Embed Size (px)
Citation preview
George Burn’s Poultry Farm
Class Announcements
Service Learning Assignment: Schedule a meeting with Danika Leblanc (
[email protected]) prior to contacting your organization
Ensure that you have met or scheduled a meeting with the client organization before you leave for reading week and ensure that that meeting includes me.
Midterm February 19th (Wednesday) Business Banquet - April 2nd – 5:45-8pm,
Catering - Gabrieau's Bistro; Keynote Speaker - Annette Verschuren, Past President of Home Depot for Canada and Asia
Friday, Wednesday February19th(in-class) Worth: 30% Coverage: Chpts. 6, 7, 8 , 22 (p. 780-791), 23 (p.
808-814) Format:
Short answer questions with multiple parts No – multiple choice, journal entries, ethics Answer for only THREE of the four questions; each
question is worth 25 points. Preparation:
Problems On-line Lecture Notes On-line Additional Office Hours:
Tuesday 18th – 9:000am – 2:00pm (normally none) Wednesday 19th – 9:00am – 12:30pm (normally 11:00am –
2:00pm)
Midterm
Class Objectives
1. Assessing the impact of transfer price on behaviour
2. Transfer pricing and management control systems
George Burns Poultry: Context
An integrated poultry farm and processing plant of roaster size chickens
Divided into three divisions or profit centres (Farm, Packaging, Sales)
Burns Poultry purchased by ADM and Burns continues at Farm Division
Plant Capacity - 6,000 processed per day Farm Capacity - 1,030 per day
Spoilage - 30 out of 1,030 chickens don’t pass inspection and have to be destroyed
George Burns Poultry: Pricing – External and Internal (Transfer)
$3.10/Ckn
Farm Plant Sales
$2.90/Ckn $4.25/Ckn
$3.00/Ckn (Farm) or $5.00/Ckn
$3.10/Ckn (Sales)
George Burns Poultry Case: Issues
1) Calculate Divisional Profit Farm Division Profit
Recalculate cost of goods sold Direct variable costing Abnormal spoilage
2)Assess Impact on Profitability Contribution margin of packaged chicken Farm Division Decisions
Sale of 3,000 chickens from inventory Increased hatching from 1030 to 1130 @$3.00/ckn Contract to supply 200 chickens externally $3.10 sale/purchase price of unprocessed chickens
George Burns Poultry Case: Issues (cont’d)
3) Evaluate Expansion of Farm Capital (not required for class)
4) Evaluation System Assessment goal congruence responsibility centres performance measurement
George Burns Poultry Case: Farm Division
Note:The budgeted divisional profit for the farm division was $15,059.
Favourable variance from budget of $1,515F.
Sales to plant (85,280 @ $2.90) ..................................................... $247,312 External sales (9,200 @ $3.00) ...................................................... 27,600 274,912 Cost of goods sold: Beginning inventory (67,930 @ $1.337) ................................. $ 90,889 Hatching .................................................................................. 20,172 Feed ........................................................................................ 139,167 Fixed production costs ............................................................ 82,125 Cost of goods available ............................................................ 332,353 Ending inventory (70,890 @ $1.298) ...................................... 92,015 240,338
Gross profit ..................................................................................... 34,574 Fixed administration costs .............................................................. 18,000
Divisional profit ............................................................................. $ 16,574
George Burns Poultry Case: Plant Division
Note: The budgeted divisional profit for the plant was $20,190. All actual costs other than the purchase of chickens from a broker equalled the budgeted costs.
Sales to sales division (92,000 @ $4.25) ...................................... $391,000
Direct costs: Chickens from farm (85,280 @ $2.90) .................................... $247,312 Chickens from broker (6,720 @ $3.10) .................................. 20,832 Variable processing & packaging (92,000 @ $0.48) .............. 44,160 312,304
Contribution margin ....................................................................... 78,696
Fixed production costs ................................................................... 31,850 Fixed administration costs .............................................................. 28,000 59,850
Divisional profit ............................................................................. $ 18,846
Unfavorable variance from budget ................................................. $ (1,344)
George Burns Poultry Case: Sales Division
Note:The budgeted divisional profit for the sales division was $45,500.
