Judul : re bath prices
link : re bath prices
re bath prices
hello and welcome to this acca f5 question debrief. i'll be your host forthe next 30 minutes or so i'm karl ballard, a tutor at kaplanand in this question we'll be looking atthe december 2011 paper question number 2,which is on transfer pricing. now transfer pricing is an area that students aren't very keen on.the aim of this presentation is to set you at ease to show you where the easy marks are and how to prepare a good
answer. we're going to look at the exam in a little bit of detail first. let's just remind ourselves that theexam is made up of five 20 mark questions, all of which are based around different scenarios.when it comes to a transfer pricing question the scenarios are often quite detailed.you'll have a number of divisions, you'll have a number of figures for sales for costs, for materials, for labour and so on. remember each of these
scenarios will lead into multiplerequirements. in the question we're going to look atthere are going to be three requirements. but what's the most important thing weneed you to take away from any question in the f5 exam? you must stick to your timings!remember we've got the golden rule of 1.8 minutes per mark andyou should make sure you stick to this rule across all three requirements. in terms of getting the most out if this presentation we wouldrecommend that you have a copy
of the december 2011 paperin front of you. so if you haven't already got one,please go and get one from the acca website. this presentation then will form around three main objectives. the first one is to remindyou of the approach to transfer pricing questions in general. we'll then look at a specific question. this question from the december '11 paper. finally, the last objective is
how to improve your exam technique. eachdifferent question that you look at in the f5 requires different techniques and different ways of approaching your workings.we'll highlight some of the key bits of exam technique for transfer pricing. in terms of transferpricing, the syllabus areas are quite broad in this area and they don't always give that manyhints to what types of questions will be asked.
just to remind ourselves though of the two syllabus areas. the first one is to explain and set atransfer price either using variable cost, full cost or a market cost. the second requirement is to explain how transfer prices canbe used and how they can distort performance and decisions. now in terms of a question what we'll typically see is you beingasked to prepare some profit statements and to conclude on the scenario as wellas talking about the performance of the
different divisions. this is really what the syllabus isasking us to do. but we need to be prepared to do thataround a number of different ways of setting thattransfer price. in terms of exam preparation what you must always do whenattempting any type of question is to be ready for all of these syllabus areas. please don't try and just concentrate on the areasof f5 that you prefer.
we don't know what's going to come upin the f5 exam so it's very good idea it's a very goodidea to have a clear understanding of all the five main syllabus areas. remember there are easy marks in transfer pricing.yes it's one of the areas that students don't likebut i can guarantee to you that if a question comes upthere are a good easy 8 to 12 marks that you should be able toget in this question which will see you on the way to hittingthat 50%
that you need to pass this paper. remember profit statements will be keyand in this question we're going to prepare two different profit statements. and don't though just obsess about the numbers. the interpretation of these numbers andtalking about the issues is very important as well. and finally remember that you must practise questions! don't just revise the topics.yes they're important
but question practice is key to improving your exam technique. ok, so let's have a look nowat question number 2 from the december 2011 paper. but what about general answer strategy first? how should we approach all answersthat we're preparing in the exam. remember the exam room is a very stressful andtime-pressured environment so it's important to stick to your plan
and our plan for the answer should first be to stick to your timings. don't let the clock slip past you! make sure you've got a watch on.make sure you've written down the time to start and finish each question. the first thing you must do thoughis to read the requirement. as i've said before,the scenario is often laid out in the question first. the requirementwill be down the bottom of the page. you should directyour attention straight
to that requirement first.read all of the requirements. in this question there are three of those.make sure you understand each ofthose requirements before you go to the scenario and work out what the key bitsof information and numbers are that you need from that scenario. then consider the layout of your answer.don't just take a pen straight to paper. think about how youranswer is going to be laid out. in a question such as this,your profit statement
will often head up your page andit should be followed by well referenced workings. we'll show yousome of those workings on the face of these profit statementsin just a minute. finally make sure you workefficiently and neatly. the examiner and the marker needto be able to read your script to award you the marks. so don't rush and try and score the basic easy marks. ok, in a bit more detail then,this question was formed of three main requirements.the first requirement
was under the current transferpricing system what profit would be recorded for eachof the divisions and bath co as a whole.this is worth then 6 marks so we've gotaround about 11 minutes here. the second part was tocalculate the maximum profit earned by bath coif we were to optimise the transfer price. this is worth 8 marks so we're going to have a couple more minutesto do this part of the question but this is very much going to build on our
answer in part a). so perhaps wecan give ourselves a little bit more leeway in a) and that will buy us time in b) to copy some of the stuff that we've donethere in part a). finally then we need to discuss the issues that have occurred. and what issues both the divisional managers need to take into account to benefit the company as a whole andalso make sure we conclude and come up with a recommendation.that part then is worth 6 marks so about another 11 minutes there.
