Deck 16: Responsibility Accounting, Performance Evaluation and Transfer Pricing

Question 1

Choices about decision-making authority and about organisational structure are often related.

Answer 1

A

Question 2

Which of the following best describes "general knowledge" in a decision-making context?

A) Customer lists and preferences kept by individual departments in retail sales
B) Knowledge that is easily transferred between employees
C) Detailed information about manufacturing processes
D) Knowledge that can be obtained only outside the organisation

Answer 2

B

Question 3

Investment centre managers are held responsible only for their costs.

Answer 3

B

Question 4

An ideal transfer price would be the opportunity cost of internal transfers.

Question 5

If a supplying division has excess capacity, the best transfer price is the product's variable cost.

Question 6

Economic value added can be measured so that it reduces most of the problems that arise under residual income.

Question 7

When decision making is decentralised:

A) Decision-making authority is delegated throughout the organisation
B) The important information in an organisation is very general
C) Upper management does not make decisions
D) Organisations are less likely to experience agency costs concerning goal congruence

Question 8

Return on investment can be decomposed into two ratios: investment turnover and return on sales.

Question 9

Technical details about complex manufacturing processes are examples of specific knowledge.

Question 10

In a profit centre, managers' primary goal is to maximise revenues.

Question 11

Return on investment is typically calculated as net profit divided by total sales.

Question 12

If manufacturing departments are only responsible for production decisions, they are considered cost centres.

Question 13

Residual income measures a company's profits given a required rate of return.

Question 14

Which type of knowledge is most costly to transfer within an organisation?

A) Decentralised
B) Financial
C) Centralised
D) Specific

Question 15

If a product has an external market and divisions are treated as profit centres, cost-based transfer prices can often lead to suboptimal decisions.

Question 16

In a dual-rate transfer pricing system, the selling department is credited for the market price and the buying department is charged the product's variable cost.

Question 17

Responsibility accounting is the process of using financial information to justify pay increases and promotions for managers.

Question 18

Transfer pricing policies can affect a company's tax liability, particularly if it does business internationally.

Question 19

Return on investment cannot be used effectively to evaluate profit centres because it motivates managers to make suboptimal decisions from the viewpoint of the organisations' owners.

Question 20

A transfer price is required only when goods or services are transferred between cost centres in the same organisation.

Question 21

Managers are held responsible for revenues in: $\begin{array}{llcc} \text { I } & \text { Revenue centres} \\ \text { II } & \text { Profit centres} \\ \text { III } & \text {Investment centres} \\\end{array}$

A) II and III only
B) I only
C) I and III only
D) I, II, and III

Question 22

Residual income is calculated as:

A) Net profit - (required rate of return × average operating assets)
B) Operating profit - (required rate of return × average equity)
C) Operating profit - (required rate of return × average operating assets)
D) Net profit - (required rate of return × average equity)

Question 23

A segment with an ROI of 30% has a profit of $84,000. The company's required rate of return on segment investments is 18%. The segment's residual income is:

A) $25,200
B) $26,712
C) $50,400
D) $33,600

Question 24

An advantage of centralised decision making is:

A) More rapid decision making in all contexts
B) Greater effectiveness in volatile environments
C) More motivated employees
D) Less monitoring of decisions

Question 25

PNY Pty Ltd reported operating profit of $30,000, revenue of $50,000, and average operating assets of $40,000 for a recent year. Which of the following is true?

A) PNY's return on sales was 1.67
B) PNY's return on investment was 75%
C) PNY has an adequate return on investment
D) PNY's return on sales was 80%

Question 26

A corporate accounting department would most often be considered a:

A) Cost centre, because its costs can be controlled by upper management
B) Revenue centre, if accountants have input in pricing decisions
C) Cost centre, because it is typically a high cost operation
D) Cost centre, because it is a support service

Question 27

Budgets can be used to evaluate managerial performance in: $\begin{array}{llcc} \text { I } & \text { Cost centres} \\ \text { II } & \text { Profit centres } \\ \text { III } & \text { Investment centres } \\\end{array}$

A) II only
B) I and II only
C) II and III only
D) I, II, and III

Question 28

The Herbert Division of PNY reported net profit of $2,500, operating profit of $4,000, average equity of $24,000, and average operating assets of $30,000 in a recent accounting period. If Herbert's required rate of return is 12%, its residual income was:

A) $(380)
B) $400
C) $380
D) $1,100

Question 29

Economic value added uses "adjusted after-tax operating profit" as one of its inputs. One purpose of using after-tax profit, rather than operating profit, is to B:

A) Encourage managers to minimise taxes
B) Improve information reported to the ASIC
C) Encourage managers to file tax reports
D) Remove bias from the EVA calculation

Question 30

Among the responsibility centres listed, which type of responsibility centre is most likely to use growth in sales as a performance measure?