Variance from budget was $0.
Sales (92,000 @ $5.00) ................................................................. $460,000
Direct costs: Chickens from plant (92,000 @ $4.25) .................................. 391,000
Contribution margin ....................................................................... 69,000
Fixed selling costs .......................................................................... $11,500 Fixed administration costs .............................................................. 12,000 23,500
Divisional profit ............................................................................. $ 45,500
1.George Burns Poultry: Divisional Profit
Note: 6720 @ (3.10-2.90) = $1,344
Divison Targeted Profit Actual Profit Variance Bonus 5%Farm 15,059.00 16,574.00 1,515.00 75.75 Plant 20,190.00 18,846.00 1,344.00- - Sales 45,500.00 45,500.00 - -
1.George Burns Poultry: Farm Division Profit (Reported)Farm Division Actual Operating Results Reported
For the Quarter Ended May 31, 2003
Full Absorption Costing
Sales to plant (85,280 @ $2.90) $247,312
External sales (9,200 @ $3.00) 27,600274,912
Cost of goods sold:Beginning inventory (67,930 @ $1.337)
$90,889
Hatching 20,172Feed 139,167Fixed production costs 82,125Cost of goods available 332,353Ending inventory (70,890 @ $1.298)
92,015 240,338
Gross profit 34,574Fixed administration costs 18,000Divisional profit $16,574
1.George Burns Poultry: Farm Division Profit (Reported) Company Policy1. Direct costing not absorption costing2. Normal spoilage is part of cost of goods
sold3. Abnormal spoilage is a separate expense;
not part of cost of goods sold Transferred to Plant In Inventory
Hatching .................................................................. $0.200 $ 0.200 Feed ......................................................................... 1.400 0.700 Fixed production costs [$328,500 ÷ (1,030 hatched/day × 365 days)] .....
0.874
0.437
2.474 1.337 Normal spoilage ($2.474 × 3%) .............................. 0.074 - Standard/average production cost per chicken ........ $ 2.548 $ 1.337
1.George Burns Poultry: Farm Division Profit (Revised)Farm Division Actual Operating Results Reported Revised
For the Quarter Ended May 31, 2003Full Absorption Costing
Variable Costing
Sales to plant (85,280 @ $2.90) $247,312 $247,312External sales (9,200 @ $3.00) 27,600 27,600
274,912 274,912Cost of goods sold:Beginning inventory (67,980 @ $1.337)
$90,889 Beginning inventory (67,980 @ ([email protected]))
$61,182
Hatching 20,172 Hatching 20,172Feed 139,167 Feed 139,167Fixed production costs 82,125 - -Cost of goods available 332,353 Cost of goods available 220,521Ending inventory (70,890 @ $1.298)
92,015 Ending inventory (70,890 @ ([email protected]))
63,801
Abnormal spoilage 240,338 Abnormal spoilage 1,018 155,702Gross profit 34,574 Contribution Margin 119,210
Fixed production costs 82,125Abnormal spoilage(94,480@3%-3,[email protected] 1,018
Fixed administration costs 18,000 Fixed administration costs 18,000Divisional profit $16,574 Divisional profit $18,067
2.George Burns Poultry: Contribution Margin
Packaged Chickens
Sales
Variable Costs:Farm - HatchingFarm - FeedFarm - Spoilage(3%)Plant - PackageSales - n/a -
- - -
Contribution Margin -$ -$ -$
Chickens
2.George Burns Poultry: Contribution Margin
Packaged Chickens
Sales 3.000 3.100 5.000
Variable Costs:Farm - Hatching 0.200 0.200 0.200 Farm - Feed 1.400 1.400 1.400 Farm - Spoilage(3%) 0.048 0.048 0.048 Plant - Package 0.480 Sales - n/a -
1.648 1.648 2.128
Contribution Margin 1.352$ 1.452$ 2.872$
Chickens
2.George Burns Poultry: Farm Division Decisions
a.Sale of 3,000 chickens from inventory
b.Increased hatching from 1030 to 1130 @$3.00/ckn
c.Contract to supply 200 chickens externally
d.$3.10 sale/purchase price of unprocessed chickens
