Deck 22: Responsibility Accounting and Transfer Pricing

Question 1

The transfer price is the dollar amount used in recording sales to primary customers.

Answer 1

False

Question 2

A cost that is directly traceable to a particular center must be a variable cost.

Answer 2

False

Question 3

One purpose of a responsibility accounting system is to evaluate the performance of center managers.

Answer 3

True

Question 4

An investment center is a profit center where management can make related capital investment choices.

Question 5

If a business activity qualifies as a profit center, it cannot also qualify as an investment center.

Question 6

The contribution margin approach to preparing reports for managers classifies costs into fixed and variable costs.

Question 7

Revenue, less variable costs, less traceable fixed costs, is called the contribution margin.

Question 8

Common fixed costs jointly benefit several parts of the business and would not change significantly even if one of the parts of the business were discontinued.

Question 9

The responsibility margin is the contribution margin less common fixed costs.

Question 10

Responsibility margin is useful in evaluating the consequences of short-run marketing strategies, while contribution margin is more useful in evaluating long-term profitability.

Question 11

In responsibility income statements, revenue is first assigned to the centers responsible for creating that revenue.

Question 12

All costs become traceable at some level of the organization.

Question 13

Traceable fixed costs usually cannot be eliminated even if the center is closed.

Question 14

Evaluating the performance of cost centers involves subjective judgments as to the value of the services rendered by these centers.

Question 15

Profit centers generate revenues and expenses.

Question 16

When an external market exists for a transferred product or service, most companies use either negotiated transfer prices or cost-plus transfer prices.

Question 17

A common cost may become a traceable cost as it moves up to larger responsibility centers.

Question 18

Performance margin is equal to controllable fixed costs minus the contribution margin.

Question 19

An accounting system designed to measure the performance of each center within a business is referred to as a profitability accounting system.

Question 20

A responsibility income statement shows the revenue and expenses of each cost center within a particular part of a business.

Question 21

An investment center:

A) Is a profit center for which management is able to objectively measure the cost of the assets used in the center's operations.
B) Is a cost center for which management is able to identify the original amount invested.
C) May be either a cost center or a profit center.
D) Is a subunit of the organization that provides services to other centers within the organization.

Question 22

San Francisco's famous St. Francis Hotel is owned by Westin Hotel and Resort Group. Westin should evaluate the St. Francis as:

A) A cost center.
B) A historical landmark.
C) An investment center.
D) A profit center (other than an investment center).

Question 23

The term responsibility center reflects the idea that the "centers" of a business usually are defined in a manner such that each center is:

A) Responsible for earning a specified amount of profit.
B) Responsible for all business operations in a specific region.
C) Under the control of a specified center manager.
D) Approximately the same size.

Question 24

The part of a business a particular manager is held responsible for is called a:

A) Cost center.
B) Profit center.
C) Investment center.
D) Responsibility center.

Question 25

An example of a revenue center is:

A) The accounting department in a manufacturing company.
B) The maintenance department of a university.
C) The furniture department of a retail department store.
D) The human resources department in a hospital.

Question 26

If a company wanted to evaluate the manager's ability to control costs, the company would probably look at the:

A) Performance margin.
B) Responsibility margin.
C) Contribution margin.
D) None of the above.

Question 27

If operations at a center are discontinued, all traceable costs attributed to the cost would be discontinued.

Question 28

In assigning costs to centers, each center is charged with costs attributed to the center and based on company-wide rates.

Question 29

One of the unique services provided by San Francisco's St. Francis Hotel is cleaning and polishing coins (pocket change) for the guests. From the standpoint of hotel management, this "money laundry" should be viewed as:

A) A contribution center.
B) A cost center.
C) An investment center.
D) A profit center (other than an investment center).

Question 30

Carrier Corporation produces heating and air conditioning equipment at a number of plants throughout the United States including one in Syracuse, New York. Carrier should evaluate its Syracuse plant as:

A) A cost center.
B) An investment center.
C) A profit center (other than an investment center).
D) A committed center.

Question 31

Disneyland charges visitors for admission to the park but not for individual rides or attractions. "Splash Mountain" is one of the rides in Disneyland. The Walt Disney Company should evaluate "Splash Mountain" as:

A) A revenue center.
B) A cost center.
C) An investment center.
D) A profit center (other than an investment center).

