Patricia sighed and briefly closed her eyes. She was frustrated with the reconciliation she was working on. She was sure that she was missing something, but she could not determine what it was. And she felt the clock ticking. Patricia knew that the time budget for this assignment was only three hours, and she had already worked on it for two hours.

Patricia started with a CPA firm after graduation, three months ago. Her first few assignments had been stressful. She had been a good student in school, and she expected to do well at work, too. But she often felt inadequate here, as though she was supposed to know more than she did. Her supervisor, Ron, told her not to worry too much. He said that her job was to learn and that she would be performing well soon. ‘All new-hires are slow to begin with', he told her, ‘Just let me know if you have questions'. However, Patricia felt that she had pestered him with enough questions. Most of the time, the answers to her questions seemed so obvious ¼ after Ron had answered her.

She looked at the reconciliation again.

REQUIRED ANALYSE INFORMATION

(a) Explain why it might be difficult to establish accurate time budgets for accounting tasks.

(b) Provide possible reasons why Patricia's time on this assignment could exceed the budget.

(c) Explain why Patricia is reluctant to seek Ron's help on this assignment.

(d) Describe how Ron might evaluate Patricia's performance assuming:

1. She seeks his help and completes the assignment in four hours.
2. She does not seek his help and completes the assignment in eight hours.

(e) Suppose Patricia does not seek Ron's help and completes the assignment in eight hours.

1. What priorities has Patricia used in making this choice?
2. Has Patricia behaved ethically? Why or why not?

(f) What could Patricia learn from this experience that will improve her performance in the future?

Transfer price; incentives for internal services

Avra Valley Services has two divisions, Computer Services and Management Advisory Services. Both divisions work for external customers and, in addition, work for each other. Fees earned by Computer Services from external customers were $400 000 in 2008. Fees earned by Management Advisory Services from external customers were $700 000 in 2011. Computer Services worked 3000 hours for Management Advisory Services last year, and Management Advisory Services worked 1200 hours for Computer Services. The total costs of external services performed by Computer Services were $220 000, and for Management Advisory Services costs were $480 000.

Required:

(a) Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Management Advisory Services is $50 per hour and the transfer price from Management Advisory Services to Computer Services is $60 per hour.

(b) The manager of Computer Services has found another company willing to provide the same services as Management Advisory Services at $50 per hour. All of the employees in both units are guaranteed 40-hour work weeks. Currently, Management Advisory Services has idle capacity because of an economic downturn. Calculate the change in operating income for the entity as a whole if Computer Services uses outsourced services instead of using Management Advisory Services.

(c) Recommend a transfer price policy that would provide incentives to use the internal services. Explain your recommendation.

(d) Discuss possible qualitative factors that might affect the attractiveness of the outsourcing option.

‘Executives should only be compensated based upon the achievement of targets. They should not receive a fixed salary component'. Discuss.