ch22 - Cost Accounting, 13e (Horngren et al.) Chapter 22 1...

Info iconThis preview shows pages 1–46. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Cost Accounting, 13e (Horngren et al.) Chapter 22 1 Managemen t Control Systems, Transfer Pricing, and Multination al Consideratio 1) n s The goal of a management control system is to improve the collective decisions in an organization in an economically feasible way. Answer: TRUE Diff: 1 Terms: management control system Objective: 1 AACSB: Communication 2) Managem ent control systems reflect only financial data. Answer: FALSE Explanation: Management control systems also reflect nonfinancial data. Diff: 1 Terms: management control system Objective: 1 AACSB: Reflective thinking 3) Presentin g financial and nonfinancial information in a single report is called the unified reporting method. Answer: FALSE Explanation: This is called the Diff: 1 Terms: management control system Objective: 1 AACSB: Reflective thinking 4) Motivatio n is the desire to attain a selected goal combined with the resulting drive or pursuit toward that goal. Answer: TRUE Diff: 1 Terms: motivation Objective: 1 AACSB: Reflective thinking 5) The essence of decentralization is the freedom for managers at lower levels of the organization to make decisions. Answer: TRUE Diff: 1 Terms: decentralization Objective: 1 AACSB: Analytical skills 6) A management control system would include both formal as well as informal control mechanisms. Answer: TRUE Diff: 2 Terms: management control system Objective: 1 AACSB: Analytical skills 7) A well- designed management control system obtains all of its information from within the company. Answer: FALSE Explanation: Well-designed management control systems use information both from within the company and from outside the company, such as stock price and customer satisfaction measures. Diff: 2 Terms: management control system Objective: 1 AACSB: Communication 8) Absenteei sm would be an example of a Balanced Scorecard control measure from a customer perspective. Answer: FALSE Explanation: Absenteeism would be an example of a Balanced Scorecard control measure from a learning and growth perspective. Diff: 2 Terms: management control system Objective: 1 AACSB: Reflective thinking 9) Goal congruence exists when individuals work toward achieving one goal, and groups work toward achieving a different goal. Answer: FALSE Explanation: Goal congruence exists when individuals and groups work toward achieving the same goal. Diff: 2 Terms: goal congruence Objective: 1 AACSB: Reflective thinking 10) Effort is defined as achievement of a goal. Answer: FALSE Explanation: Effort is exertion toward Diff: 2 Terms: effort Objective: 1 AACSB: Reflective thinking 11) Effort in terms of management control systems is defined in terms of physical exertion such as a worker producing at a faster rate. Answer: FALSE Explanation: Effort goes beyond physical exertion and includes both physical and mental actions. Diff: 2 Terms: effort Objective: 1 AACSB: Reflective thinking 12) Managem control systems motivate managers and other employees to exert effort through a variety of rewards tied to the ent achievement of goals. Answer: TRUE Diff: 2 Terms: effort Objective: 1 AACSB: Communication 13) A benefit of decentralization should be increased motivation of subunit managers. Answer: TRUE Diff: 2 Terms: decentralization Objective: 2 AACSB: Reflective thinking 14) One centralization is an increase in development of an experienced pool of management talent to fill higher-level management benefit of positions. Answer: FALSE Explanation: Decentralization assists management development and learning and therefore will help the managers develop more responsibility so they can eventually fill the higherlevel management positions. Diff: 2 Terms: decentralization Objective: 1 AACSB: Reflective thinking 15) A profit center is related to a decentralized unit, whereas a cost center is related to a centralized unit. Answer: FALSE Explanation: The labels "profit center" and "cost center" are independent of the degree of centralization or decentralization within a company. Diff: 2 Terms: decentralization Objective: 2 AACSB: Reflective thinking 16) Suboptim al decision making is also called congruent decision making. Answer: FALSE Explanation: It's also called incongruent decision making. Diff: 2 Terms: incongruent decision making, suboptimal decision making Objective: 2 AACSB: Ethical reasoning 17) Surveys indicate that decisions made most frequently at the corporate level are related to sources of supplies and products to manufacture. Answer: FALSE Explanation: These decisions are made Diff: 2 Terms: decentralization Objective: 2 AACSB: Ethical reasoning 18) An important advantage of decentralized operations is that it improves corporate control. Answer: FALSE Explanation: Decentralized operations Diff: 1 Terms: decentralization Objective: 2 AACSB: Reflective thinking 19) The degree of freedom to make decisions is known as decentralization. Answer: FALSE Explanation: The degree of freedom to make decisions is known as autonomy. Diff: 2 Terms: decentralization, autonomy Objective: 2 AACSB: Reflective thinking 20) Products transferred between subunits within an organization are considered intermediate products. Answer: TRUE Diff: 1 Terms: intermediate product Objective: 3 AACSB: Analytical skills 21) Market price is the only price that a firm should use when transferring goods from one subunit to another subunit. Answer: FALSE Explanation: Market price is not the only price that a firm should use when transferring goods from one subunit to another. Diff: 2 Terms: transfer price Objective: 3 AACSB: Reflective thinking 22) The a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions. choice of Answer: FALSE Explanation: The choice of a transferpricing method has a large effect. Diff: 2 Terms: transfer price Objective: 3 AACSB: Reflective thinking 23) No matter the transfer price, the manager of the selling division should sell the division's product to other company divisions in the how low interests of overall company profitability. Answer: FALSE Explanation: The manager of the selling division should maximize overall company profitability by selling the product at the highest possible price. Diff: 2 Terms: transfer price Objective: 3 AACSB: Ethical reasoning 24) The costs used in cost-based transfer prices can only be actual costs. Answer: FALSE Explanation: The costs can also be Diff: 2 Terms: transfer price Objective: 4 AACSB: Reflective thinking 25) There are two methods for determining transfer prices: market-based transfer prices and cost-based transfer prices. Answer: FALSE Explanation: There is also a third method: negotiated transfer prices. Diff: 2 Terms: transfer price Objective: 4 AACSB: Reflective thinking 26) A major age of using budgeted costs for transfer prices is that often inefficiencies in actual costs are passed along to the receiving disadvant division. Answer: FALSE Explanation: When actual costs are used inefficiencies are passed along to the receiving division. Diff: 2 Terms: transfer price Objective: 6 AACSB: Reflective thinking 27) Dual pricing reduces the goal-congruence problem associated with a pure cost-based transfer-pricing method. Answer: TRUE Diff: 2 Terms: dual pricing, goal congruence Objective: 6 AACSB: Reflective thinking 28) Cost- based transfer pricing is a better method when the products being transferred are specialized in nature. Answer: TRUE Diff: 2 Terms: decentralization Objective: 6 AACSB: Reflective thinking 29) A firm using a cost-based transfer price will never have the selling division be able to achieve goal congruence. Answer: FALSE Explanation: A firm using a cost-based transfer price can have the selling division be able to achieve goal congruence. Diff: 2 Terms: transfer price Objective: 6 AACSB: Reflective thinking 30) The prices negotiated by two divisions of the same company usually have no specific relationship to either costs or market price. Answer: TRUE Diff: 2 Terms: transfer