Management Accounting Report: Assessing Departmental Performance

This report examines management accounting principles, specifically focusing on transfer pricing within Raven Industries, a company with three departments: Carpet, Furniture, and Cushion. The report addresses the issue of correctly assessing departmental performance when inter-departmental transfers occur. It highlights the manager of the Cushion department's concern that using variable costs for transfers to the Furniture department inaccurately reflects performance. The report analyzes different transfer pricing methods, including cost-based and market-based approaches. It demonstrates, through calculations and comparative statements, how using market prices for inter-departmental transfers provides a more accurate picture of each department's profitability. The report includes a recommendation to the CEO of Raven Industries to adopt market-based transfer pricing to improve performance measurement. The report provides detailed workings and calculations to support its findings, emphasizing the importance of correct valuation techniques for assessing departmental performance and making informed business decisions.