £  40)	260000
Labor costs ( 6500* £ 25)	162500
Other variable costs ( 6500* £ 12)	78000
Total expenses	562500
Net profit	1062500

 

The company as a whole

Mayfair Ltd
Profit statement for the month
Particulars	Amount (£)
Revenue
Sales (13000 * £ 250)	3250000
Total Revenue	3250000
Expenses
Allocated head office costs	34000
Annual fixed costs	70000
Material costs (13000* £ 105)	1365000
Labor costs ( 13000* £ 70)	910000
Other variable costs ( 13000* £ 27)	351000
Total expenses	2730000
Net profit	520000

 

Analysis: From the above-provided profit statements, it can be appropriately identified that considering a transfer pricing arrangement worth £ 250 per unit leads to enhancement in the profitable structure of an individual Division both A and B including the company as a whole. On the other hand considering a transfer pricing arrangement worth £ 150 per unit leads to a decrease in the profitable structure of both the Divisions A and B and the company as a whole. Hence, the selection of transfer price of £ 250 is regarded as applicable here in the comparison of its initial pricing structure of £ 190 per unit due to evolving with a higher net profitable structure as a whole. 

b)

Concerning the provided case study scenario, it can be appropriately identified that the available transfer pricing policy of Mayfair Ltd is recognised in terms of the cost-plus method. The determine cost-plus method emerges as a traditional transaction approach that is utilised for analysing the purpose of the controlled transaction between the company's associated purchaser and supplier. However, the method is subjected applicable when semi-finished goods are said to be transacted in between its associated parties or when its consult enterprises pose long-term arrangements to buy and supply. Furthermore, the supplier's costs are subsequently added relative to the markup pricing structure of the company's product or service (Challoumis, 2019). This implication is mainly considered to evolve with the existing market scenario and also to demonstrate adequate profitability to take into account while performing their functions. Hence, it can be said that the combined price of either the divisions or parties depicts the arm's length pricing structure for the entire business transaction (De Mooij and Liu, 2020). It can be eventually referred according to the mentioned case situation that Mayfair Ltd is identified as a well-established organisation that manufacturers wooden garden furniture, while its divisions are under two different heads namely Division A and Division B. Moreover, Division A poses the responsibility to manufacture furniture items and then transfers the products to Division B to varnish and finally sell them to the well-known retailer of the nation. While performing this particular transaction, Division A of the company ensures a transfer pricing arrangement in collaboration with Division A, and hence the undertaken transfer pricing policy is determined as a cost-plus method relative to Mayfair Ltd.

The transfer price refers to the price structure undertaking which the goods and services from one subsidiary or division are sold to another subsidiary or division within a similar organisation. However, transfer pricing structure can be subsequently evaluated by referring to three different measures namely the cost-based method, negotiated method, and the market-based method (Gunawan and Surjandari, 2022). Furthermore, the company requires undertaking motivational impact of its divisions in association with its managers while selecting an appropriate extent of transfer price implication due to various reasons. One of the common reasons behind this includes that transfer prices because affecting to both the subsidiaries' performance on opposite terms and hence evolving with improper structure might results in a benefit to one division while hurting another existing one (Hemling et al. 2022). Irrespective of this, transfer price cause impacts on three diverse managerial accounting sections of the company including managerial incentives, taxes, and division performance. Furthermore, transfer pricing structure can enhance the entire tax burden of the company evolving with both the subsidiaries' tax jurisdictions and motivational impact requires considering by manager to maintain adequate performance and profitability of the company's divisions (Asongu et al. 2019).  

c)

The transfer price implication is not recognised as an illegal act nor does the practice ensure forth a tax avoidance extent. However, there might be able to arise problems while evaluating transfer prices where divisions remain located in diverse nations. Transfer mispricing emerges as a common problem that exists only when the transfer price structure between the divisions is not determined relative to the domestic law or international applicable norms term (Kananto, 2019). Furthermore, it is due to prevailing of this specific problem that leads arise to another problem concerning transfer pricing namely profit shifting and an issue of tax evasion. To the policy extent, governments likely to exercise their rights to tax the taxpayer's profitability rely on the generated income structure within their respective territory. Besides problems concerning practice and policy level are likely to exist referring to the narrower tax administration aspects (Rogers and Oats, 2022). Irrespective of this, it determines difficulties for tax administrations at the practical level to generate pertinent and detailed data from the conducted transactions by the organisations located outside their respective jurisdiction. Though transfer pricing emerges as innocuous, it is bound to specifically shape the nation's tax base that remains involves with the cross-border transaction including tax authorities and other business organisations. Moreover, transfer pricing is mainly demonstrated and manipulated by undertaking deductible expenses movement to that of the higher taxation jurisdiction, thereby causing a shifting in the revenue structure to the tax haven nations (Khris and Whiteside, 2020). 