price Objective: 7 AACSB: Analytical skills 31) One major advantage of negotiated transfer pricing is that it can be done with little time or effort. Answer: FALSE Explanation: The disadvantage of negotiated transfer pricing is the time and energy spent on the negotiations. Diff: 2 Terms: transfer price Objective: 7 AACSB: Reflective thinking 32) Opportuni ty costs represent the cash flows directly associated with the production and transfer of the products and services. Answer: FALSE Explanation: Opportunity costs are the maximum contribution forgone by the selling division if the products or services are transferred internally. Diff: 2 Terms: opportunity costs, transfer price Objective: 8 AACSB: Reflective thinking 33) Market- based transfer prices are ideal in perfectly competitive markets when there is idle capacity in the selling division. Answer: FALSE Explanation: Market-based transfer prices are ideal when there is no idle capacity. Diff: 2 Terms: transfer price, perfectly competitive market Objective: 8 AACSB: Reflective thinking 34) If the product sold between divisions has no intermediate market, the opportunity cost of supplying the product internally is the variable cost of the product. Answer: FALSE Explanation: The opportunity cost of supplying the product internally is zero. Diff: 2 Terms: transfer price Objective: 8 AACSB: Reflective thinking 35) Additiona that arise in multinational transfer pricing include tariffs and customs duties levied on imports of products into a country. l factors Answer: TRUE Diff: 2 Terms: transfer price Objective: 9 AACSB: Multiculturalism and diversity 36) Tax considerations should play no part in determining a transfer price between international divisions of a firm. Answer: FALSE Explanation: Tax considerations should play an important part in determining a transfer price between international divisions of a firm. Diff: 2 Terms: transfer price Objective: 9 AACSB: Multiculturalism and diversity 37) It is possible to increase the overall after-tax profit of a multinational corporation by adjusting transfer prices. Answer: TRUE Diff: 2 Terms: decentralization Objective: 9 AACSB: Multiculturalism and diversity 38) Which of the following is NOT a characteristic of a management control system? A) It aids and B) coordinates the process of making decisions. It encourages short-term profitability. C) It motivates D) individuals throughout the organization to act in concert. It coordinates forecasting sales and cost-driver activities, budgeting, and measuring and evaluating performance. Answer: B Diff: 2 Terms: management control system Objective: 1 AACSB: Reflective thinking 39) The formal management control system includes: A) performance B) measures mutual C) commitments incentive plans D) Both A and C are correct. Answer: D Diff: 1 Terms: management control system Objective: 1 AACSB: Reflective thinking 40) Exertion towards a goal is: A) motivation B) effort C) goal congruence D) incentive Answer: B Diff: 1 Terms: effort Objective: 1 AACSB: Reflective thinking 41) The degree of freedom to make decisions is: A) decentralization B) autonomy C) centralization D) motivation Answer: B Diff: 1 Terms: autonomy Objective: 1 AACSB: Reflective thinking 42) If an oil refinery used refinery down-time as a Balanced Scorecard control measure, it would represent the ________ perspective. A) financial B) customer C) internal D) business process learning and growth Answer: C Diff: 2 Terms: management control system Objective: 1 AACSB: Reflective thinking 43) If a manufacturer used its common stock price as a Balanced Scorecard control measure, it would represent the ________ computer perspective. A) financial B) customer C) internal D) business process learning and growth Answer: A Diff: 2 Terms: management control system Objective: 1 AACSB: Reflective thinking 44) ________ minimum constraints and maximum freedom for managers at the lowest levels of an organization to make decisions and to means take actions. A) Total B) centralization Use of market- based transfer pricing C) Total D) decentralization Use of negotiated transfer pricing Answer: C Diff: 2 Terms: decentralization Objective: 2 AACSB: Reflective thinking 45) An advantage of decentralization is that it: A) creates greater responsiveness to local needs B) focuses C) manager's attention on the organization as a whole does not result in a duplication of activities D) reduces the cost of gathering information Answer: A Diff: 1 Terms: decentralization Objective: 2 AACSB: Reflective thinking 46) A disadvantage of decentralization is that it: A) creates greater responsiveness to local needs B) focuses C) manager's attention on the organization as a whole does not result in a duplication of activities D) encourages suboptimal decision making Answer: D Diff: 1 Terms: decentralization Objective: 2 AACSB: Reflective thinking 47) All of the following are benefits of decentralization EXCEPT that it: A) creates greater responsiveness to local needs B) decreases C) management and worker morale leads to quicker decision making D) sharpens the focus of managers Answer: B Diff: 2 Terms: decentralization Objective: 2 AACSB: Reflective thinking 48) What is used to describe the situation when a manager's decision, which benefits one subunit, is more than offset by the costs to the the term organization as a whole? A) suboptimal B) decision making dysfunctional decision making C) congruent D) decision making Both A and B are correct. Answer: D Diff: 2 Terms: suboptimal decision making, dysfunctional decision making Objective: 2 AACSB: Ethical reasoning 49) Which of the following statements is FALSE? A) A centralized structure does not empower employees to handle customer complaints directly. B) A decentralized structure forces top management to lose some control over the organization. C) Decentralizatio n slows responsiveness to local needs for decision making. D) The extent to are pushed downward, and the types of decisions that are pushed down, provide a measure of the level of which decisions centralization/decentralization in an organization. Answer: C Diff: 2 Terms: decentralization Objective: 2 AACSB: Reflective thinking 50) Area(s) which is/are usually appropriate for decentralized decision making is(are): A) sources of B) supplies and materials long-term C) financing product D) advertising Both A and C are correct. Answer: D Diff: 2 Terms: decentralization Objective: 2 AACSB: Reflective thinking 51) The benefits of a decentralized organization are greater when a company: A) is large and B) unregulated is facing great uncertainties in their environment C) has few D) interdependencies among division All of these answers are correct. Answer: D Diff: 1 Terms: decentralization Objective: 2 AACSB: Reflective thinking 52) A product may be passed from one subunit to another subunit in the same organization. The product is known as a(n): A) interdepartment al product B) intermediate C) product subunit product D) transfer product Answer: B Diff: 1 Terms: intermediate product Objective: 3 AACSB: Reflective thinking 53) Transfer prices should be judged by whether they promote: A) goal B) congruence. the balanced C) scorecard method. a high level of subunit autonomy in decision making. D) Both A and C are correct. Answer: D Diff: 2 Terms: transfer price, goal congruence, autonomy Objective: 3 AACSB: Reflective thinking 54) A transfer-pricing method leads to goal congruence when managers: A) always act in B) their own best interest act in their own best interest and the decision is in the long-term best interest of the manager's subunit C) act in their own best interest and the decision is in the long-term best interest of the company D) act in their own best interest and the decision is in the short-term best interest of the company Answer: C Diff: 3 Terms: transfer price, goal congruence Objective: 3 AACSB: Ethical reasoning 55) Negotiate d transfer prices are often employed when: A) market prices are stable B) market prices are volatile C) market prices change by a regular percentage each year D) goal congruence is not a major objective Answer: B Diff: 2 Terms: transfer price Objective: 4 AACSB: Reflective thinking 56) The costs used in cost-based transfer prices: A) are actual costs B) are budgeted C) costs can either be D) actual or budgeted costs are lower than the market-based transfer prices Answer: C Diff: 2 Terms: transfer price Objective: 4 AACSB: Reflective thinking Answer the following questions using the information below: Dakoil Corporation has two divisions, Refining and Production. The company's primary product is Enkoil Oil. Each division's costs are provided below: Production: Refining: Variable costs per barrel of oil Fixed costs per barrel of oil Variable costs per barrel of oil Fixed costs per barrel of oil $ 3 $ 2 $10 $12 The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other suppliers at $20 per barrel. 