Deck 22: Management Control Systems, Transfer Pricing, and Multinational Considerations

Question 1

Which of the following would be considered an example of an element of an informal control system?

A) procedures developed by first level managers to help guide staff in their daily work
B) a policy that requires all employees to take at least two weeks of vacation each year
C) Shared values within an organization's culture
D) the master budget

Answer 1

Shared values within an organization's culture

Question 2

In a management control system, which of the following is described as the extent to which managers strive or endeavor in order to achieve a goal?

A) Efficiency
B) Effectiveness
C) Effort
D) Variance

Answer 2

Effort

Question 3

Which of the following is a part of the formal management control system?

A) mutual commitments among the members of the organization
B) the accounting information system provides metrics about costs, revenues, and contribution margins
C) shared values and loyalties among the members of the organization
D) general understanding about acceptable behavior for managers

Answer 3

the accounting information system provides metrics about costs, revenues, and contribution margins

Question 4

Effective management control systems should also motivate managers and other employees.

Question 5

The formal management control system includes the shared values, loyalties, and mutual commitments among members of the organization.

Question 6

Effort refers to physical exertion, such as a worker producing at a faster rate, but excludes non-physical aspects like acumen and diligence of a worker.

Question 7

An organization should design its management control system independently of its strategies, so that the system is not affected by change of strategies in future.

Question 8

If a computer manufacturer used its common stock price as a Balanced Scorecard control measure, it would be utilizing which of the following?

A) an external measure
B) customer related measure
C) internal business process measure
D) learning and growth measure

Question 9

Management control systems utilize information gathered within a company and from external sources so as to aid management with their planning and control decision making.

Question 10

The management accounting system is an informal management control system which provide information about the firm's costs, revenues, and income.

Question 11

Goal congruence exists when individuals work toward achieving one goal, and groups work toward achieving a different goal.

Question 12

Line managers supervising individual refineries are concerned with ________.

A) obtaining information about the firm's opportunity costs
B) obtaining information about the firm's sunk costs
C) obtaining information about the firm's equipment downtime and product quality
D) obtaining information about customer satisfaction and market share

Question 13

Management control systems should be designed to support the organizational responsibilities of individual managers.

Question 14

Management control systems is designed only for top level managers and is not applicable to line managers.

Question 15

Which of the following is a characteristic of a management control system?

A) It gathers key information that aids in the process of making decisions
B) It encourages short-term profit planning
C) Helps managers to act rapidly and with autonomy
D) It deals with coordinating planning across the organization and is not concerned with behavioral aspects of managing

Question 16

A well-designed management control system uses information from ________.

A) internal sources only as they are the most reliable sources of information
B) external sources only as they are more dynamic and future oriented
C) both internal and external sources as a wide range of information is required
D) external sources only as they are the most reliable sources of information

Question 17

The formal management control system includes shared values, loyalties, and mutual commitments among members of the company, company culture, and norms about acceptable behavior for managers and other employees.

Question 18

Effort in terms of management control systems is defined in terms of physical exertion such as a worker producing at a faster rate.

Question 19

Which of the following is true of goal congruence?

A) It exists when the management's strategy is in line with the shareholders' requirements.
B) It exists when individuals and groups work toward achieving the organization's goals.
C) It exists when both internal and external stakeholders of an organization have similar goals.
D) It exists when an organization's goals are in line with the social acceptability of organizational goals.

Question 20

The human resources systems is a part of the formal management control systems of an organization.

Question 21

________ occurs when a decision's benefits for one subunit is more than offset by the costs to the organization as a whole.

A) Suboptimal decision making
B) Independent decision making
C) Congruent decision making
D) Departmental decision making

Question 22

In a profit center, the manager is accountable for investments, revenues, and costs.

Question 23

Which of the following is not a benefit of decentralization?

A) Creates competition among subunit managers.
B) Sharpens the focus of subunit managers.
C) Assists in development and learning.
D) creates greater responsiveness to the needs of customers and suppliers.

Question 24

The management accounting systems, which provide information about the firm's
costs, revenues, and income.

Question 25

Incongruent decision making occurs when individuals and groups work toward achieving the organization's goals even if departmental performance is adversely affected.

