BUACC 5933 Cost and management accounting exam

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Question 1: (20 marks)

Part 1. Suppose that your sister Angelina Humphrey is a manager of a regional glass producer. This company was recently acquired by Big Frame Ltd., the largest frame maker in Victoria. In a meeting with Big Frame’s management board, Angelina is informed that her business division is required to supply glass to the frame division. She is suggested to meet with the frame division’s manager and discuss a transfer price. However, Angelina does not understand what transfer price means and how this term might affect her business division.

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Briefly explain transfer pricing to Angelina and how it will impact her business division’s performance in the future. [5 marks]

Part 2. David works for Woolgarments Company as a production manager. He often participates in the annual budgeting process of the company. David is requested by the Chief Executive Officer Linda to submit his department’s budgeted production for the following year. Linda reviews and typically adds 10 percent to the production budget provided by David. The new amount becomes David’s target production level for the following year. David can receive a cash bonus if his department exceeds the projected production level.


a. Explain any incentive that David might have to be dishonest with Linda about the production level he thinks the department can achieve. [5 marks]

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b. Explain the impact David’s inaccurate production estimates could have on other company departments or employees. [5 marks]

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c. Suggest what should be done to prevent a manager from providing inaccurate budgets which can easily achieved. [5 marks]

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