A) Profit
B) Revenue
C) Cost
D) Investment

Question 31

PNY Pty Ltd reported operating profit of $80,000 and average operating assets of $120,000 in a recent accounting period. Which of the following transactions would definitely increase PNY's return on investment?

A) Switching suppliers for raw materials
B) Collecting accounts receivable
C) Increasing product prices
D) Decreasing research and development expense

Question 32

Herbert Feigl Ltd had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The operating (pre-tax) profit was

A) $192,500
B) $35,000
C) $30,500
D) $16,250

Question 33

Herbert Feigl Ltd had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The capital investment was:

A) $75,000
B) $170,000
C) $1,250,000
D) $200,000

Question 34

Decision-making based on general knowledge is more likely to occur in this type of organisation:

A) Decentralised
B) Effective
C) Centralised
D) Ineffective

Question 35

Efficiency measures, such as number of new products developed, may be more useful than financial measures in:

A) Discretionary cost centres.
B) Revenue centres.
C) Profit centres.
D) Investment centres.

Question 36

Which of the following responsibility centres can be evaluated using residual income?

A) Profit centres
B) Revenue centres
C) Cost centres
D) Investment centres

Question 37

How are research and development costs treated for financial reporting and for economic value added (EVA) calculations? $\begin{array}{llcc}\underline{\text { Financial Reporting}}&\quad\quad \underline{\text { EVA} }\end{array}$

a. $\begin{array}{llcc} \text { Capitalised } & \quad\quad\quad \text { Capitalised} \\\end{array}$

b. $\begin{array}{ll}\text { Expensed } & \quad\quad\quad\quad\text { Expensed } \end{array}$

c. $\begin{array}{ll}\text { Capitalised } & \quad\quad\quad\text { Expensed }\end{array}$

d. $\begin{array}{ll}\text { Expensed } & \quad\quad\quad\text { Capitalised }\end{array}$

A) Expensed/Expensed
B) Capitalised/Expensed
C) Capitalised/Capitalised
D) Expensed/Capitalised

Question 38

The Bright Division of the Wingbury Pty Ltd requires a 12% rate of return. During a recent year Grant had a net profit of $400,000 and a residual income of $250,000. What was its ROI?

A) 15%
B) 12%
C) 32%
D) 26%

Question 39

Specific knowledge is: $\begin{array}{ll}\text { I } & \text { More detailed tharn general knowledge} \\\text { I } & \text { More costly to transfer than general kuowledge } \\\text {III } & \text { An exarnple of an agency cost}\end{array}$

A) I and III only
B) II and III only
C) I and II only
D) I, II, and III

Question 40

Responsibility accounting includes: $\begin{array}{llcc} \text { I } & \text { Monitoring primarily for mistakes} \\ \text { II } & \text { Assigring authority to divisional maragers } \\ \text { III } & \text { Mearuring the performance of divisional managers } \\\end{array}$

A) I and III only
B) II and III only
C) I and II only
D) I, II, and III

Question 41

Division A of DymocksLtd has operating data as follows: $\begin{array}{llcc} \text { Capacity} & \text { 20,000 units } \\ \text { Selling price }& \text {\$ 80 per unit }\\ \text { Variable costs} & \text { \$ 45 per unit }\\ \text {Fixed costs } & \text { \$ 20 per unit }\\\end{array}$

Division B wants to purchase units from Division
A If Division A agrees to sell units to Division B, A's variable costs will be $5 less per unit. If Division A is operating at capacity, what is the minimum price it should charge?

A) $75
B) $20
C) $40
D) $60

Question 42

Problems with market-based transfer prices include:

A) Lack of objectivity
B) Their impact on corporate profitability
C) Lack of knowledge about underlying costs
D) Their lack of reliance on supply-and-demand relationships

Question 43

A transfer pricing policy based on market price:

A) Is best because the market price is always objective and easily obtainable.
B) May result in suboptimal decision making for the company as a whole.
C) Maximises total organisational profit.
D) Is the only alternative accepted by the Australian Taxation Office.

Question 44

The price used to record exchanges of goods and services inside an organisation is called a:

A) Exchange price
B) Full price
C) Transfer price
D) Suboptimal price

Question 45

Division A of Dymocks Ltd has operating data as follows: $\begin{array}{llcc} \text { Capacity} & \text { 20,000 units } \\ \text { Selling price }& \text {\$ 80 per unit }\\ \text { Variable costs} & \text { \$ 45 per unit }\\ \text {Fixed costs } & \text { \$ 20 per unit }\\\end{array}$




B wants to purchase units from Division
A If Division A agrees to sell units to Division B, A's variable costs will be $5 less per unit. If Division A has capacity available to meet B's requirements, what is the minimum price it should charge?

