Deck 17: Responsibility Accounting, Performance Evaluation and Transfer Pricing

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

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

Question 6

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

Question 7

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 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

Investment centre managers are held responsible only for their costs.

Question 16

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

Question 17

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

Question 18

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

Question 19

The Gold Coast Division of Vallance Ltd produces and sells a product to outside and internal customers. Per-unit data collected from its operations include: If the Gold Coast division is operating at full capacity and selling solely to outside customers, what price should another division pay for Gold Coast's product?

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

Question 20

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

Question 21

When decision making is decentralised

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

Question 22

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

Question 23

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

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

Question 24

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

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

Question 25

The Victorian Division of WDY 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 Victoria's required rate of return is 12%, its residual income was

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

Question 26

Residual income is calculated as

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

Question 27

How are research and development costs treated for financial reporting and for economic value added (EVA) calculations?

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

Question 28

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

Question 29

The National Division of Roboto Ltd is buying 10,000 widgets from an outside supplier at $30 per unit. Roboto's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: If the National Division buys its 10,000 widgets from the Overseas Division, the transfer price should be

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

Question 30

Division A of Sibley Ltd has operating data as follows: 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) $40
B) $75
C) $20
D) $60

Question 31

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

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

Question 32

Hitek 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: 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?

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

Question 33

KNY 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 KNY's return on investment?

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

Question 34

The Gold Coast Division of Vallance Ltd produces and sells a product to outside and internal customers. Per-unit data collected from its operations include: If the Gold Coast Division has excess capacity available to meet an internal order, what transfer price should be set?

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

Question 35

Division A of Sibley Ltd has operating data as follows: 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) $40
B) $75
C) $20
D) $60

Question 36

The National Division of Roboto Ltd is buying 10,000 widgets from an outside supplier at $30 per unit. Roboto's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: 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) $ 75,000 higher
B) $150,000 lower
C) $300,000 higher
D) $225.000 lower

Question 37

Division A produces a component for Honda 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: The minimum price at which A would sell components internally is

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

Question 38

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

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

Question 39

Division A produces a component for Honda 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: The price range within which A would sell components to the Assembly Division is

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

Question 40

The Jupiter Division of Space Ltd produces dilithium crystals. One-third of its output is sold to the Antari Division, and the remainder is sold externally. Jupiter's estimated sales and cost data for the coming year are: Assume that Jupiter cannot sell any additional crystals externally. If the Antari Division has an opportunity to buy from an outside supplier at $1.40 per crystal and Jupiter refuses to meet this price, the company as a whole will be

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

Question 41

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

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

Question 42

Budgets can be used to evaluate managerial performance in

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

Question 43

A corporate accounting department would most often be considered a

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

Question 44

Specific knowledge is

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

Question 45

Setting transfer prices can be especially problematic when

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

Question 46

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

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

Question 47

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

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

Question 48

Dual-rate transfer pricing systems are appropriate when the

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

Question 49

Teresa's Taco 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 (pretax) profit was

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

Question 50

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

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

Question 51

The Geelong Division of the Wasson Widget Co. requires a 12% rate of return. During a recent year Shannon had a net profit of $400,000 and a residual income of $250,000. What was its ROI?

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

Question 52

A transfer pricing policy based on market price

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

Question 53

Which of the following is an advantage of cost-based transfer prices?

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

Question 54

Teresa's Taco 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) $1,250,000
B) $75,000
C) $170,000
D) $200,000

Question 55

Managers are held responsible for revenues in

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

Question 56

Responsibility accounting includes

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

Question 57

When a company uses activity-based transfer prices

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

Question 58

Problems with market-based transfer prices include

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

Question 59

An advantage of centralised decision making is

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

Question 60

Which prices are recorded by departments under a dual-rate transfer pricing system?

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

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

Question 62

Teresa's Taco 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) 7%
B) 6.1%
C) 38.5%
D) 3.25%

Question 63

Teresa's Taco 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) 15.4%
B) 21.67%
C) 15.25%
D) 17.5%