Question 32

The primary difference between profit centers and cost centers is that:

A) Profit centers generate revenue.
B) Cost centers incur costs.
C) Profit centers are evaluated using return on investment criteria.
D) Profit centers provide services to other centers in the organization.

Question 33

Carrier Corporation's Syracuse plant is organized into Air Conditioning and Heating Products divisions. The management of the Syracuse plant should evaluate the Heating Products division as:

A) A cost center.
B) An investment center.
C) A profit center (other than an investment center).
D) A responsibility center.

Question 34

A responsibility accounting system measures the performance of each of the following centers except:

A) Profit center.
B) Investment center.
C) Control center.
D) Cost center.

Question 35

Disneyland is one of several theme parks owned by The Walt Disney Company. Disneyland should be evaluated as:

A) An investment center.
B) A cost center.
C) An entertainment center.
D) A profit center (other than an investment center).

Question 36

John Thomas is the manager of materials movement for the Syracuse plant of Carrier Corporation. Thomas should be evaluated as manager of:

A) A cost center.
B) An investment center.
C) A profit center (other than an investment center).
D) Human resources under his supervision.

Question 37

Which of the following is not a valid reason for developing responsibility center information?

A) Responsibility center information is useful in deciding how to allocate resources among segments of the business.
B) Separately measuring the revenue and expenses of each responsibility center is a necessary step in developing financial statements for the business entity viewed as a whole.
C) Responsibility center information is useful in evaluating the performance of segment managers.
D) Responsibility center information helps management to quickly identify sections of the business that are performing poorly.

Question 38

The dollar amount used by one division which supplies a good or a service to another division within a company is called a:

A) Market price.
B) Transfer price.
C) Fair price.
D) Agreed-upon price.

Question 39

Cost centers are evaluated primarily on the basis of their ability to control costs and:

A) Their return on assets.
B) Residual income.
C) The quantity and quality of the services they provide.
D) Their contribution margin ratio.

Question 40

Fixed costs that the manager of a department cannot change are called:

A) Controllable.
B) Committed.
C) Traceable.
D) Common.

Question 41

All of the following costs are traceable to a specific factory except:

A) Depreciation on the company's fleet of tractor trailer trucks.
B) Direct materials.
C) Salaries of production supervisors.
D) Wages of production set-up laborers.

Question 42

The cost of heating and air conditioning the store should be:

A) Allocated among the sales departments based upon relative sales volume.
B) Allocated among the sales departments based upon their relative floor space.
C) Classified as a common fixed cost.
D) Omitted from the segmented income statements.

Question 43

Responsibility margin is equal to:

A) Revenue, less contribution margin and traceable fixed costs.
B) Revenue, less variable costs.
C) Revenue, less variable costs and traceable fixed costs.
D) Revenue, less variable fixed costs, traceable fixed costs, and common costs.

Question 44

Of the following, which should be classified as a common fixed cost?

A) Depreciation on the Schenectady factory.
B) Salaries of the plant managers.
C) Salaries of the company's legal staff.
D) Property taxes on the Akron factory.

Question 45

In preparing a responsibility income statement that shows contribution margin and responsibility margin, two concepts are involved in allocating costs to the various centers. These concepts are:

A) Whether the costs are variable or fixed and whether they are material in dollar amount.
B) Whether the costs are traceable to the responsibility center and whether the responsibility center is organized as a profit center or an investment center.
C) Whether the costs are variable or fixed and whether they are directly traceable to the responsibility center.
D) Whether the costs are traceable to the responsibility center and whether they are material in dollar amount.

Question 46

Parker's newly hired director of accounting services feels that the property taxes on the Cairo factory should be allocated to the fabricating, assembly, and finishing departments based upon the square footage they occupy. Of the following, which is not a valid reason to reject this recommendation?

A) The property taxes would not change even if one or more of the departments were eliminated.
B) Such an allocation violates GAAP.
C) The property taxes are not under the control of department managers.
D) The allocation may imply changes in efficiency that are unrelated to center performance.

Question 47

The Akron factory employs two quality control inspectors at an annual salary of $70,000 each. These salaries should be classified as:

A) Common fixed cost.
B) Variable cost.
C) Committed fixed cost.
D) Controllable fixed cost.