57) What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 180% of variable costs? A) $5.40 B) $9.00 C) $18.00 D) $23.40 Answer: A Explanation: A) 1 Diff: 2 T 4 AACSB: Analytical skills 58) What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 110% of full costs? A) $5.50 B) $22.00 C) $24.20 D) $29.70 Answer: A Explanation: A) 1 Diff: 2 T 4 AACSB: Analytical skills 59) Assume 200 barrels are transferred from the Production Division to the Refining Division for a transfer price of $6 per barrel. The Refining Division sells the 200 barrels at a price of $40 each to customers. What is the operating income of both divisions together? A) $2,400 B) $2,600 C) $3,600 D) $6,800 Answer: B Explanation: B) R Diff: 3 T 4 AACSB: Analytical skills Answer the following questions using the information below: Greenlawn Corporation has two divisions, Distribution and Production. The company's primary product is fertilizer. Each division's costs are provided below: Production: Distribution: Variable costs per pound Fixed costs per pound Variable costs per pound Fixed costs per pound $0.05 $0.25 $0.03 $0.02 The Distribution Division has been operating at a capacity of 4,000,000 pounds a week and usually purchases 2,000,000 pounds from the Production Division and 2,000,000 pounds from other suppliers at $0.45 per pound. 60) What is the transfer price per barrel from the Production Division to the Distribution Division, assuming the method used to place a value on each pound of fertilizer is 160% of variable costs? A) $0.05 B) $0.11 C) $0.08 D) $0.40 Answer: C Explanation: C) transfer price Objective: 4 AACSB: Analytical skills 61) What is the transfer price per barrel from the Production Division to the Distribution Division, assuming the method used to place a value on each pound of fertilizer is 120% of full costs? A) $0.30 B) $0.36 C) $0.45 D) $0.55 Answer: B Explanation: B) transfer price Objective: 4 AACSB: Analytical skills 62) Assume 100,000 pounds are transferred from the Production Division to the Distribution Division for a transfer price of $0.40 per pound. The Distribution Division sells the 100,000 pounds at a price of $0.55 each to customers. What is the operating income of both divisions together? A) $10,000 B) $15,000 C) $20,000 D) $25,000 Answer: C Explanation: C) R Diff: 3 T 4 AACSB: Analytical skills Answer the following questions using the information below: Calculate the Division operating income for the BetaShoe Company which manufactures only one type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers. The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair at 100,000 units. Sole's costs per pair of soles are: Direct materials Direct labor Variable overhead Division fixed costs $4 $3 $2 $1 Assembly's costs per completed pair of shoes are: Direct materials $6 Direct labor $2 Variable overhead $1 Division fixed costs $7 63) What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division? A) $10 B) $16 C) $20 D) $26 Answer: C Explanation: C) $ Diff: 2 T 4 AACSB: Analytical skills 64) What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the method used to place a value on each pair of soles is 180% of variable costs? A) $14.40 B) $12.60 C) $16.20 D) $28.80 Answer: C Explanation: C) $ Diff: 2 T 4 AACSB: Analytical skills 65) What is the transfer price per pair of shoes from the Sole Division to the Assembly Division per pair of soles if the transfer price per pair of soles is 125% of full costs? A) $10 B) $12.50 C) $13 D) $15 Answer: B Explanation: B) $ Diff: 2 T 4 AACSB: Analytical skills 66) Calculate difference in overall corporate net income between Scenario A and Scenario B if the Assembly Division sells 100,000 and pairs of shoes for $60 per pair to customers. compare Scenario A: Negotiated transfer price of $15 per pair of soles the Scenario B: Market-based transfer price A) $500,000 more net income under Scenario A B) $500,000 of net income using Scenario B C) $100,000 of net income using Scenario A. D) None of these answers is correct. Answer: D Explanation: D) T Diff: 3 T 4 AACSB: Analytical skills 67) Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40,000 of soles are produced and transferred to the Assembly Division. The Sole Division's operating income is: A) $320,000 B) $360,000 C) $400,000 D) $440,000 Answer: A Explanation: A) R Diff: 3 T O 4 AACSB: Analytical skills 68) If the Division sells 100,000 pairs of shoes at a price of $60 a pair to customers, what is the operating income of both divisions Assembly together? A) $4,400,000 B) $3,400,000 C) $3,000,000 D) $2,600,000 Answer: B Explanation: B) R Diff: 3 T O 4 AACSB: Analytical skills Answer the following questions using the information below: Calculate the Division operating income for the Cool Air Company which manufactures only one type of air conditioner and has two divisions, the Compressor Division, and the Assembly Division. The Compressor Division manufactures compressors for the Assembly Division, which completes the air conditioner and sells it to retailers. The Compressor Division "sells" compressors to the Assembly Division. The market price for the Assembly Division to purchase a compressor is $77. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 5,000-10,000 units. The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10,000 units. Compressor's costs per compressor are: Direct materials $34.00 Direct labor $14.50 Variable overhead $6.00 Division fixed costs $15.00 Assembly's costs per completed air conditioner are: Direct materials $300.00 Direct labor $125.00 Variable overhead $40.00 Division fixed costs $15.00 69) What is the market-based transfer price per compressor from the Compressor Division to the Assembly Division? A) $34.00 B) $54.50 C) $69.50 D) $77 Answer: D Explanation: D) $ Diff: 2 T 4 AACSB: Analytical skills 70) What is the transfer price per compressor from the Compressor Division to the Assembly Division if the method used to place a value on each compressor is 150% of variable costs? A) $81.75 B) $77.00 C) $9.00 D) $ 72.75 Answer: A Explanation: A) $ transfer price Objective: 4 AACSB: Analytical skills 71) What is the transfer price per compressor from the Compressor Division to the Assembly Division if the transfer price per compressor is 110% of full costs? A) $84.70 B) $80.00 C) $76.45 D) none of the items Answer: C Explanation: C) $ Diff: 2 T 4 AACSB: Analytical skills 72) Assume the transfer price for a compressor is 150% of total costs of the Compressor Division and 1,000 of the compressors are produced and transferred to the Assembly Division. The Compressor Division's operating income is: A) $31,750 B) $32,750 C) $34,750 D) $36,500 Answer: C Explanation: C) R Diff: 3 T O 4 AACSB: Analytical skills 73) If the Division sells 1,000 air conditioners at a price of $750.00 per air conditioner to customers, what is the operating income of Assembly both divisions together? A) $200,500 B) $207,000 C) $194,000 D) $165,750 Answer: A Explanation: A) R Diff: 3 T O 4 AACSB: Analytical skills Answer the following questions using the information below: Division A sells soybean paste internally to Division B, which in turn, produces soybean burgers that sell for $5 per pound. Division A incurs costs of $0.75 per pound while Division B incurs additional costs of $2.50 per pound. 