A) $75
B) $20
C) $40
D) $60

Question 46

The Sliver Coast Division of Harvey Ltd produces and sells a product to outside and internal customers. Per-unit data collected from its operations include: $\begin{array}{llcc} \text { Outside salesprice} &\$640 \\ \text { Direct materials } &105\\ \text { Direct labour } &250\\ \text {Fixed overhead } &180\\\end{array}$




If the Silver Coast Division has excess capacity available to meet an internal order, what transfer price should be set?

A) $355
B) $430
C) $625
D) $285

Question 47

Which of the following is an advantage of cost-based transfer prices?
I $\quad$ Managers do not have much incentive to reduce fixed costs
II $\quad$ Managers may be motivated to purchase goods and services from outside the company
IV $\quad$ Contribution margins may be split between buying and selling divisions

A) I only
B) II only
C) III only
D) None of the above (I, II, and III are all disadvantages)

Question 48

Division A of a firm produces a single product, which is sold only to Division
B) Division A has a total investment of $1,000,000, while Division B has a total investment of $2,000,000. Division A annually sells 100,000 units of its product to Division B for $5 per unit and earns $150,000 in operating profit. Division B currently earns $250,000. If Division A raises its selling price to $6 per unit and nothing else changes:

A) The firm's overall ROI will rise
B) The firm's overall ROI will fall
C) Division A's ROI will increase to 20%
D) The firm's overall ROI will remain unchanged

Question 49

The Venus Division of Heinz Ltd produces dilithium crystals. One-third of its output is sold to the Bruno Division, and the remainder is sold externally. Venus's estimated sales and cost data for the coming year are: $$\begin{array} { l c c } & \underline{\text { Antari Division} } & \underline{\text { External Sales} } \\ \text { Units } & 12,500 & 25,000\\\text { Sales } & \$ 18,750 & \$ 50,000 \\\text { Variable costs } & 12,500 & 25,000 \\\text { Fixed costs } & 3,750 & 7,500\end{array}$$ Assume that Venus cannot sell any additional crystals externally. If the Bruno Division has an opportunity to buy from an outside supplier at $1.40 per crystal and Venus refuses to meet this price, the company as a whole will be:

A) $3,750 worse off
B) $6,250 better off
C) $1,250 better off
D) $5,000 worse off

Question 50

The National Division of RedBubble Ltd is buying 10,000 widgets from an outside supplier at $30 per unit. RedBubble's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: $\begin{array}{llcc} \text { Sales price per unit } &\$45.00 \\ \text { Variable costper unit } &22.50\\ \text {Fixed cost (at capacity) per unit } &15.00\\\end{array}$

If the National Division buys its 10,000 widgets from the Overseas Division, the transfer price should be:

A) $30.00
B) $22.50
C) $45.00
D) $37.50

Question 51

When a company uses activity-based transfer prices:

A) The internal buyer is motivated to understate the number of units to buy internally
B) Capacity is usually reserved for products or services that are transferred internally
C) The internal buyer is motivated to overstate the number of units to buy internally
D) Batch-level costs are excluded from the computation

Question 52

The Silver Coast Division of Harvey Ltd produces and sells a product to outside and internal customers. Per-unit data collected from its operations include: $\begin{array}{llcc} \text { Outside salesprice} &\$640 \\ \text { Direct materials } &105\\ \text { Direct labour } &250\\ \text {Fixed overhead } &180\\\end{array}$

If the Silver Coast division is operating at full capacity and selling solely to outside customers, what price should another division pay for Silver Coast's product?

A) $625
B) $640
C) $285
D) $480

Question 53

Setting transfer prices can be especially problematic when:

A) Compensation is tied to the financial performance of responsibility centres
B) Centralised decision making is the organisational norm
C) Managers are evaluated based on non-financial factors
D) Compensation is tied to the financial performance of the organisation as a whole

Question 54

Herbert Feigl Ltd had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The return on sales was:

A) 6.1%
B) 38.5%
C) 7%
D) 3.25%

Question 55

Division A produces a component for Holden Ltd's main product - motor vehicles. The division operates as a profit centre. It also sells to outsiders. The present selling price is $75 per component. The company buys 600,000 units of a similar component per year from outside sources. The external purchase price is $73 as a result of a quantity discount. Division A has adequate capacity to supply the needs of the Assembly division. The following data are for Division A: $\begin{array}{ll}\text { Direct material } & \$ 30 \text { per unit } \\\text { Direct labour } & \$ 25 \text { per unit } \\\text { Variable overhead } & \$ 10 \text { per unit } \\\text { Fixed overhead (based on a capacity of } & \$ 6 \text { per unit } \\5,000 \text { units) } &\end{array}$
The price range within which A would sell components to the Assembly Division is:

