Transfer Pricing and Variances

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Arab Open University B392: TMA – 2nd Semester 2021 – 2022
Cut-Off Date: 17th April 2022
The TMA:
This TMA is based around two parts of “Transfer Pricing and Variances” and “Controlling
cash flow for business growth”. Marks will be awarded for blending the context of each case and
with relevant theory by means of your own interpretation. In addition to this, some research is
required.
The TMA requires you to:
1- Review various study sessions beside the supplementary materials.
2- Unit 2, 3, 4, and 5
3- Conduct a simple information search using the internet and the e-library.
4- Present your findings in not more than 1,500 words ± 10% (700 words for part A and
560 for part B).
5- You should use a Microsoft Office Word and Times New Roman Font of 12 points.
Justify – Line space = 1.15
6- You should read and follow the instructions below carefully. Each part of the process
will carry marks for the assignment.
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The TMA Questions
PART A: Transfer Pricing and Variances
Gamma Company produces cars. Two of the profit centers, Tires center and Assembly center, were
in conflict over the price of tires. External suppliers of tires offered Rania, the manager of the
Assembly center, the same type and quality of tire for $200. Rania used to buy these tires
internally for $300 each.
Jamil the CEO of the company called for a meeting with the managers of both centers in order to
solve the issue. Kamil the manager of the Tires Centre explained that:
“The tires we produce have been a trusted brand for over 60 years and are distributed by Gamma
Company to members all over the globe. Our tires have long been recognized as a leading private
brand since 1954.” Tires Center: Cost per tire

AssignmentTutorOnline

Rania answered that the external suppliers offered the same specifications and quality for a $100
less, and that she should be able to buy them internally at least at the same price.
Required:
1. Advise and justify whether the Assembly Centre should to buy tires from inside or outside the
firm. (130 words)
If there is untapped energy in the company or department, it should be preferred to manufacture tires
internally to exploit the company’s resources with an emphasis on the quality of the product or tires and
supply tires to the other department on time.
The choice between internal manufacturing and external purchasing, digitally and accounting, is based
on the comparison between the purchase price of the tire in the market, which is —————————
And the variable cost only for production, while ignoring the fixed cost, which is ——————— and
under comparison, we choose the least of course because of ——————————————–
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2. Based on your answer in the previous requirement, provide and justify a proper transfer price.
(130 words)
The internal transfer price between departments is determined on the basis of whether the
department has excess or untapped capacity or not. If there is untapped energy and resources,
the internal transfer price must be at least equal to the variable cost because it influences
decision-making.
If the department does not have any excess capacity, then the lowest transfer price should be
the same as the selling price or the market price which is ——————————-
3. The Tires Centre had a capacity of 40,000 tires per year, and the Assembly Centre use around
90,000 tires per year. The Tires center could sell all of its production externally for $300. Based
on these special circumstances provide a recommendation for Gamma Company whether
these two centers should buy/sell internally or externally. Justify your answer. (50 words)
According to the current situation, does the tire department have spare capacity or not?
The answer is ——–, accordingly the lowest exchange rate is —— the market price —— which is —–
—
In light of this, it is possible to compare the market price with the internal transfer price, and therefore
choose the highest for the department, which is ——- for the collection section: According to the case
data: the market price is ——- while the internal transfer price is —- —— Therefore, the lowest price
for the production and assembly department is ——- because it is the cheapest and most affordable.
4. Explain why setting transfer prices by Gamma can be controversial when a product is being
transferred between two profit centers. (130 words)
Why setting transfer rates can be controversial when moving a product between two profit centers.
The process of determining the internal transfer prices between the company’s departments is a thorny
process and is not easy because each department or department focuses on its own profitability in many
cases, as obligating a department to transfer the framework, for example internally, is less profitable
compared to selling it externally.
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5. Gamma Company provided you, as a consultant, the following information:

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Required:
Discuss the performance of the company for the past year. Show your workings. (400 words)
[Marks: (8+8+6+8+40) = 70]
To answer this question, we need to calculate the deviations for the following elements:
1. Sales of cheese
2. Sales of yogurt
3. Material of litters
4. Material of 100gr
5. Labor
6. Other cost
7. Profit before interest and tax
According to the above, a deviation tree is drawn and an analysis is written for each deviation, whether it
is a positive or negative deviation.
The accounting rules:
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The competitive effectiveness:
a- The impact of the change in sales volume:
The sales (market) variance = (actual volume – planned volume) × planed price
The sales (market) variance =
b- The sales (market) variance =
The impact of the change in price:
The sales price variance = actual volume × (actual price – planed price)
The sales price variance =
The sales (market) variance =
The operating efficiency:
c- The impact of the change in raw material (KGs):
The efficiency (quantity) variance = (actual volume – planned volume) × planned price
The efficiency (quantity) variance =
The efficiency (quantity) variance =
The spending variance = (actual price – planned price) × actual volume
The spending variance =
d- The impact of the change in raw material (Litters):
The efficiency (quantity) variance = (actual volume – planned volume) × planned price
The efficiency (quantity) variance =
The efficiency (quantity) variance =
The spending variance = (actual price – planned price) × actual volume
The spending variance =
e- The impact of the change in labor:
The efficiency (hours) variance = (actual hours – planned hours) × planned labor rate
The efficiency (hours) variance =
The efficiency (hours) variance =
The spending variance = (actual labor rate – planned labor rate) × actual hours The
spending variance =
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The impact of the change in other costs:

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Note: ( write a comment )
The tree of variance analysis:
Change in profits
$1,700 (F)
Competitive effectiveness
$26,000 (F)
Operating efficiency
$24,300 (U)
Variance due to selling
price
Variance due to
market (sales)
Variance associated
with other costs
Variance associated
with direct costs
Variance associated
with direct material
( )
Variance associated
with direct labor
Eff. Var. Spend. var Eff. Var. Spend. var
( )
Spend. var
Variance associated with
direct material (L)
Eff. Var.
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Case Study B: Controlling cash flow for business growth
Cash flow is of vital importance to the health of a business. One saying is: ‘revenue is vanity,
cash flow is sanity, but cash is king’. What this means is that whilst it may look better to have
large inflows of revenue from sales, the most important focus for a business is cash flow.
Required:
1. Describe what is meant by ‘cash flow budget’. (130 words)
Define the cash flow budget
2. Explain how a cash flow forecast can help a business now and in the future. Give examples.
(100 words)
Advantages and benefits of cash flow budget
1. Understand the impact of future plans and possible outcomes
2. Keep track of overdue payments
3. Plan for upcoming cash gaps
4. Manage surplus cash
Support your answer by examples
3. Analyze why cash is considered to be more important to a business than revenue or profit.
(250 words)
Define the difference between the cash and the profit (Cash is King)
Why cash is more important than revenue or profit?
1. Cash flow can be bought, profit can’t
2. Cash flow is an incredibly difficult metric to manipulate
3. Good cash flow means your business can avoid taking on debt
4. Cash can highlight operational issues better than income statements.
5. Cash flow statements are a better barometer of sustainable growth.
4. Evaluate the importance of cash flow to a business of your choice. Explain how a recession
would most likely affect this business. (170 words)
Define the cash flows
a. The importance of cash flow to business
b. Keeping Up with Debt
c. Good Cash Flow Increases Opportunity
d. How a recession would affect this business?
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Define the recession
a. Negative impacts for recession
b. Reduced profits
c. Reduction in cash flow
d. Credit Impairment and Bankruptcy
e. Falling Stocks and Slumping Dividends
In your answer, you should explain each point or inquiry separately.
All answers should be supported by examples.
Use the following headings (below) to make up the different sections of your work:

END of Questions