SEMESTER – SPRING 2022

ADVANCED COST & MANAGEMENT ACCOUNTING (MGT605)

ASSIGNMENT NO. 02

DUE DATE: 30TH August, 2022 MARKS: 15

Learning Objective
The students are expected to understand computation of costs, revenues and operating profits using transfer
pricing method under various approaches for various divisions of any given company.

Learning Outcome
The students will be able to compute costs, revenues and operating profits using transfer pricing method
under various approaches for various divisions of any given company.

Case
Model Oil Company (MOC) has three sections - Production, Transportation, and Refining. MOC operates each section as
its profit centre. Production Section is responsible for managing production of crude oil from a petroleum field located at
County Oilfields. Transportation Section manages pipeline operations transporting crude oil from Oilfields to the company’s
refinery located at RefineFields. Refining Section at RefineFields operates a refinery to process crude oil using two barrels of
crude oil to produce one barrel of petrol. Petrol is the only saleable product that the refinery makes. Variable costs for each
Section are driven by number of barrels which is a single cost driver in each Section. The unit fixed costs for each Section are
subject to its budgeted annual output.
Following is some production and financial information for each Section of MOC.
a. The Production Section sells crude oil to outside parties in the market at Rs. 13 per barrel. Its total cost per barrel of crude
oil is Rs. 8 which includes variable and fixed unit costs of Rs. 2 and Rs. 6 respectively.
b. The Transportation Section buys crude oil from the Production Section, transports it to RefineFields through a pipeline
having the capacity to carry 40,000 barrels of crude oil per day. Overall cost per barrel of crude oil to the Transportation
Section is Rs. 4 which includes variable and fixed unit costs of Rs. 1 and Rs. 3 respectively. The output is delivered
to the Refinery at Rs. 18 per barrel.
c. The Refining Section has a daily operating capacity of 30,000 barrels of crude oil. However, it can process 10,000 barrels
of oil per day from the Production Section and 20,000 barrels per day of oil bought from other oil producers. Its overall
cost of producing per barrel of petrol is Rs. 14 which includes variable and fixed unit costs of Rs. 8 and Rs. 6 respectively.
The refinery can also purchased crude oil from the external market at Rs. 18 per barrel. The Refinery’s final output in the
form of petrol can be sold to the external parties at a price of Rs. 52 per barrel.
Required:
Prepare a statement in columnar form showing operating profit for each Section of MOC for per 100 barrels of crude oil under
the following alternative transfer-pricing approaches:
a) Market-based transfer prices;
b) Cost-based transfer prices at 110% of full costs. It is to notable that full costs refer to the cost of the transferred-in product
plus the Section’s own variable and fixed costs; &
c) Negotiated transfer prices - to be between market-based and cost-based transfer prices per unit as from Production
Section to Transportation Section at Rs. 10 and from Transportation Section to Refining Section at Rs. 16.75.

IMPORTANT
24 hours extra/grace period after the due date is usually available to overcome uploading
difficulties. This extra time should only be used to meet the emergencies and above
mentioned due dates should always be treated as final to avoid any inconvenience.
IMPORTANT/SPECIAL INSTRUCTIONS/SOLUTION GUIDELINES: BE NEAT IN
YOUR PRESENTATION
DEADLINE
 Make sure to upload the solution file before the due date on VULMS.
 Any submission made via email after the due date will not be accepted.
FORMATTING GUIDELINES
 Use the font style “Times New Roman” or “Arial” and font size “12”.
 It is advised to compose your document in MS-Word format.
 You may also compose your assignment in Open Office format.
 Use black and blue font colors only.

REFERENCING GUIDELINES
 Use APA style for referencing and citation. For guidance search “APA reference style” in
Google and read various websites containing information for better understanding or visit
http://linguistics.byu.edu/faculty/henrichsenl/apa/APA01.html

RULES FOR MARKING

Please note that your assignment will not be graded or graded as Zero (0), if:
 It is submitted after the due date.
 The file you uploaded does not open or is corrupt.
 It is in any format other than MS-Word or Open Office; e.g. Excel, PowerPoint, PDF etc.
 It is cheated or copied from other students, internet, books, journals etc.

Note related to load shedding: Please be proactive

Dear students!
As you know that Post Mid-term semester activities have started and load
shedding problem is also prevailing in our country. Keeping in view the fact, you
all are advised to post your activities as early as possible without waiting for the
due date. For your convenience; activity schedule has already been uploaded on
VULMS for the current semester, therefore no excuse will be entertained after
due date of assignments or GDBs.