again, it's very easy to get bogged down in the numbersin parts a) and b) in the first 14 marks but you should leave sufficient time for part c) where you need to interpret your answer. so, for transfer pricing always draw a diagram.this won't get you any marks but is very very important to help you understand how to approach these questions
and to lay out the informationin an easy to understand manner. as part of this presentation we willshow you how to draw a basic diagram. in terms of the scenario, there can bequite a lot of information for a transfer pricing question. so overthe next couple of slides were just going to pull out some of the key parts ofinformation in this question. we've got two divisions in this question, divisions a and b. we've got a final finished product: a bath. but this bath consists of
a main unit and some fittings. the fittings represent the productthat is transferred from b to a so the product transfers from b to a, the money transfers from a to b. that money will need to be reflectedin our profit statements. all of division a's sales are made externally. division b sells both to division a
but it also sells externally to themarket as well. what are some of the key figures thenthat we've given in this question? well there's a whole host of them. we've got everything from sellingprice and materials to labour, overheads, production and sales and demand. you're going to need to makesure that you understand these figures. you are going to need all of them for this question so makesure you can sift through the ones that will be important,
firstly for your diagram and then for your profit statement. the examiner has been quite nicein this question he's laid out or she has laid out the information in avery easy to understand manner, separating out both division a's and b's figures. what other information though have we got from thescenario? this will help us in parts b) and c). well historically the transfer price has been set by head office. now though new managers are in place. historically again, division a has only been able to
purchase bath fittings from division bbut again this could change. currently division a believes it can now buy bath fittings in the external market price for $65 per set rather than the $70 that division b is charging you. so now then let's draw a diagram.let's try and represent some of these key pieces of information. first up mark on our two divisions, a and b.
then show us where the product is moving. the product moves from b to a. the price charged by b for the internal transfer is $75. other information here that is key is the capacity of both divisions.the capacity for division a is 80,000; the capacity for division b is 200,000. we're also told that the maximum demand
for the internal productis 80,000. this is to ensure that a is working at full capacity. finally then let's mark on the maximum external demand for both divisions. for division a it's 80,000; for division b it's 180,000. once we've done our diagram,we can then revisit our requirements.firstly let's look at
requirement a) where we need to show under the current system what the profit is for each of the divisions and thecompany as a whole. the first thing we should do is lay outour profit statements. we're going to need a well drawn-out table and then we're going to go through the tableand systematically and enter each of the figures that we need keeping a close eye on the time.try and start with the easier numbers first and then move to the harder ones.
once you've done that, total up thefigures for the whole organisation. remember you'll be computing the figuresseparately first for each division. then simply add themthrough in the final column for bath co. the profit statement should looksomething like this. you're going to need four main columns. in the first column you'll have the costs and the revenue, and then in columns 2, 3 and 4, you're going to havethe two divisions a and b and the total.
some of the headings you're going to needin the first column include the sales both made internally and externally. then we'll move on to the costs.these include the transfer price, the material, the labourand the fixed costs. finally at the bottom, we'll need the profit. the first set of figures to enterare the sale prices a, remember, only sells externally so it sells 80,000 units for $450 each.b, on the other hand
should sell 80,000 units to a to ensurethat a is fully utilised. remember it has capacity of 200,000 so it will have 120,000 units remaining. each of these should be sold externally for $80. following through the calculation into costs. the costs for division a include the material for each of the 80,000 units and labour of $45. for division b, the material only costs $5,
but labour costs $15. once we've got those figures, we can thentotal them up and our diagram will start to look likethis. in the top we've got external sales for a of $36 million, and for b of $9.6 million. moving on to the costs, we can see that the material and labour costs we wereable to work out from before. the fixed costs of $7.4 million and $4.4 million can be very easily taken from thequestion.
once we've done that,we can start to add up the total for the company as a whole simply goacross each row and total the two figures up. once we've done that, add down the columnsto come up with the profit. we can see here then that the total profitfor the company is $10.16 million. and always note that in atransfer pricing question the internal sale in division b should match the transfer price cost
in division a. this represents themoney that leaves a that is given to b. and that brings us to the end of the first part. in the next part of the question,we'll look at requirement b). here, we need to work out the maximum profit that can be calculated for the company as a whole. to do this we'll need to makesure that the transfer price is optimised. the first thing we're going to do here thenis update our diagram
for the new information that we're told. then, well repeat the profit statements,making sure that we change them for these new updated figures. so here we can see our original diagram. what i would recommend in the exam,once you've finished with the diagram is just to cross out the figures from a) and write in the new figures that you'll need in part b). these include in this question the factthat division a can now purchase bath fittings externally
for $65. this means that division bwould need to lower its transfer price. if not, division a will simply ignore divisionb and division b will end up with under-utilised capacity. so b lowers its price to $65. this means that the maximum demand from division b to division a will now be only 20,000 units.