74) What is Division A's operating income per pound, assuming the transfer price of the soybean paste is set at $1.25 per pound? A) $0.500 B) $0.875 C) $1.250 D) $1.625 Answer: A Explanation: A) $ Diff: 2 T 4 AACSB: Analytical skills 75) Which of the following formulas correctly reflects the company's operating income per pound? A) $5.00 - ($0.75 + $2.50) = $1.75 B) $5.00 - ($1.25 + $2.50) = $1.25 C) $5.00 - ($0.75 + $3.75) = $0.50 D) $5.00 - ($0.25 + $1.25 + $3.50) = 0 Answer: A Explanation: A) $ Diff: 2 T 4 AACSB: Analytical skills 76) Transferri ng products or services at market prices generally leads to optimal decisions when: A) the market for the intermediate product is perfectly competitive B) the C) interdependencies of the subunits are minimal there are no D) additional costs or benefits to the company in buying or selling in the external market All of these answers are correct. Answer: D Diff: 2 Terms: transfer price, suboptimal decision making, perfectly competitive market Objective: 5 AACSB: Reflective thinking 77) A benefit of using a market-based transfer price is the: A) profits of the B) transferring division are sacrificed for the overall good of the corporation profits of the C) division receiving the products are sacrificed for the overall good of the corporation economic D) viability and profitability of each division can be evaluated individually None of these answers is correct. Answer: C Diff: 2 Terms: transfer price Objective: 5 AACSB: Reflective thinking 78) When an has excess capacity, market prices may drop well below their historical average. If this drop is temporary, it is called: industry A) distress prices B) dropped prices C) low-average D) prices substitute prices Answer: A Diff: 1 Terms: transfer price Objective: 5 AACSB: Reflective thinking 79) Cost- based transfer prices are helpful when: A) a market exists for the product B) a price is easy to obtain C) the product is unique D) All of these answers are correct. Answer: C Diff: 2 Terms: transfer price Objective: 5 AACSB: Reflective thinking 80) Optimal corporate decisions do NOT result when goods or services are transferred at: A) market prices B) full-cost prices C) variable-cost D) prices Either B or C is correct. Answer: D Diff: 2 Terms: transfer price, suboptimal decision making Objective: 6 AACSB: Reflective thinking 81) When s do not want to use market prices or find it too costly, they typically use ________ prices, even though suboptimal companie decisions may occur. A) average-cost B) full-cost C) long-run cost D) short-run average cost Answer: B Diff: 2 Terms: transfer price Objective: 6 AACSB: Reflective thinking 82) Crush Company makes internal transfers at 180% of full cost. The Soda Refining Division purchases 30,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $30 per container via an external shipper. To reduce costs, the company located an independent supplier in Missouri who is willing to sell 30,000 containers at $20 each, delivered to Crush Company's Shipping Division in Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 30,000 containers at a variable cost of $2.50 per container. What is the total cost to Crush Company if the carbonated water is purchased from the local supplier? A) $ 900,000 B) $1,200,000 C) $1,501,000 D) $1,620,000 Answer: A Explanation: A) 3 Diff: 2 T 6 AACSB: Analytical skills 83) Crush Company makes internal transfers at 160% of full cost. The Soda Refining Division purchases 40,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $40 per container via an external shipper. To reduce costs, the company located an independent supplier in Illinois who is willing to sell 40,000 containers at $30 each, delivered to Crush Company's Shipping Division in Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 40,000 containers at a variable cost of $4.50 per container. What is the total cost of purchasing the water from the Illinois supplier and shipping it to the Soda Division? A) $1,200,000 B) $1,380,000 C) $1,600,000 D) $180,000 Answer: B Explanation: B) 4 Diff: 2 T 6 AACSB: Analytical skills 84) Soft sales decisions. The Assembly Division can purchase stuffing, a key component, from the Production Division or from Cushion external suppliers. The Production Division has been the major supplier of stuffing in recent years. The Assembly Division Company has announced that two external suppliers will be used to purchase the stuffing at $20 per pound for the next year. The is highly Production Division recently increased its unit price to $40. The manager of the Production Division presented the decentrali following information variable cost $32 and fixed cost $8 t o top management in order to attempt to force the Assembly zed. Each Division to purchase the stuffing internally. The Assembly Division purchases 20,000 pounds of stuffing per month. division is empowere What would be the monthly operating advantage (disadvantage) of purchasing the goods internally, assuming the external d to make supplier increased its price to $50 per pound and the Production Division is able to utilize the facilities for other its own operations, resulting in a monthly cash-operating savings of $30 per pound? A) $1,000,000 B) $360,000 C) $(240,000) D) $(400,000) Answer: C Explanation: C) P O O transfer price Objective: 9 AACSB: Analytical skills 85) An advantage of using budgeted costs for transfer pricing among divisions is that: A) overall B) corporate profitability is usually higher it usually C) provides a basis for optimal decision making the divisions D) know the transfer price in advance it promotes subunit autonomy Answer: C Diff: 2 Terms: transfer price Objective: 6 AACSB: Reflective thinking 86) The transfer- pricing method that reduces the goal-congruence problems associated with a pure cost-plus-based transfer-pricing method is: A) dual pricing B) market pricing C) single pricing D) Both A and B are correct. Answer: A Diff: 2 Terms: transfer price, dual pricing, goal congruence Objective: 6 AACSB: Reflective thinking 87) Dual pricing is not widely used in practice because: A) the manager of the supplying division does not have sufficient incentive to control costs B) it increases goal congruence C) managers are not insulated from the frictions of the market place D) Both B and C are correct. Answer: A Diff: 2 Terms: dual pricing Objective: 6 AACSB: Reflective thinking 88) An advantage of a negotiated transfer price is the: A) close B) relationship between the negotiated price and the market price negotiated C) transfer price preserves divisional autonomy negotiations D) usually do not require much time and energy Both B and C are correct. Answer: B Diff: 2 Terms: transfer price Objective: 7 AACSB: Reflective thinking 89) The range over which two divisions will negotiate a transfer price is: A) between the B) supplying division's variable cost and the market price of the product between the C) supplying division's variable cost and its full cost of the product it could be D) anywhere above the supplying division's full cost of the product between the supplying division's full cost and 180% above its full cost Answer: A Diff: 2 Terms: transfer price Objective: 7 AACSB: Reflective thinking 90) A disadvantage of a negotiated transfer price is that: A) each division B) manager must put forth effort to increase division operating income negotiated C) transfer price preserves divisional autonomy negotiations D) usually require much time and energy Both B and C are correct. Answer: C Diff: 2 Terms: transfer price Objective: 7 AACSB: Reflective thinking 91) Which of the following transfer-pricing methods always achieves goal congruence? A) a market-based transfer price B) a cost-based C) transfer price a negotiated D) transfer price full-cost plus a standard profit margin Answer: C Diff: 2 Terms: transfer price, goal congruence Objective: 8 AACSB: Reflective thinking 92) Which of the following transfer-pricing methods preserves