Q10, Nov 2010, PQR Ltd. Division B of PQR Ltd.

contracted to buy from Div A 20000 units of a component which goes into the final product made by Div B. The transfer price for this internal transaction was set at Rs. 120 per unit by mutual agreement. This comprises of (per unit) Direct and variable labour cost of Rs. 20; material cost of Rs. 60; fixed overheads of Rs. 20 (Lumpsum of Rs. 4 lacs) and Rs. 20 as Return on Investment of Rs. 20 lacs that Div A would require for this additional activity. During the year, actual off take of Div B from Div A was 19600 units. Div A was able to reduce material consumption by 5% but its budgeted investment overshot by 10%. (a) As Financial Controller of Div A, compare actual vs budgeted performance (b) Its implications for Management Control.

Performance of Division B Actual Variance F/A Flex Budget 19600 120

Nos of Units Transfer Price/Unit Less Unit Variable Costs: Material Cost Direct & Variable Labour Unit Contribution Sales Material cost Direct & Variable Labour Contribution Contribution (check) Fixed Cost Profit Investment ROI

19600 120

57 20 43 2352000 1117200 392000 842800 842800 400000 442800 2200000 20.13%

60 20 40 2352000 1176000 392000 784000 784000 400000 384000 2000000 19.20%

-58800 F 0

58800 F 200000 A 0.93% F

1 2 3 4

Comments: Variance in Material consumption was favourable (Rs. 58800) Variance in Investment made was unfavourable (Rs. 200000) Overall variance reflected in ROI was favourable (0.93%) Implication on Mnaagement Control is that through the Budgets and Transfer Pricing systems, we can make specific observations about the favourable and unfavourable areas of performance and then work towards improving the performance.

Standard Budget 20000 120

60 20 40 2400000 1200000 400000 800000 800000 400000 400000 2000000 20.00%