During the current financial year JAVA plc has undergone significant organisational changes: amongst other things, the company has adopted a divisional organisational structure and is now composed of two divisions or business segments, Division A and Division B.

Budget information It is planned that there will be transfers of components from Division A to Division B during the next financial year and, in line with a newly-adopted transfer pricing system, transfers will be made at total cost. Budgets for the next financial year are:

Division A Division B J plc

Own Production Costs: (Note 1) 000 000 000 Variable costs 100 200 300 Fixed costs 400 300 700

Total cost 500 500 10000

Note 1: these costs exclude the impact of transfers between divisions.

Division A is budgeted to produce 10,000 units of Component A, selling 8,000 units to external customers at 100 per unit and transferring 2,000 units to Division B.

Division B is budgeted to take 2,000 units from Division A and put them through its own production process before selling all 2,000 units as Product B to external customers at 500 per unit.

Additional information Both Divisions A and B are budgeted to operate at 80% of capacity during the next financial year. However Division B has received an offer from a new customer, M plc, who wishes to buy 200 units of Product B during the next financial year at a price of 120 per unit; this offer meets all legal requirements and would not affect the budgeted business of either Division A or Division B. It is expected that M plc would buy at least 200 units of Product B each year for the next 5 years, although a guaranteed contract is not envisaged.

Further information It is expected that, in the near future, JAVA plc will adopt management systems whereby decision-making will be largely de-centralised at divisional level, except for matters relating to corporate strategy. Furthermore a system of responsibility accounting will be employed. Under this system, the general managers of Division A and Division B will each be held accountable for the financial performance of their own division and will be eligible for significant bonuses related to this financial performance. Within each division, the sales and marketing function will be regarded as a revenue centre, the production function as a cost centre and the administration and research functions as managed cost centres.

Required:

(a) as far as is possible from the information given, prepare budgets for the next financial year for Division A, Division

B and JAVA plc.

(b) present financial analysis of M plcs offer, viewed from the perspective of:

the general manager of Division B

the chief executive of JAVA plc, and analyse reasons for and against acceptance of this offer.

(c) explain the concept of responsibility accounting and analyse how it may employed in JAVA plc.