sub-unit autonomy? A) market-based transfer pricing B) cost-based C) transfer pricing negotiated D) transfer pricing Both A and C are correct. Answer: D Diff: 2 Terms: transfer price, autonomy Objective: 8 AACSB: Reflective thinking 93) The minimum transfer price equals: A) opportunity B) costs less the additional outlay costs opportunity C) costs times 125% plus the additional outlay costs opportunity D) costs divided by the additional outlay costs incremental costs plus opportunity costs Answer: D Diff: 1 Terms: transfer price Objective: 8 AACSB: Reflective thinking 94) The seller Product A has no idle capacity and can sell all it can produce at $20 per unit. Outlay cost is $4. What is the opportunity of cost, assuming the seller sells internally? A) $4 B) $16 C) $20 D) $24 Answer: B Explanation: B) $ Diff: 2 T 8 AACSB: Analytical skills 95) The seller product has no idle capacity and can sell all it can produce at $11 per unit. Outlay cost is $3. What is the opportunity cost, of a assuming the seller sells internally? A) $2 B) $4 C) $8 D) $11 Answer: C Explanation: C) $ Diff: 2 T 8 AACSB: Analytical skills 96) In analyzing transfer prices, the: A) buyer will not willingly purchase a product for less than the incremental costs incurred to manufacture the product internally B) seller will not willingly sell a product for less than the incremental costs incurred to make the product C) buyer will D) willingly pay more than the ceiling transfer price buyer will not pay less than the ceiling transfer price Answer: B Diff: 3 Terms: transfer price Objective: 8 AACSB: Reflective thinking 97) One of the problems in using one set of accounting records for tax reporting and another set of records for internal management reporting is: A) it is illegal B) tax authorities may suspect manipulation of records C) it is almost D) impossible to keep the records straight and hard to reconcile the books Both A and B are correct. Answer: B Diff: 1 Terms: transfer price Objective: 9 AACSB: Reflective thinking 98) Section U.S. Internal Revenue Code governing the taxation of multinational transfer pricing recognizes that transfer prices can be: 482 of the A) market based B) negotiated C) cost-plus based D) Both A and C are correct. Answer: D Diff: 1 Terms: transfer price Objective: 9 AACSB: Multiculturalism and diversity 99) A(n) is a binding agreement between a multinational and the United States Internal Revenue Service to obtain approval for a ________ specific transfer price for a number of years. A) Tax Treaty B) Advanced C) Pricing Agreement Revenue Ruling D) Dual Price Ruling Answer: B Diff: 2 Terms: transfer price Objective: 9 AACSB: Multiculturalism and diversity 100) Global Giant, a multinational corporation, has a producing subsidiary in a low tax rate country and a marketing subsidiary in a high tax country. If Global Giant wants to minimize its worldwide tax liability, we would expect Global Giant to: A) stop producing in the low tax rate country B) stop marketing in the high tax rate country C) establish a low transfer price when the producing unit sells to the marketing unit D) establish a high transfer price when the producing unit sells to the marketing unit Answer: D Diff: 2 Terms: transfer price Objective: 9 AACSB: Multiculturalism and diversity 101) For each , Customer, Internal Business Process, or Learning and Growth) the measure best represents. of the following ________ a. On-time delivery of gasoline from refineries to retail stations Balanced ________ b. Customer satisfaction Scorecard ________ c. Common stock price measures, ________ d. Return on investment identify ________ e. Market share which of ________ f. Number of days lost to accidents the four ________ g. Employee satisfaction perspectiv ________ h. Friendliness of employees es ________ i. Repeat purchases (Financial ________ j. Cash flow from operations Answer: a. Internal business process b. Customer c. Financial d. Financial e. Customer f. Internal business process g. Learning and growth h. Internal business process i. Customer j. Financial Diff: 3 Terms: transfer price Objective: 1 AACSB: Analytical skills 102) For each of the following activities, characteri stics, and applicatio ns, identify whether they can be found in a centralized organization, a decentralized organization, or both types of organizations. ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Answer: a. b. c. d. e. f. g. h. i. j. Freedom for managers at lower organizational levels to make decisions Gathering information may be very expensive Greater responsiveness to user needs Have few interdependencies among divisions Maximum constraints and minimum freedom for managers at lowest levels Maximization of benefits over costs Minimization of duplicate functions Minimum of suboptimization Multiple responsibility centers with various reporting units Profit centers a. b. c. d. Decentralization Decentralization Decentralization Decentralization Diff: 2 Terms: decentralization Objective: 2 AACSB: Analytical skills 103) For each based, negotiated, or all types of transfer pricing. of the following, ________ a. Bargaining between selling and buying units identify ________ b. Budgeted costs whether it ________ c. 145% of full costs BEST ________ d. Internal product transfers are required if goods are available internally relates to ________ e. Manufacturing costs plus marketing costs plus distribution costs plus customer service costs market- ________ f. Prices listed in a trade journal based, ________ g. Selling price less normal sales commissions cost________ h. Variable manufacturing cost plus a markup Answer: a. b. c. Negotiated Cost-based Cost-based Diff: 2 Terms: transfer price Objective: 4 AACSB: Analytical skills 104) For each of the following statement s regarding the satisfactio n of transfer pricing criteria, identify whether you would expect the transfer pricing method to meet the criteria. Provide a yes, no, or sometimes for each situation. ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Answer: a. b. c. d. e. f. g. h. i. j. k. l. Market-Based transfer pricing achieves goal congruence. Cost-Based transfer pricing achieves goal congruence. Negotiated transfer pricing achieves goal congruence. Market-Based transfer pricing motivates management effort. Cost-Based transfer pricing motivates management effort. Negotiated transfer pricing motivates management effort. Market-Based transfer pricing is useful for evaluating subunit performance. Cost-Based transfer pricing is useful for evaluating subunit performance. Negotiated transfer pricing is useful for evaluating subunit performance. Market-Based transfer pricing preserves subunit autonomy. Cost-Based transfer pricing preserves subunit autonomy. Negotiated transfer pricing preserves subunit autonomy. a. b. c. d. e. Yes Sometimes Yes Yes Yes Diff: 2 Terms: transfer price Objective: 4 AACSB: Analytical skills 105) The Mill Flow Company has two divisions. The Cutting Division prepares timber at its sawmills. The Assembly Division prepares the cut lumber into finished wood for the furniture industry. No inventories exist in either division at the beginning of 20X5. During the year, the Cutting Division prepared 60,000 cords of wood at a cost of $660,000. All the lumber was transferred to the Assembly Division, where additional operating costs of $6 per cord were incurred. The 600,000 boardfeet of finished wood were sold for $2,500,000. Required: a. b. Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost - $11 a cord. Determine the operating income for each division if the transfer price is $9 per cord. c. Since the Cutting Division sells all of its wood internally to the Assembly Division, does the manager care what price is selected? Why? Should the Cutting Division be a cost center or a profit center under the circumstances? Answer: a. Revenue Cost of services: Incurred Transferred-in Total Operating income * 60,000 cords × $11 = $660,000 b. Revenue Cost of services: Incurred Transferred-in Total Operating income * 60,000 cords × $9 = $540,000 c. The manager of Cutting cares about the transfer price if the division is a profit center but not if it is a cost center. Under the circumstances, the division probably should be a cost center and not worry about the profit it pretends to make by selling to another division. Cutting $540,000* $ 660,000 0 $ 660,000 $(120,000) Assembly $2,500,000 $ 360,000 540,000 $900,000 $1,600,000 Cutting $660,000* $ 660,000 0 $ 660,000 $ 0 Assembly $2,500,000 $ 360,000 660,000 $1,020,000 $1,480,000 Diff: 2 Terms: transfer price Objective: 4 AACSB: Analytical skills 106) Sandra's Sheet Metal Company has two divisions. The Raw Material Division prepares sheet metal at its warehous e facility. The Fabrication Division prepares the cut sheet metal into finished products for the air conditioning industry. No inventories exist in either division at the beginning of 2008. During the year, the Raw Material Division prepared 450,000 square feet of sheet metal at a cost of $1,800,000. All the sheet metal was transferred to the Fabrication Division, where additional operating costs of $1.50 per square foot were incurred. The 450,000 square feet of finished fabricated sheet metal products were sold for $3,875,000. Required: a. Determine the operating income for each division if the transfer price from Raw Material to Fabrication is at a cost of $4 per square foot. b. Determine the operating income for each division if the transfer price is $5 per square foot. c. Since the Raw Materials Division sells all of its sheet metal internally to the Fabrication Division, does the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a cost center or a profit center under the circumstances? Answer: a. Revenue Cost of services: Incurred Transferred-in Total Operating income * 60,000 cords × $11 = $660,000 b. Revenue Cost of services: Incurred Transferred-in Total Operating income * 60,000 cords × $9 = $540,000 c. The manager of Raw materials cares about the transfer price if the division is a profit center but not if it is a cost center. Under the circumstances, the division probably should be a cost center and should not worry about the profit it pretends to make by selling to another division. Cutting $2,250,000* $1,800,000 0 $1,800,000 $450,000 Assembly $3,875,000 $ 675,000 2,250,000 $2,925,000 $950,000 Raw Material $1,800,000* $1,800,000 $ 1,800,000 $ 0 Fabrication $3,875,000 $ 675,000 1,800,000 $2,475,000 $1,400,000 Diff: 2 Terms: transfer price Objective: 4 AACSB: Analytical skills 107) Bedtime Division makes the finished products. The covers can be sold separately for $5.00. The pillows sell for $6.00. The Bedding information related to manufacturing for the most recent year is as follows: Company manufact Cover Division manufacturing costs $6,000,000 ures Sales of covers by Cover Division 4,000,000 pillows. Market value of covers transferred to Assembly 6,000,000 The Sales of pillows by Assembly Division 7,200,000 Cover Additional manufacturing costs of Assembly Division 1,500,000 Division makes Required: covers and the Compute the operating income for each division and the company as a whole. Use market value as the transfer price. Are Assembly all managers happy with this concept? Explain. Answer: Cover Revenue: External Internal Total Cost of goods: Incurred Transferred-in Total Operating income The Assembly manager is probably not happy because the division is showing a loss. The manager would probably argue for a transfer price at something less than market price. However, since the market is open and competitive, the market price can be justified. The division needs to either increase its price or reduce its costs if it expects to show a profit. $ 4,000,000 6,000,000 $10,000,000 $ 6,000,000 0 $ 6,000,000 $ 4,000,000 Assembly $7,200,000 0 $7,200,000 $1,500,000 6,000,000 $7,500,000 $ (300,000) Company $11,200,000 $11,200,000 $ 7,500,000 $ 7,500,000 $ 3,700,000 Diff: 3 Terms: transfer price Objective: 4 AACSB: Analytical skills 108) DesMoine , each division performs work for the other division. The external fees earned by each division in 20X5 were $200,000 for s Valley Computer Services and $350,000 for Management Advisory Services. Computer Services worked 3,000 hours for Company Management Advisory Services, who, in turn, worked 1,200 hours for Computer Services. The total costs of external has two services performed by Computer Services were $110,000 and $240,000 by Management Advisory Services. divisions, Computer Required: Services and a. Determine the operating income for each division and for the company as a whole if the transfer price from Computer Managem Services to Management Advisory Services is $15 per hour and the transfer price from Management Advisory Services to ent Computer Services is $12.50 per hour. Advisory Services. b. Determine the operating income for each division and for the company as a whole if the transfer price between In divisions is $15 per hour. addition to their c. What are the operating income results for each division and for the company as a whole if the two divisions net the external hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this customers arrangement? Answer: a. Computer Revenue: External Internal Total Cost of services: Incurred Transferred-in Total Operating income * Computer Services = 3,000 hours × $15 = $45,000 Management Advisory Services = 1,200 hours × $12.50 = $15,000 Revenue for one is an expense of the other. b. Revenue: External Internal Total Cost of services: Incurred Transferred-in Total Operating income * Computer Services = 3,000 hours × $15 = $45,000 Management Advisory Services = 1,200 hours × $15 = $18,000 Revenue for one is an expense of the other. c. Revenue: External Internal $ 200,000 45,000 $245,000 $110,000 15,000 $125,000 $120,000 Management $350,000 15,000 $365,000 $240,000 45,000 $285,000 $80,000 Company $550,000 $550,000 $350,000 $350,000 $200,000 Total Cost of se Incurre Transfe Total Operating Computer $ 200,000 45,000 $245,000 $110,000 18,000 $128,000 $117,000 Management $350,000 18,000 $368,000 $240,000 45,000 $285,000 $83,000 Company $550,000 $550,000 $350,000 $350,000 $200,000 Computer $ 200,000 22,500 Management $350,000 0 Company $550,000 Computer Services favors this procedure for the current year. If the hours are always in favor of Computer Services, the manager of Computer Services will favor this procedure. Diff: 2 Terms: transfer price Objective: 4 AACSB: Analytical skills 109) Better $4 per liter. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs Food 800,000 liters of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of Company the olive oil company, now a division, are as follows: recently acquired Direct materials per liter $1.00 an olive Direct processing labor 0.50 oil Variable processing overhead 0.24 processin Fixed processing overhead 0.40 g Total $2.14 company that has Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking an annual Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the capacity Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price, since fixed overhead cost should of be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold 2,000,000 to outsiders for $4 per liter. liters and that Required: processed and sold a. Compute the operating income for the Olive Oil Division using a transfer price of $4. 