how have we got to this figure?well, the maximum capacity of division b is 200,000. the maximum demand for division b is180,000. the difference between the two is the 20,000. and b, in this case is going to preferto sell externally as it will make a higher contribution thanselling to division a but over all a won't lose out because it cannow source units externally. it's going to source 60,000 of these units
as 20,000 of these units are sourced from b. so here is our original profit statement from a. but we're going to update some of these figures. in the exam, you will be required todraw out a fresh profit statement but just to make thingsa little bit easier to understand in this presentation i decided to use the original figures from part a). the figures that will change include the internal and external sales in part b). we'll also need to update thetransfer price,
the material cost and the over all profit figures. first let's look at the internal sales revenue. this will only be now for20,000 units and we've had to lower our price to $65 to match the external units that a can source. we'll also be making a higher amount ofexternal sales there'll be a 180,000 now of external sales at $80 each. in terms of transfer price
remember that must match what we had above,so we have 20,000 x 65, the new material costs though represents the products bought externally for $65and we're going to buy 60,000 of these. also, each product that we buy either externally or from division b requires $200 of material so for all 80,000 units there will be a material cost of $200. now we've got these figures
we can start to enter the totals into our table. once we've got these we can total it up for the entire organisation and then work out the profitfor each of the divisions. note here then that the profitover all for the company has gone up by just less than $1 million. so this optimisation of the transfer price over all has benefited the company. and this is something that we need totalk about in part c).
so, just to remind yourselves, in atransfer pricing question when you've got a profit statement please enter the easy figures first if you are stuck. start with the fixed costs. these will always be the same. enter in division a's external sales.this again is quite an easy figure - it doesn't dealwith any of the concepts of transfer pricing. then enter the labour. in this case thelabour was the same whether we sold internally or externally.
and those have not changed between parts a) and part b). work through the other figuresthen as best you can. part b), in this question was a challenging part, so if you only pull 3 or 4 markstogether you should be more than happy with your performance here. if you have time, total everything up butagain don't be worried about dropping the question and moving on to part c) if you haven'tquite finished all the numbers. there are 6 marks available in part c)and 3 or 4 of those
are definitely within your grasp. so for part c), we needed to discuss the issues that divisional managers take intoaccount when coming up with transfer prices. also how their interests will affect thecompany as a whole. please make sure as well thatyou provide a conclusion and a reasoned recommendation.in terms of the 6 marks that are available there will be 1 or 2 marks availablefor this and you will only get 4 marks if you neglect a conclusion.
lots of points that we can make here. make sure those points are short and punchy. make sure that you use a wide variety ofdifferent points. don't simply repeat the same point over and over again. there's no specific list of whatpoints will get marks and what won't get marks so try and think on your feet. and please use some of the figuresthat we had there from part a) and b), especially the profit figures. and remember that recommendation.so, what are some of the
issues here that we might talk about? well, the managers are likely to be assessedagainst their divisional profit. this sets the scene. if a managerachieves a higher profit under one transfer price than other, he'sgoing to prefer the transfer price that leads to him having a higher profit because his bonusis likely to be linked to this. so we end up with quite silo thinking. we're not thinking about the company as awhole, we're simply thinking about bettering ourselves and our division.
all they will be then is driven by increasing their profit. they won't consider other divisions the decisions that they make will also not be in the best interest of the company as awhole. they won't often have a view of that bigger picture. scenario b), we must note gives the highest over all profit. the optimum transfer price will usually give this, so ideally we should have a scenario in which b) occurs.
policies will help insure that this senario occurs. it's also importantto make sure that capacity in both the divisions is always maximised. managers, though, will not wantto be told what to do. they would like to have to their own independence and they can become demotivated iftransfer prices are imposed very centrally. ideally they will want to sourcematerials from their cheapest possible sources
but this could lead to under-utilised divisions. if, for example, division a wasable to source bath fittings for $50 it would decide not to use division b at all. this would leave b running under capacity. what's our recommendation then?well ensure that a buys 20,000 units of bath fittings from division b to ensurethat it's fully utilised.
ensure that b sells to division a at $65 so a doesn't end up going elsewhere. allow a and b some degree of negotiation. managers will not want to have transferprices enforced and this can be demotivating. so what do we need to rememberfrom this question? conclusion. students don't like transfer pricing. a lot of students don't want to attempt a transfer pricingquestion. they'll often leave it
to the last question in the examand will not give sufficient time over to it. but what we've seen here today is thatthere are easy marks available. a well drawn out profit statementwith a few figures in can push you from a fail to a pass. always remember to draw a diagram.this will allow you to interpret what's happening in thequestion smoothly, quickly and easily.it won't get you any marks but you will find the question a lotharder without one. make sure that you're confident drawingup profit statements.
in most transfer pricing questions,these are required. and finally be prepared to discuss some ofthe issues for each division and for the company as a whole.talk about managers decision-making, talk about goal congruence,talk about motivation. finally i'd just like to wish you thebest of luck in your further studies when you come to sit the f5 examand the rest of the modules that use sit under acca. thank you very much for taking the timeto listen to the presentation today and enjoy the rest of your day.