2a.George Burns Farm Division: Eliminate 3,000 Inventory Farm Division Profit
3000 @ $1.352 = $4,056 Sales Division Profit - Chicken
3000 @ $1.452 = $4,356 ($300 opp cost) Sales Division Profit – Packaged Chicken
3000 @ $2.872 = $8,616 ($4,560 opp cost)
2b.George Burns Farm Division: Increase Hatching 1,030 to 1,130 Farm Division Profit
100 @ $1.352 @ 91 days = $12,303 Sales Division Profit - Chicken
100 @ $1.452 @ 91 days = $13,213 ($910 opp cost)
Sales Division Profit – Packaged Chicken 100 @ $2.872 @ 91 days = $26,135
($13,832 opp cost)
2c.George Burns Farm Division: Sell 200 Chickens/day Externally
Farm Division Profit 200 @ $1.352 @ 91 days = $24,606
Sales Division Profit - Chicken 200 @ $1.452 @ 91 days = $26,426 ($1,820
opp cost) Sales Division Profit – Packaged Chicken
200 @ $2.872 @ 91 days = $52,270 ($27,664 opp cost)
Plant Division Cost 100 @ (3.10-3.00) @ 91 days = $910 (extra cost)
George Burns Poultry: Farm Division vs Company Overall
External Sale $3.00
Transfer $2.90 Difference
Sale of Chicken
Sale of Processed Chicken Difference
1. Reduction in Inventory 3,0002. Sale of 200 chickens externally3. Increase hatching 1,030 to 1,130
Total - - - - - -
Company OverallFarm Division
George Burns Poultry: Farm Division vs Company Overall
External Sale $3.00
Transfer $2.90 Difference
Sale of Chicken
Sale of Processed Chicken Difference
1. Reduction in Inventory 3,000 4,056.00 3,756.00 300.00 4,356.00 8,616.00 4,560.00 2. Sale of 200 chickens externally 24,606.00 22,786.00 1,820.00 26,426.00 52,270.00 27,664.00 3. Increase hatching 1,030 to 1,130 12,303.00 11,393.00 910.00 13,213.00 26,135.00 13,832.00
Total 40,965.00 37,935.00 3,030.00 43,995.00 87,021.00 46,056.00
Company OverallFarm Division
George Burns Poultry: Evaluation Responsibility
Centre Decentralized but
central decision making
Controllability over sales centralized (except for sales department)
Transfer prices are imposed
Decentralized organizations drill decision making autonomy into the divisions or subunits
Sales centralization is not decentralization
Imposition of transfer pricing removes decision autonomy with adversevconsequences
George Burns Poultry: Evaluation Responsibility
Centre (cont’d) All three divisions
are designated as Profit Centre
Evaluation based on meeting target division profit
Revise responsibilities centre designation Farm & plant
divisions – cost centres
Sales division – revenue centre
Measure for Evaluation should be consistent with responsibility
George Burns Poultry: Evaluation
Compensation Bonuses were paid at
5% of division profit in excess of target
Divisional Profit impacted by Transfer Price Transfer prices set at
$2.90 per chicken transferred and $4.25 per packaged chicken
Transfer prices set at 12% profit margin before admin costs
Non financial measures (spoilage, customer satisfaction, etc.) should be considered
Transfer price range ($2.13 to $3.00)
Transfer prices set at cost plus may cause inefficiencies to become another’s responsibility
Remedying Motivational Problems of Transfer Pricing Policies
1) Change responsibility centre classification Consider treating the selling division as a cost centre. Consider treating the selling division as a profit centre for
external sales and a cost centre for internal transfers. Use these criteria when evaluating division performance.
2) Dual transfer pricing A dual transfer-pricing system charges the buying division
for the cost of the transferred product (however the cost might be determined) and credits the selling division with the cost plus some profit allowance.
3) Average between minimum and maximum
Class Objectives- Revisited
1. Assessing the impact of transfer price on behaviour
2. Transfer pricing and management control systems