1,400,000 liters last b. Compute the operating income for the Olive Oil Division using a transfer price of $2.14. year at a market c. What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your price of recommendation. Answer: a. Sales: External (1,200,000 × $4) Internal (800,000 × $4) Cost of goods sold: Variable (2,000,000 × $1.74) Fixed (2,000,000 × $0.40) Operating income b. Sales: External (1,200,000 × $4) Internal (800,000 × $2.14) Cost of goods sold: Variable (2,000,000 × $1.74) Fixed (2,000,000 × $0.40) Operating income c. Due to current demand in excess of the capacity, the Olive Oil Division should not be penalized by having to sell inside. All sales equivalent to the current external demand of 1,400,000 liters should be at the market price. Current external demand Current internal demand Total demand Capacity Excess demand Internal demand Noncompetitive internal demand Sales: External (1,200,000 × $4) Internal (200,000 × $4) Internal (600,000 × $2.14) Cost of goods sold: Variable (2,000,000 × $1.74) Fixed (2,000,000 × $0.40) Operating income $4,800,000 3,200,000 $3,480,000 800,000 $8,000,000 4,280,000 $3,720,000 $4,800,000 1,712,000 $3,480,000 800,000 $6,512,000 4,280,000 $2,232,000 1,400,000 800,000 2,200,000 2,000,000 200,000 800,000 600,000 $4,800,000 800,000 1,284,000 $6,884,000 $3,480,000 800,000 4,280,000 $2,604,000 Diff: 3 Terms: transfer price Objective: 4 AACSB: Analytical skills 110) Sportswea r Company manufact ures socks. The Athletic Division sells its socks for $6 a pair to outsiders. Socks have manufacturing costs of $2.50 each for variable and $1.50 for fixed. The division's total fixed manufacturing costs are $105,000 at the normal volume of 70,000 units. The European Division has offered to buy 15,000 socks at the full cost of $4. The Athletic Division has excess capacity and the 15,000 units can be produced without interfering with the current outside sales of 70,000. The 85,000 volume is within the division's relevant operating range. Explain whether the Athletic Division should accept the offer. Answer: Sales Variable costs Contribution margin The proposal should be accepted because it makes a contribution to fixed costs and profits of $1.50 per unit. This would increase the division's operating income by $22,500 = ($1.50 × 15,000 units). $4.00 2.50 $1.50 Diff: 2 Terms: transfer price Objective: 6 AACSB: Analytical skills 111) Colorfull Autocar Company manufact ures automobil es. The Red Car Division sells its red cars for $25,000 each to the general public. The red cars have manufacturing costs of $12,500 each for variable and $5,000 each for fixed costs. The division's total fixed manufacturing costs are $25,000,000 at the normal volume of 5,000 units. The Blue Car Division has been unable to meet the demand for its cars this year. It has offered to buy 1,000 cars from the Red Car Division at the full cost of $17,500. The Red Car Division has excess capacity and the 1,000 units can be produced without interfering with the current outside sales of 5,000. The 6,000 volume is within the division's relevant operating range. Explain whether the Red Car Division should accept the offer. Answer: Unit Sales Variable costs Contribution margin The proposal should be accepted because it makes a contribution to fixed costs and profits of $5,000 per unit. This would increase the division's operating income by $5,000,000 = ($5,000 × 1,000 units). $17,500 12,500 $5,000 Diff: 2 Terms: transfer price Objective: 6 AACSB: Analytical skills 112) Coppersto ne Company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. Its 20X5 sales were 150,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140% of variable costs. Under a dual transfer-pricing system, the Mixing Division pays only the variable cost per unit. The fixed costs of the Bottle Division are $125,000 per year. Mixing sells its finished products to outside customers for $11.50 per unit. Mixing has variable costs of $2.50 per unit in addition to the costs from the Bottle Division. The annual fixed costs of Mixing were $85,000. There were no beginning or ending inventories during the year. Required: What are the operating incomes of the two divisions and the company as a whole for the year? Explain why the company's operating income is less than the sum of the two divisions' total income. Answer: Bottle Revenue: External Internal Total Variable costs: Incurred Transferred-in Total Contribution margin Fixed Costs Operating income * 40,000 × $3 × 1.40 = $168,000 The internal sales are not included in the company's statement because the company cannot sell to itself. Therefore, it has to exclude $48,000 of dual pricing. $750,000 168,000 $918,000 $570,000 0 570,000 348,000 125,000 $223,000 Mixing $460,000 0 $460,000 $100,000 120,000 220,000 240,000 85,000 $155,000 Company $1,210,000 $1,210,000 $670,000 670,000 540,000 210,000 $330,000 Diff: 2 Terms: transfer price, dual pricing Objective: 6 AACSB: Analytical skills 113) The desks per year with a capacity of 15,000. The variable costs assigned to each desk are $300 and annual fixed costs of the Home division are $900,000. The computer desk sells for $400. Office Company The Executive Division wants to buy 5,000 desks at $280 for its custom office design business. The Computer Desk makes all manager refused the order because the price is below variable cost. The executive manager argues that the order should be types of accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby office causing operations to be at their most efficient level. desks. The Required: Computer Desk a. Should the order from the Executive Division be accepted by the Computer Desk Division? Why? Division is b. From the perspective of the Computer Desk Division and the company, should the order be accepted if the Executive currently Division plans on selling the desks in the outside market for $420 after incurring additional costs of $100 per desk? producing 10,000 c. What action should the company president take? Answer: a. Sales Variable costs Contribution margin The manager should not accept the order because it is below variable costs. It will generate a loss of $100,000 [5,000 units x $(20)]. This is a losing proposition in both the short run and long run. b. What the Executive Division does with the desks after receiving them is of no consequence to the Computer Desk Division. However, the division will still object to the transfer price of $280. The company, on the other hand, will encourage the offer because it increases total company operating income by $100,000 = 5,000 × [$420 - ($300 + $100)]. c. If the company president wants the Executive Division to have the new business, it should arrange a dualpricing system or else have negotiated prices between divisions. Dual pricing would allow the selling division to get a market value $280 300 $(20) the buying division to get some type of cost-plus transfer price. The negotiated price would allow the buying and selling divisions to feel like they had a part in the final pricing decision. Diff: 3 Terms: transfer price Objective: 6, 7 AACSB: Analytical skills 114) Discuss the possible problems a corporation might have if its operations are totally decentralized. Answer: (Answers may vary) Senior management has the ultimate responsibility for the business. In a totally decentralized operation, senior executive management has little say about the conduct of the business. Another problem could be caused by the appointment of managers who are not capable of running their business. The lack of senior management control might result in problems developing and resulting in even bigger problems before anyone was aware of the incompetent managers. Certain types of activities belong centralized such as gathering information and certain human resource functions. Diff: 2 Terms: decentralization Objective: 1 AACSB: Reflective thinking 115) The president of Silicon Company has just returned from a week of professional development courses and is very excited that she will not have to change the organization from a centralized structure to a decentralized structure just to have responsibility centers. However, she is somewhat confused about how responsibility centers relate to centralized organizations where a few managers have most of the authority. Required: Explain how a centralized organization might allow for responsibility centers. Answer: It does not make any difference what type of organizational structure exists when it comes to defining responsibility centers. If a centralized organization desires to hold its managers responsible for their actions, it can design a reporting system that assigns all costs and revenues to their controllable managers. It's just that, in a centralized organization, each manager may have more items to control than are