Question 26

The human resources systems, which provide information about the recruiting and
training of employees, absenteeism, and accidents.

Question 27

The quality system, which provides information about yields, defective products, and
late deliveries to customers.
The informal management control system includes the shared values, loyalties, and mutual commitments among members of the organization, the company's culture, and the unwritten norms about acceptable behavior for managers and other employees.

Question 28

What is goal congruence?

Question 29

An investment center is always a decentralized subunit.

Question 30

In decentralized organizations, a manager might look to further the success of their subunit to the detriment of other subunits. Such behavior would be from which of the following results of decentralization?

A) duplication of output
B) gains from raid decision making
C) unhealthy competition
D) broadening the reach of top management

Question 31

Surveys indicate that decisions made most frequently at the corporate level are related to sources of supplies and products to manufacture.

Question 32

Which of the following is a drawback of decentralizing a multinational company?

A) It may lead to increased exchange rate risk.
B) It may result in lack of control and results in increasing risk.
C) It creates less responsiveness to the needs of a subunit's customers, suppliers, and employees.
D) It may lead to an increase in bureaucracy.

Question 33

Which of the following is an advantage of decentralization?

A) leads to gains from rapid decision making by subunit managers
B) focuses manager's attention on the organization as a whole
C) does not result in a duplication of activities
D) reduces the cost of gathering information

Question 34

Which of the following statements is true of decentralization?

A) A decentralized 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) Decentralization slows responsiveness to local needs for decision making.
D) A decentralized structure only delegates recurring and structured decisions to lower levels.

Question 35

The labels profit center and cost center are dependent on the degree of centralization or decentralization in a company.

Question 36

Which of the following is an advantage of decentralization?

A) It assists management development and learning.
B) It focuses managers' attention on the organization as a whole.
C) It does not result in a duplication of activities.
D) It encourages suboptimal decision making.

Question 37

Decentralization in multinational companies may lead to lack of control.

Question 38

"Management control systems consist of formal and informal control systems." Briefly explain the formal and informal management systems and enlist their components.

Question 39

Which of the following is a responsibility center to measure the revenues and costs of subunits in centralized or decentralized companies?

A) investment center
B) environmental center
C) exchange policy center
D) taxation rebate center

Question 40

Decisions regarding sources of long-term financing are best made at subunit level as the subunit has local knowledge and can leverage it in negotiations.

Question 41

Which of the following is a benefit of decentralization?

A) It creates greater responsiveness to local needs.
B) It helps in rasing capital at a local level.
C) It relieves top managers of accountability.
D) It sharpens the focus of subunits and broadens the reach of top management

Question 42

For each of the following Balanced Scorecard measures, identify which of the four perspectives (Financial, Customer, Internal Business Process, or Learning and Growth) the measure best represents.
________a.On-time delivery of gasoline from refineries to retail stations
________b.Customer satisfaction
________c.Common stock price
________d.Return on investment
________e.Market share
________f.Number of days lost to accidents
________g.Employee satisfaction
________h.Friendliness of employees
________i.Repeat purchases
________j.Cash flow from operations

Question 43

A transfer-pricing method leads to goal congruence when ________.

A) there is a price difference in different markets due to market inefficiencies
B) managers do no act for their own best interest and work for the long-term best interest of the manager's subunit
C) managers act in their own best interest and the decision is in the long-term best interest of the company
D) there is a low degree of centralization

Question 44

Why is decentralization costly?

Question 45

Which of the following is true of transfer pricing?

A) It creates costs for the selling subunit.
B) It creates revenues for the buying subunit.
C) It helps top managers evaluate the performance of individual subunits.
D) It makes managers' information-processing and decision-making tasks difficult.

Question 46

Which of the following is true of hybrid transfer prices?

A) The cost used in hybrid transfer prices is always the actual cost.
B) The cost used in hybrid transfer prices is always the budgeted cost.
C) They take into account both cost and market information.
D) They are less popular in manufacturing industry.

Question 47

What are transfer prices and what are its criteria?

Question 48

The costs used in cost-based transfer prices ________.

