Business Accounting Assignment Evaluating Organisational Scenarios

Question

Task: The business accounting assignment consist of the following questions:

Question 1
Watch: How Harry Potter Movies Technically Lost Money - YouTubehttps://www.youtube.com/watch?v=JIoDfWgbVgU Read: Hollywood Accounting in Wikipedia. https://en.wikipedia.org/wiki/Hollywood_accounting Optional Reading: How Hollywood accounting can make a $450M movie ‘unprofitablehttps://www.theatlantic.com/business/archive/2011/09/how-hollywood-accounting-can-make-a-450-million-movie-unprofitable/245134/

Required:

A. In your own words, explain what is meant by Hollywood Accounting, and why it exists?
B. Explain and give an example of how a film company can inflate their costs and lower their net income for a specific movie through the use of a related entity (or entities).
C. List 3 examples of movies that were box office smashes, but were considered “losers” on the balance sheet and income statement.
D. What do powerful stars do to make sure they get fairly paid?
E. Does the practice of Hollywood Accounting violate GAAP / IFRS?

Question 2
SkyAir, a large multi-national airline has many responsibility centres.

A. The South American division, which is responsible for operations in South America and has the authority to purchase new aircraft and add/cut routes.
B. The Pilot Training group, which is responsible for training new SkyAir pilots.
C. The reservations group, which is responsible for processing SkyAir reservations
D. The maintenance division, which is responsible for SkyAir aircraft maintenance. As well, from time-to-time will also do maintenance for other airlines, but this represents less than 1% of revenues.

E. The fuel group, which is responsible for SkyAir fueling aircraft.

Required:

What type of cost-centre (Cost, Revenue, Profit, Investment) should each of these be considered for evaluation purposes?

Question 3

ABC Unicycle makes unicycles and has two divisions. Each division is evaluated as a profit center. The Wheel division, located in Nambia, produces unicycle wheels and can choose to sell wheels on either the open market at $30 per wheel, or sell them to the Assembly division.

The Assembly division, located in Elbonia, assembles unicycles and can choose to either buy wheels from the Wheel division or purchase wheels on the open market.

(* Fixed overhead costs are based on current production volumes)

Required:
A. What is the likely range of transfer prices between the Wheel Division and Assembly Division for an additional wheel?
B. What is the likely range of transfer prices between the Wheel Division and Assembly Division for 400 additional wheels (hint: it is not the answer in part A x 400)?
C. Assume that in future years that the Wheel Division will only sell wheels to the Assembly Division and no longer sell any wheels on the open market. Should the Wheel Division continue to be assessed as a profit centre? Explain your response.

Answer

Business Accounting AssignmentAnswer 1
A) Accounting in the entertainment business is a term that refers to the methods used by the television, film, and industry to come up with budgets and record earnings from various cinematic productions. To put it another way, Hollywood accounting is utilised to assure that no one, save the companies that create the films, ends up making a lot of money.
B) You may inflate your expenditures and decrease your net profits by using the Tinsel town accounting strategy, which involves setting up different organisations for each film you make. When the firm is asking an enormous cost for their services, they want to exclude any profit they could make from the film's income (Thompson, 2019). For instance, Harry Potter and Order of the Phoenix, which allegedly lost $167 million while spending over $350 million on marketing and distribution, was a notable illustration of this.

C) • Return of the Jedi
• Yesterday
• Harry Potter and Order of the Phoenix

D) Famous people make it a point to use gross points only and never to accept net earnings as an option. In a situation where all box office proceeds must be distributed to those with gross points, the usage of gross point gives the star negotiating leverage.

E) In the perspective of GAAP and IFRS, Hollywood accounting is lawful, but not in the eyes of the law. The reason for this is that they may raise their prices while simultaneously reducing their profits (Ougolnitsky, 2021). Their financial statements do not include all of the transactions that took place in a specific contract, according to him. This also means that just a small number of individuals gain financially from such dubious practises, while the actor, for example, does not get their fair portion of the transaction.

Answer 2
A manager is in charge of a responsibility centre, which is a part of the firm that is within their purview. In order to evaluate the manager's performance, the corporation can use this data to collect quantitative information about the section. A comparison of budgeted controllable costs with actual controllable costs is used to evaluate the performance of cost centres (Thompson, 2019). Departments like human resources and production are good examples of cost centres. Comparing a planned controllable income statement to a real controllable income statement should be the basis for evaluating profit centre performance.