reasonably possible. Diff: 2 Terms: management control system, decentralization Objective: 2 AACSB: Reflective thinking 116) Explain what transfer prices are, and what are the four criteria used to evaluate them? Answer: Transfer prices are the prices that one subunit of the firm charges another subunit of the firm for a good or service. Transfer prices are evaluated based on firm goal congruence, management efforts, subunit performance evaluations, and the subunit autonomy. Diff: 2 Terms: transfer price Objective: 3 AACSB: Reflective thinking 117) Briefly explain each of the three methods used to determine a transfer price. Answer: Transfer prices can be calculated using an external market price. They could be calculated using a cost basis, and perhaps including a markup. They could also be calculated using a negotiated price between the buying and selling divisions. Diff: 2 Terms: transfer price Objective: 4 AACSB: Reflective thinking 118) Briefly the conditions that should be met for market-based transfer pricing to lead to optimal decision making among subunits of a describe large organization. Answer: The conditions for which market-based transfer pricing is likely to lead to optimal decision making are: (1) the market for the intermediate product is perfectly competitive, (2) interdependencies of the subunits are minimal, and (3) there are no additional costs or benefits to the company as a whole from buying or selling in the external market instead of transacting internally. In a perfectly competitive market, the marketbased transfer prices promote goal congruence, motivate the management to take the same actions as if they were transacting externally, evaluate subunit performance, and preserve subunit autonomy. Diff: 2 Terms: transfer pricing, market-based Objective: 5 AACSB: Reflective thinking 119) When cost- based transfer pricing is used between subunits of a large organization, describe how to avoid making suboptimal decisions. Answer: When market prices are unavailable or too costly to obtain, it is often appropriate to use cost-based transfer prices. In some cases, the supplying division will charge full cost (or full cost plus a markup) to the receiving division. This is not optimal, because it causes the receiving division to treat the transferred in full cost per unit as if it were a variable cost. Since the full cost includes an allocation for overhead, it is not all variable cost. As a result, the organization as a whole will make suboptimal decisions using this as a basis. A more appropriate method would be to use a variable cost or incremental cost for the units being transferred between subunits within an organization. In the event that the supplying organization is a profit center and has other external customers for its products, then there may be some accommodation made for prorating the difference between variable This method would be superior to allowing a full cost (or full cost plus markup) method to be used. The objective is to have the organization as a whole act in a manner that will approximate competitive marketplace conditions as much as possible to promote cost efficiency in the long run. Diff: 2 Terms: transfer pricing, cost-based Objective: 6 AACSB: Reflective thinking 120) The Micro Internal Sales External Sales Division Sales: of Silicon 300,000 chips at $10 $3,000,000 Computer 200,000 chips at $12 $2,400,000 s Variable expenses at $4 1,200,000 800,000 produces Contribution margin $1,800,000 $1,600,000 computer Fixed cost (allocated in units) 1,500,000 1,000,000 chips that Operating income $ 300,000 $ 600,000 are sold to the The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.60 each. The Personal manager of Micro Division is not willing to meet the $8.60 price. She argues that it costs her $9.00 to produce and sell Computer each chip. Sales to outside customers are at a maximum of 200,000 chips. Division and to Required: outsiders. Operating a. Verify the Micro Division's $9.00 unit cost figure. data for the Micro b. Should the Micro Division meet the outside price of $8.60? Explain. Division for 20X5 c. Could the $8.60 price be met and still show a profit for the Micro Division sales to the Personal Computer Division? are as Show computations. follows: Answer: a. Variable costs Fixed costs [($1,500,000 + $1,000,000)/500,000 units] Total unit costs b. Yes, because the contribution margin is positive ($8.60 $4.00 = $4.60). If it loses the internal business, the other sales would have to absorb the fixed costs, which would force even higher external prices. The Micro Division manager does not have much bargaining power since the external sales are already at a maximum. c. Sales (300,000 × $8.60) Variable costs (300,000 × $4) Contribution margin Fixed costs (300,000 × $5.00) Operating income Internal sales will not show a profit. This assumes the fixed costs are still allocated at $5.00 per unit. $4.00 5.00 $9.00 $2,580,000 1,200,000 $1,380,000 1,500,000 $ (120,000) Diff: 2 Terms: transfer price Objective: 7 AACSB: Analytical skills 121) The per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows: Assembly Division Direct materials $ 40 of Direct manufacturing labor 20 American Variable factory overhead 12 Car Fixed factory overhead 40 Company Total $112 has offered to The Electrical Division has been selling 250,000 batteries per year to outside buyers at $136 each; capacity is 350,000 purchase batteries per year. The Assembly Division has been buying batteries from outside sources for $130 each. 90,000 batteries Required: from the Electrical a. Should the Electrical Division manager accept the offer? Explain. Division for $104 b. From the company's perspective, will the internal sales be of any benefit? Explain. Answer: a. Variable cost per battery = $40 + $20 + $12 = $72 Sales to Assembly Variable costs Contribution margin Because the Electrical Division is not at capacity, it should sell to the Assembly Division up to 100,000 units at $104. This will add $2,880,000 (90,000 × $32) at the current level to its operating income without reducing its outside sales. b. The internal sales would be beneficial to the company because the internal variable manufacturing costs of $72 per battery are less than the external price of $130 currently being paid by the Assembly Division. The company would be saving $5,220,000 [90,000 × ($130 - $72)] per year. $104 72 $ 32 Diff: 3 Terms: transfer price Objective: 8 AACSB: Analytical skills 122) A has a plant in a high tax jurisdiction that produces products for a facility in a low tax jurisdiction. Suggest a strategy, company including transfer prices, which will result in the lowest tax for the overall corporation. Answer: The overall corporate objective would be to report high costs and low revenue in the high tax jurisdiction, and low costs and high revenue in the low tax jurisdiction. In this situation, a low transfer price from the high tax jurisdiction facility will allocate more profit to the low tax jurisdiction. This will decrease total taxes paid by the corporation. Diff: 2 Terms: transfer price Objective: 9 AACSB: Reflective thinking 123) What is unused capacity within the selling division in the determination of a negotiated transfer price to another division? the role of Answer: Unused capacity within the selling division affects the opportunity cost of an internal transfer. If there is unused capacity within a selling division, there are no opportunity costs involved in an internal transfer price situation. In this situation, the transfer price is likely to be in the lower range, covering only the outlay costs involved in the production of the product. Diff: 2 Terms: transfer price Objective: 9 AACSB: Reflective thinking ...
View Full Document

This note was uploaded on 09/18/2010 for the course ACCT 424 taught by Professor All during the Spring '10 term at DeVry Long Beach.

Page1 / 982

ch22 - Cost Accounting, 13e (Horngren et al.) Chapter 22 1...

This preview shows document pages 1 - 46. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online