Two potential pitfalls encountered in the design of performance indicators and measurement systems D Corporation is one of the major producers of pre-fabricated houses in the home buildingindustry. The corporation consists of two divisions:1. Bell Division, which acquires the raw materials to manufacture the basic house componentsand assembles them into kits.2. Cornish Division, which takes the kits and constructs the homes for final home buyers.The corporation is decentralized and the management of each division is measured by its income andreturn on investment.Bell Division assembles seven separate house kits using raw materials purchased at theprevailing market prices. The seven kits are sold to Cornish for prices ranging from US$45,000 toUS$98,000. The prices are set by corporate management of D Corporation using prices paid by Cornishwhen it buys comparable units from outside sources. The smaller kits with the lower prices havebecome a larger portion of the units sold because the final house buyer is face with prices that areincreasing more rapidly than personal income. The kits are manufactured and assembled in a new plantpurchased by Bell this year. The division had been located in a leased plant for the past fouryears.All kits are assembled upon receipt of an order from the Cornish Division. When the kit iscompletely assembled it is immediately taken by the Cornish Division for final construction. Thus, BellDivision has no finished goods inventory.The Bell Division's accounts and reports are prepared on an actual-cost basis. There is no budgetand standards have not been developed for each product. A factory overhead rate is calculated at thebeginning of each year. The rate is designed to charge all overhead to the product each year. Any under-or over- applied overhead is allocated to the cost of goods sold account and the WIP inventories.Bell Division's annual report is presented below. This report forms the basis of the evaluation ofthe division and its management by the corporation management.Additional information regarding corporate and division practices is as follows:The corporation office does all the personnel and accounting work for each division.The corporate personnel costs are allocated on the basis of number of employees in thedivision.The accounting costs are allocated to the division on the basis of total costs excludingcorporate charges.The division administration costs are included in factory overhead.The finance charges include a corporate-imputed interest charge on division assets anddivisional lease payments.anyThe division investment for the ROI calculation includes division inventory and plant andequipment at gross book value. Bell DivisionPerformance Report for the Year Ended December 31, 2020Increase/(Decrease) from 2019% CHANGE20202019AMOUNTSummary DataNet Income ($000 omitted)Return on Investment (ROI)Kits sold (units)$34,222$31,573$2,6498.4(6%)(14.0)(4.8)37%43%2,0002,100(100)Production DataKits started2,4001,60080050.0Kits transferred to Cornish Div.2,0002,100(100)(4.8)Kits in process at year-end700300400133.3Increase (Decrease) in kits in(500)process at year-endFinancial Data ($000)400Sales$138,000$162,800($24,800)(15.2)©The University of the West IndiesCourse Code: ACCT 3039211.../page 3Production costs of units sold40,000(8,000)(11,300)(8,000)($27,300)(20.0)(21.3)(21.6)(21.0)Raw material32,000Labor41,70053,000Factory overhead29,00037,000Cost of units sold$102,700$130,000Other Costs: Corporate Charges forPersonnel services228210188.6Accounting servicesFinancing costs(15)(225($222)425(3.4)(42.9)(18.9)440300525Total other costs$953$1,175Adjustments to IncomeUnreimbursed fire loss52(52)(100.0)Raw material losses due to125125impropoer storageTotal adjustments$125$52$73(100.0)(20.9)Total Costs$103,778$131,227($27,449)DIVISION INCOME$34,222$31,573$2,6498.4Division Investment$92,000$73,000$19,00026.0ROI37%43%(6%)(14.0)

Question

Accepted Answer

Transfer price is the price quoted between the departments or companies that are related to each…