Section B)

Question 2)

a)

Controllable costs determine the cost structure that said affected by the manager’s decision-making extent. However, managers are recognised as responsible to affect controllable costs and these costs ensure partially revealing their manager’s actions (Santos, 2018). Referring to this, the idea of considering managers responsible for those undertaken decisions related to controllable costs as provided by the authority refers to the controllability principle. Hence, the controllability principle depicts that managers must be said held accountable only for the outcomes that they can lead significantly influence. Furthermore, the principle also suggests the requirement of distinguishing both uncontrollable and controllable factors (Mahmud et al. 2018). More specifically, the impacts of the acts of nature subjected to be treated in terms of uncontrollable while the treatment related to the remaining factors signifies variables in practical. 

b) 

Reporting by exception emerges as the performance metrics or transactions where original outcomes are significantly deviated from expectations and further flags those outliers for resolution and follow-up purposes also. In another word, reporting by exception is sometimes determined as a document that depicts those instances relative to which actual performance is entitled to significantly deviate in a negative direction from their absolute expectations (Henderson et al. 2020). However, the major purpose of this reporting is to ensure management attention on just those sections that demand immediate implications or actions. Reporting by exception serves as a metric of an early warning system as the reporting is often explored as a leading indicator before occurring of any bigger issues ahead.  Moreover, reporting by exception ensure a cases lists on a monthly, weekly, and also on the daily basis (Fisch, 2018).

c)

Standard in the common words determines the measurement of what is specifically expected to consider under the anticipated or current situations. However, standards depict one such significant quantitative approach to management control and also for measuring the purpose of the business operations performance (Kelly, 2020). Concerning this, the various types of standards which organisations utilised relative to standard costing implications are discussed below.

Basic standards: These refer to the standards that are demonstrated undertaking those factors that remain unchanged and are basic over a longer period. However, basic standards are not generally utilised as it is not said updated based on the latest situations and hence cannot helps to evaluate short-term period inclusive variance analysis (Drobyazko et al. 2019).

Normal standards: These standards are expected to consider only if normal situations exist. Although normal standards serve as a good yardstick yet it depicts challenges in terms of attainable outcomes. Furthermore, these standards are utilised by management in such circumstance that evolves simply in nature and is said not prone to any form of great fluctuations level (Kianian et al. 2019).

Current standards: These standards signify representative of the existing business scenarios. These are mainly short-term in nature and are largely utilised for controlling means. Furthermore, these standards depict the situation that the business is currently acquiring or is must require to achieve subsequently (Gurav, 2020).

Expected and attainable standards: These standards rely on the current circumstances and conditions and signify what is said to be attainable concerning placing the existing setup. However, current standards may be recognised easier or lower than the expected standards ones. These standards are subjected useful as they provide help to management to evaluate their respective performance and in terms to consider the unused potential at the right time.

Moreover, the selection related to adequate standards does not rely on the fact of always being good or bad in terms of acquiring relative implications (Gurav, 2020). The perception exists relative to the matter of situation and considers judgment to ensure decision regarding the suitability of the standard based on the specific situation that can facilities with reliable and relevant information and are also applicable and easily available. Hence, the selection completely relies based on the requirements of determining which standard type is suitable for utilisation purposes. For instance, concerning any environmental or financial crisis, it is regarded well if the management goes for current standards irrespective of considering attainable standards even though maintaining current standards emerges sometime difficult also (Gurav, 2020).

d)

(i) Fixed overhead volume variance= Applied fixed overheads- Budgeted fixed overhead

Standard fixed overheads= Budgeted fixed overheads/ Budgeted production

Budgeted fixed overheads= £ 504, 000

Budgeted production= 7, 500 units

Standard fixed overheads = £ 504, 000/ 7,500 = £ 67 per unit

Applied fixed overheads= Standard fixed overheads* original production= £ 67* 8,000 = £ 536,000

Fixed overhead volume variance= £ 536,000- £ 504, 000 = £ 32,000

(ii) Fixed overhead volume efficiency variance= (Original hours- standard hours)* standard fixed overhead absorption rate

Fixed overhead volume efficiency variance= (25, 200- 1,800)* £ 67 per unit= £ 1, 567, 800

(iii) Fixed overhead volume capacity variance= (Predicted hours- original hours)* Predicted fixed overhead absorption rate per hour

Fixed overhead volume capacity variance= (1, 800- 25, 200)* £ 20 per unit= £ (468,000)

The fixed overhead volume variance signifies the difference between the fixed overhead amounts for goods production relying on production volume and that of the budgeted amount applied for the production of the goods means. However, fixed overhead volume variance must require being equivalent to that of the fixed volume efficiency variance and fixed volume capacity variance to acquire a favorable extent, and concerning the mentioned scenario the company said unfavorable as there identify differences in the valuation structure.