Question 48

A responsibility income statement generally does not show the:

A) Contribution margin of each responsibility center.
B) Traceable fixed costs allocated to each responsibility center.
C) Segment margin of each responsibility center.
D) Net income of each responsibility center.

Question 49

The company's CEO must decide which of the three factories to expand in order to increase productive capacity. She should be most interested in the:

A) Sales of each factory.
B) Contribution margin at each factory.
C) Fixed costs traceable to each factory.
D) Responsibility margins of each factory.

Question 50

All of the following costs are traceable to specific sales departments except:

A) Cost of goods sold.
B) Depreciation of equipment and fixtures used in the department.
C) Advertising a special sale in a particular department.
D) The salary of the store manager.

Question 51

Sloan Sporting Goods has stores in four geographic regions. Each region has at least 20 stores. In the company's responsibility accounting system, sales are recorded separately for each sales department within each store. The total sales for a particular region are determined by:

A) Combining the total sales of all stores in that region.
B) Using a separate revenue account to record the sales transaction for each region.
C) Taking a percentage of the company's total sales that is equal to the percentage of the company's stores located in that region.
D) Adding together the sales tickets for all sales transactions in the region.

Question 52

In a responsibility accounting system, the recording of revenue and costs begins with the:

A) Most profitable segments of the business.
B) Least profitable segments of the business.
C) Broadest areas of managerial responsibility.
D) Smallest areas of managerial responsibility.

Question 53

The responsibility margin is calculated by:

A) Subtracting fixed costs traceable to a center from its contribution margin.
B) Subtracting common fixed costs from the contribution margin.
C) Subtracting variable costs from sales.
D) Subtracting common fixed costs from variable costs.

Question 54

In a responsibility income statement, the term common fixed costs describes fixed costs that:

A) Occur every month.
B) Jointly benefit several responsibility centers of the business.
C) Occur in virtually every responsibility center of the business (such as salaries).
D) Are easily traceable to specific profit centers.

Question 55

Depreciation of the fixtures and equipment used exclusively in a particular sales department should be classified as a:

A) Common fixed cost.
B) Variable cost.
C) Controllable fixed cost.
D) Committed fixed cost.

Question 56

The monthly salaries of the employees of the store's Accounting Department should be classified as a:

A) Common fixed cost.
B) Traceable fixed cost.
C) Committed fixed cost.
D) Controllable fixed cost.

Question 57

The concept of contribution margin applies:

A) Only to investment centers.
B) Only to profit centers.
C) Only to cost centers.
D) To all types of responsibility centers.

Question 58

The most common value used for transfer pricing is:

A) Total variable costs.
B) Total fixed and variable costs.
C) Market value less fixed costs.
D) Market value.

Question 59

Depreciation on the factory would be an example of a:

A) Controllable fixed cost.
B) Period cost.
C) Responsibility cost.
D) Committed fixed cost.

Question 60

The contribution margin is calculated by:

A) Subtracting fixed costs from sales.
B) Subtracting variable costs from sales.
C) Subtracting fixed and variable costs from sales.
D) Subtracting common costs from sales.

Question 61

The measurement most often used to evaluate a business unit organized as an investment center consists of:

A) Contribution margin stated as a percentage of average total assets.
B) Responsibility margin stated as a percentage of net sales.
C) Contribution margin stated as a percentage of net sales.
D) Responsibility margin stated as a percentage of average total assets.

Question 62

Company MHF operates subsidiaries in two countries. One of the subsidiaries consumes the output of the other in the production of a good for sale to the public. The company could increase cash flows by:

A) Using a transfer price based on full cost.
B) Using a transfer price to transfer as much income as possible to the subsidiary located in the lower tax country.
C) Using a transfer price based on market value.
D) Using a transfer price to transfer as much income as possible to the subsidiary located in the higher tax country.

Question 63

Responsibility accounting systems are characterized by:

A) The intercompany target pricing charged among the centers.
B) The relationship of the corporate office with its customers or clients.
C) The relationship of each center with its customers or clients.
D) The preparation of timely performance reports.

Question 64

Division X supplies partially completed units of product to division Y. The divisions' negotiated price is $30 plus 20% per unit. Assuming Division X completed and transferred 5,000 units to division Y, the total transfer price on this transaction is:

A) $180,000.
B) $120,000.
C) $50,000.
D) $5,000.