A) $65 to $73
B) $71 to $75
C) $71 to $73
D) $65 to $75

Question 56

Division A produces a component for Holden Ltd's main product - motor vehicles. The division operates as a profit centre. It also sells to outsiders. The present selling price is $75 per component. The company buys 600,000 units of a similar component per year from outside sources. The external purchase price is $73 as a result of a quantity discount. Division A has adequate capacity to supply the needs of the Assembly division. The following data are for Division A: $\begin{array}{ll}\text { Direct material } & \$ 30 \text { per unit } \\\text { Direct labour } & \$ 25 \text { per unit } \\\text { Variable overhead } & \$ 10 \text { per unit } \\\text { Fixed overhead (based on a capacity of } & \$ 6 \text { per unit } \\5,000 \text { units) } &\end{array}$
The minimum price at which A would sell components internally is:

A) $73
B) $75
C) $71
D) $65

Question 57

The National Division of RedBubble Ltd is buying 10,000 widgets from an outside supplier at $30 per unit. RedBubble's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: $\begin{array}{llcc} \text { Sales price per unit } &\$45.00 \\ \text { Variable costper unit } &22.50\\ \text {Fixed cost (at capacity) per unit } &15.00\\\end{array}$

If the Overseas Division meets the outside supplier's price and sells the 10,000 widgets to National, the effect on overall company profits will be

A) $150,000 lower
B) $300,000 higher
C) $ 75,000 higher
D) $225.000 lower

Question 58

Which prices are recorded by departments under a dual-rate transfer pricing system? $\begin{array}{cl}\text { Selling } & \text { Purchasing } \\\underline{\text { Department }} & \underline{\text { Department }}\end{array}$

a. $\begin{array}{llcc}\text { Variable cost } \quad \text { Variable cost }\end{array}$

b. $\begin{array}{llcc} \text { Variable cost } & \text { Market price }\end{array}$

c. $\begin{array}{llcc}\text { Market price } \quad \text { Full cost } \end{array}$

d. $\begin{array}{llcc}\text { Market price } & \text { Variable cost }\end{array}$

A) Variable cost/Market price
B) Market price/Full cost
C) Variable cost/Variable cost
D) Market price/Variable cost

Question 59

Herbert Feigl Ltd had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The return on investment was:

A) 21.67%
B) 15.25%
C) 15.4%
D) 17.5%

Question 60

Winzel Ltd has 2 divisions, Diodes and Boards. The diode can be sold internally or externally. If sold externally, the sales price is $15 per diode. The Boards division needs 3 diodes for each electronic board it produces. The external sales prices and costs are: $\begin{array}{lrr}&\underline{\text {Diodes}}&\underline{\text {Boards}}\\\text { Sales price per unit } & \$ 15.00 & \$ 16.50 \\\text { Variable costs (direct) per unit } & 6.00 & 9.00 \\\text { Fixed costs per unit } & 3.00 & 6.00\end{array}$
If Diodes can sell all of its production externally, what is the minimum price at which it would be willing to sell internally, and what is the maximum price the Board Division would be willing to pay? $\begin{array} { l l } \text { Diodes } & \text { Boards }\\\underline{\text {Willing to Sell }}&\underline{\text {Willing to Pay}} \end{array}$
a. $\$ 15 \quad \quad \quad \quad \quad \quad \quad\$ 2.50$
b. $\$ 15 \quad \quad \quad \quad \quad \quad \quad \$ 7.50$
c. $\$ 15 \quad \quad \quad \quad \quad \quad \quad\$ 15.00$
d. $\$ 27 \quad \quad \quad \quad \quad \quad \quad \$ 27.00$

A) $15/$7.50
B) $15/$15
C) $15/$2.50
D) $15/$27

Question 61

Division S sold a part to both Division P and outside customers last year. The revenues from these sales were $30,000 (1,000 units) and $35,000 (1,000 units), respectively. Next year, S plans to increase the unit sales price to $42 and wants a proportionate increase in the sales price to Division P. The unit costs are $9 variable and $15 fixed. If Division P does not agree to the price increase, 50% of Division S's fixed costs will be eliminated. What is the highest price Division P would be willing to pay for external purchases?

A) $36.00
B) $16.50
C) $30.00
D) $28.50

Question 62

Which of the following transfer pricing systems potentially takes the most time to establish?

A) Dual-rate
B) Negotiated
C) Market-based
D) Full-cost

Question 63

Dual-rate transfer pricing systems are appropriate when the:

A) Selling department has excess capacity
B) Market price is higher than the variable cost
C) Market price is unknown
D) Market price is higher than the full cost