 

 

Reference List

Asongu, S.A., Uduji, J.I. and Okolo-Obasi, E.N., 2019. Transfer pricing and corporate social responsibility: Arguments, views and agenda. Mineral Economics, 32(3), pp.353-363. https://link.springer.com/article/10.1007/s13563-019-00195-2

Challoumis, C., 2019. Transfer pricing methods for services and the policy of fixed length principle. Economics and Business, 33(1), pp.222-232. https://www.researchgate.net/profile/Constantinos-Challoumis-Konstantinos-Challoumes/publication/338235899_Transfer_Pricing_Methods_for_Services_and_the_Policy_of_Fixed_Length_Principle/links/5e0a3aa0299bf10bc384fb1d/Transfer-Pricing-Methods-for-Services-and-the-Policy-of-Fixed-Length-Principle.pdf

De Mooij, R. and Liu, L., 2020. At a cost: The real effects of transfer pricing regulations. IMF Economic Review, 68(1), pp.268-306. https://link.springer.com/article/10.1057/s41308-019-00105-0

Drobyazko, S., Pavlova, H., Suhak, T., Kulyk, V. and Khodjimukhamedova, S., 2019. Formation of hybrid costing system accounting model at the enterprise. https://dspace.dsau.dp.ua/handle/123456789/2174

Fisch, J.E., 2018. Making sustainability disclosure sustainable. Geo. LJ, 107, p.923. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/glj107&section=32

Gunawan, C.T. and Surjandari, D.A., 2022. The Effect of Transfer Pricing, Capital Intensity, and Earnings Management on Tax Avoidance. Journal of Economics, Finance and Accounting Studies, 4(2), pp.184-190. https://al-kindipublisher.com/index.php/jefas/article/view/3154

Gurav, A.M., 2020. Sustainable Development-A Way Through Activity Based Costing. https://www.researchgate.net/profile/Annasaheb-Gurav/publication/339527950_Sustainable_Development_-A_Way_Through_Activity_Based_Costing/links/5e577893a6fdccbeba05852c/Sustainable-Development-A-Way-Through-Activity-Based-Costing.pdf

Hemling, L., Rossing, J.C.P. and Hoffjan, A., 2022. The use of information technology for international transfer pricing in multinational enterprises. International Journal of Accounting Information Systems, 44, p.100546. https://www.sciencedirect.com/science/article/pii/S1467089521000488

Henderson, P., Hu, J., Romoff, J., Brunskill, E., Jurafsky, D. and Pineau, J., 2020. Towards the systematic reporting of the energy and carbon footprints of machine learning. Journal of Machine Learning Research, 21(248), pp.1-43. https://www.jmlr.org/papers/volume21/20-312/20-312.pdf

Kananto, S., 2019, February. The Influences of Tax, Bonus Mechanism, Leverage and Company Size Through Company Decision on Transfer Pricing. In 5th Annual International Conference on Accounting Research (AICAR 2018) (pp. 207-212). Atlantis Press. https://www.atlantis-press.com/proceedings/aicar-18/55913666

Kelly, R., 2020. STANDARD COSTING. https://www.cpaireland.ie/CPAIreland/media/Education-Training/Study%20Support%20Resources/P1%20Managerial%20Finance/Relevant%20Articles/f2-mgmt-acc-standard-costing.pdf

Khris, B. and Whiteside, M., 2020. Transfer Pricing: Purpose of Determination and Factors Affecting Transfer Pricing Determination. Journal Dimensie Management and Public Sector, 1(2), pp.27-34. http://hdpublication.com/index.php/jdmps/article/view/48

Kianian, B., Kurdve, M. and Andersson, C., 2019. Comparing life cycle costing and performance part costing in assessing acquisition and operational cost of new manufacturing technologies. Procedia Cirp, 80, pp.428-433. https://www.sciencedirect.com/science/article/pii/S2212827119300277

Mahmud, I., Anitsal, I. and Anitsal, M.M., 2018. Revisiting responsibility accounting: what are the relationships among responsibility centers. Global Journal of Accounting and Finance, 2(1), pp.84-98. https://www.igbr.org/wp-content/uploads/2018/12/GJAF_Vol_2_No_1_2018.pdf#page=90

Rogers, H. and Oats, L., 2022, January. Transfer pricing: changing views in changing times. In Accounting Forum (Vol. 46, No. 1, pp. 83-107). Routledge. https://www.tandfonline.com/doi/abs/10.1080/01559982.2021.1926778

Santos, I.F., 2018. Controllable sliding bearings and controllable lubrication principles—an overview. Lubricants, 6(1), p.16. https://www.mdpi.com/261270

 

 

When the transfer price is £ 190 per unit					When the transfer price is £ 250 per unit
Mayfair Ltd					Mayfair Ltd
Profit statement for the month					Profit statement for the month
Particulars	Amount (£)				Particulars	Amount (£)
Revenue					Revenue
Sales (13000 * £ 190)	2470000				Sales (13000 * £ 250)	3250000
Total Revenue	2470000				Total Revenue	3250000
Expenses					Expenses
Allocated head office costs	34000				Allocated head office costs	34000
Annual fixed costs	70000				Annual fixed costs	70000
Material costs (13000* £ 105)	1365000				Material costs (13000* £ 105)	1365000
Labour costs ( 13000* £ 70)	910000				Labour costs ( 13000* £ 70)	910000
Other variable costs ( 13000* £ 27)	351000				Other variable costs ( 13000* £ 27)	351000
Total expenses	2730000				Total expenses	2730000
Net profit	-260000				Net profit	520000