Question 65

Many companies view performance margin as a more useful tool than responsibility margin for evaluating segment managers. This is because:

A) Managers have no control over traceable fixed costs.
B) Performance margin is not affected by the size of the department.
C) Performance margin indicates the change in operating income that would result from closing the department.
D) Performance margin includes only those revenue and costs under the manager's direct control.

Question 66

Refer to the above information. The contribution margin of the local branch is:

A) $5,500,000
B) $2,400,000.
C) $2,246,000.
D) $3,254,000.

Question 67

Responsibility income statement-cost classification
Milton's, a large department store, prepares income statements by sales department. These statements follow the contribution margin approach, showing contribution margin and responsibility margin for each profit center as well as monthly income from operations for the store. Indicate the classification of each of the costs listed below by inserting the appropriate code letters in the space provided.
Costs
______ (a) The cost of merchandise sold in the Women's Sportswear Department.
______ (b) Advertising a sale in the Housewares Department (classify as a fixed cost).
______ (c) Depreciation on equipment used in the Automotive Service Department.
______ (d) Depreciation on the store's heating and air conditioning system.
_____ (e) Monthly salary of the manager of the Toy Department.
_____ (f) Sales taxes collected from customers and paid to local tax authorities.
_____ (g) Monthly salaries of store security guards.

Question 68

The bookstore of a university would be considered:

A) A cost center.
B) A profit center.
C) An investment center.
D) A revenue center.

Question 69

Accounting terminology
Listed below are seven technical accounting terms introduced or emphasized in this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.
______ (a) Costs that jointly benefit several responsibility centers of the business and that do not vary significantly with changes in sales volume.
______ (b) The amount charged by a responsibility center for the goods it sells to another responsibility center.
______ (c) A common measure of investment center performance.
______ (d) A responsibility center of a business that may be evaluated by the return earned on assets.
______ (e) The subtotal in a responsibility income statement that is most useful in evaluating the short-term effects of various marketing strategies on profitability.

Question 70

Responsibility accounting systems measures the performance of:

A) The entire company.
B) Each center individually.
C) Both the entire company and each center individually.
D) Neither the entire company nor each center individually.

Question 71

After the closing of Profit Center 3, the monthly income from operations for Profit Center 1, as measured by Dalton Co. should be approximately:

A) $25,000.
B) $17,500.
C) $10,000.
D) $80,000.

Question 72

Responsibility income statement
Classico's Pizza, a chain of pizza parlors, views each branch location as an investment center. The local branch reported the following results for the current year:
Compute the following measures for this investment center:
(a) Contribution margin: $________________
(b) Contribution margin ratio: ________________%
(c) Responsibility margin: $________________
(d) Increase in annual responsibility margin that would be expected to result from a 10% increase in sales volume: $________________

Question 73

The human resources department of a large company would be considered:

A) A cost center.
B) A profit center.
C) An investment center.
D) A revenue center.

Question 74

In deciding how the store will benefit most from increasing the sales of selected departments, the store manager should be most interested in the:

A) Total sales of each department.
B) Contribution margin ratios of each department.
C) Fixed costs traceable to each department.
D) Responsibility margins of each department.

Question 75

Division X supplies partially completed units of product to division Y. The divisions' negotiated price is $30 per unit. Assuming Division X completed and transferred 3,000 units to division Y, the total transfer price on this transaction is:

A) $30,000.
B) $60,000.
C) $90,000.
D) $3,000.

Question 76

Closing Profit Center 3 should cause Dalton's monthly operating income to:

A) Increase by $5,000.
B) Decrease by $15,000.
C) Decrease by $7,000.
D) Change by some other amount.

Question 77

In the short run, the greatest increase in profitability will result from increasing sales in those profit centers with the:

A) Highest performance margins.
B) Lowest traceable fixed costs.
C) Highest contribution margin ratios.
D) Highest responsibility margins.

Question 78

Responsibility accounting systems should begin with:

A) A budget by center.
B) A performance report by center.
C) A measure of corporate performance.
D) A company-wide income statement.

Question 79

The margin of the local branch is:

A) $5,500,000.
B) $1,926,000.
C) $2,246,000.
D) $2,400,000.

Question 80

The contribution margin ratio of the local branch is:

A) 50%.
B) 41%.
C) 49%.
D) 52%.