There is a perception that investment centres are distinct from profit centres. It is the controllable expenses that determine a cost centre management's success, whereas controlled income determines the success of a profit centre manager. Asset management and profit maximisation are the responsibilities of managers at investment centres. New factories, stores, and large-scale equipment purchases can be approved by these executives. Centre for Revenue Generating Activities – Despite the importance of revenue to most firms, revenue centres comprise just a tiny percentage of the total number of responsibility centres. Sales territory and sales divisions are common examples of revenue centres.

There is a South American division, which has the power to buy new aircraft and add/cut routes, and is in charge of operations in South America. - A financial hub
The organisation in charge of teaching new Sky Air pilots is known as Pilot Training. In charge of the budget In charge of booking flights on Sky Air, this department a source of income?
Sky Air's aircraft maintenance is handled by this section (Atanassova, 2019). What's more, the company occasionally performs maintenance for other airlines, although this only accounts for 2% of revenues? It's a profit centre (Beerbaum, 2020). Sky Air's planes are fuelled by this division. - The cost centre

Answer 3
A) Price transfers between wheel division and assembly division are expected to fall within a range of 30 to 40 dollars, based on wheel division's production costs and assembly division's losses from selling an additional 400 wheels

$ 30.00 ($21 + 9) is Wheel Division's transfer price for the variable cost of making unicycle wheels and the contribution Wheel Division will lose as a result of the transfer. The price of a Unicycle wheel on the open market is $ 30.00. In this case, the lowest and upper limits of the transfer price are $ 30.00.

B) For the extra sale of 400 Wheels, Head Office likes the Transfer Price to be the Marginal cost of making the Unicycle wheel plus a set overhead cost (Hamamura, 2019). By expanding production capacity to 100 percent, the Wheel Division can offer 400 wheels at a cost of $ 19.5 each, which includes the variable cost for creating unicycle wheels ($ 9 each unit) and the contribution lost on 200 units @ of $ 10.5 - (200*21)/400 - by the Wheel Division. C)Yes, the Wheel Division is still viewed as a profitable business unit.

For and Against Transfer Pricing:
• Fast and cost-effective decisions are made
• Core activities can be prioritised by top managers, who aren't distracted by mundane tasks.
• Managers' morale is boosted.
• Improved training for managers who hope to rise through the ranks in the near future.

Drawbacks:
• Managers' lack of coordination
• There has been a rise in the cost of getting information
• Managers' lack of goal congruence

Due to the shift from a profit centre to a cost centre, there are both advantages and disadvantages.
• In order to control or reduce costs, the shift from profit to cost centres has resulted in a better understanding of how much money is spent on each operation.
• Indirectly, cost centres contribute to the company's bottom line.
• A company's long-term viability depends on its ability to manage its costs effectively.?

References
Atanassova, A. (2019). Financial Accounting Aspects of Transfer Pricing. Economics and computer science, (2), 20-38.https://ideas.repec.org/a/kab/journl/y2019i2p20-38.html [Accessed on 15-11-2021]

Beerbaum, D. (2020). Benchmarking and best-practice analysis in Financial Accounting–the case of Related Party Disclosures. Journal of Applied Research in the Digital Economy (JADE).https://www.researchgate.net/profile/Dirk-Beerbaum/
publication/325181688_Benchmarking_and_best-practice_analysis_in_Financial_Accounting_-_the_case_of_Related_Party_Disclosures/links/5b0b26e94585157f871ad23f/
Benchmarking-and-best-practice-analysis-in-Financial-Accounting-the-case-of-Related-Party-Disclosures.pdf [Accessed on 15-11-2021]
Hamamura, J. (2019). Unobservable transfer price exceeds marginal cost when the manager is evaluated using a balanced scorecard. Business accounting assignmentAdvances in accounting, 44, 22-28.https://www.sciencedirect.com/science/article/pii/S0882611018300877
Hollywood Accounting in Wikipedia. https://en.wikipedia.org/wiki/Hollywood_accounting [Accessed on 15-11-2021] Ougolnitsky, G. A. (2021). SOLO FTRL algorithm for production management with transfer prices. arXiv preprint arXiv:2107.12432.https://arxiv.org/abs/2107.12432 [Accessed on 15-11-2021]
Thompson, D. (2019). How Hollywood Accounting Can Make a $450 Million Movie 'Unprofitable'. The Atlantic. Retrieved 18 July 2020, from https://www.theatlantic.com/business/archive/2011/09/how-hollywood-accounting-can-make-a-450-million-movie-unprofitable/245134/. [Accessed on 15-11-2021]