A) are actual costs
B) are budgeted costs
C) can either be actual or budgeted costs
D) are lower than the market-based transfer prices

Question 49

For each of the following activities, characteristics, and applications, identify whether they can be found in a centralized organization, a decentralized organization, or both types of organizations.
________a.Freedom for managers at lower organizational levels to make decisions
________b.Gathering information may be very expensive
________c.Greater responsiveness to user needs
________d.Have few interdependencies among divisions
________e.Maximum constraints and minimum freedom for managers at lowest levels
________f.Maximization of benefits over costs
________g.Minimization of duplicate functions
________h.Minimum of suboptimization
________i.Multiple responsibility centers with various reporting units
________j.Profit centers

Question 50

Transfer-pricing systems enable managers to focus on maximizing the performance of their subunits.

Question 51

A product may be passed from one subunit to another subunit in the same organization. The product is known as a(n) ________.

A) interdepartmental product
B) intermediate product
C) subunit product
D) transfer product

Question 52

Axelia Corporation has two divisions, Refining and Extraction. The company's primary product is Luboil Oil. Each division's costs are provided below:

The Refining Division has been operating at a capacity of 40,900 barrels a day and usually purchases 25,600 barrels of oil from the Extraction Division and 15,400 barrels from other suppliers at $64 per barrel.
Assume 260 barrels are transferred from the Extraction Division to the Refining Division for a transfer price of $26 per barrel. The Refining Division sells the 260 barrels at a price of $220 each to customers. What is the operating income of both divisions together?

A) $13,520
B) $34,060
C) $16,380
D) $50,440

Question 53

Timekeeper Corporation has two divisions, Distribution and Manufacturing. The company's primary product is high-end watches. Each division's costs are provided below:

The Distribution Division has been operating at a capacity of 4,009,000 units a week and usually purchases 2,004,500 units from the Manufacturing Division and 2,004,500 units from other suppliers at $10.00 per unit.
What is the transfer price per watch from the Manufacturing Division to the Distribution Division, assuming the method used to place a value on each watch is 170% of variable costs?

A) $1.87
B) $3.18
C) $3.19
D) $8.13

Question 54

To reduce the excessive focus of subunit managers on their own subunits, many companies compensate subunit managers on the basis of ________.

A) both the operating income earned by their respective subunits and the company as a whole
B) both the investing income earned by their respective subunits and the company as a whole
C) only the investing income earned by their respective subunits
D) both the net income and earned by their respective subunits and the company as a whole

Question 55

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.

Question 56

Negotiated 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

Question 57

Axelia Corporation has two divisions, Refining and Extraction. The company's primary product is Luboil Oil. Each division's costs are provided below:

The Refining Division has been operating at a capacity of 40,200 barrels a day and usually purchases 25,100 barrels of oil from the Extraction Division and 15,600 barrels from other suppliers at $58 per barrel.
What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 180% of variable costs?

A) $25.20
B) $34.20
C) $77.00
D) $138.60

Question 58

The transfer price creates revenues for the selling subunit and costs for the buying subunit affecting each subunit's operating income.

Question 59

Axelia Corporation has two divisions, Refining and Extraction. The company's primary product is Luboil Oil. Each division's costs are provided below:

The Refining Division has been operating at a capacity of 40,300 barrels a day and usually purchases 25,400 barrels of oil from the Extraction Division and 15,100 barrels from other suppliers at $64 per barrel.
What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 120% of full costs?

A) $18.00
B) $21.60
C) $56.00
D) $100.80

Question 60

Which of the following best describes a transfer price?

A) It is the price charged by an organization when it transfer goods to another organization in lieu of services provided by it.
B) It is the price that is to be used while calculating revenue from sales to customers for tax purposes.
C) It is the price that is charged by a department of an organization when it sells its goods to its competitors.
D) It is the price one subunit charges for a product or service supplied to another subunit of the same organization.

Question 61

The product or service transferred between subunits of an organization is called an intermediate product.

Question 62

What is decentralization and what are its benefits?

Question 63

Negotiated transfer prices are often employed when market prices are stable.

Question 64

Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $51. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-110,000 units. The fixed costs for the Polishing Division are assumed to be $20 per pair at 110,000 units.

Assume the transfer price for a pair of shoes is 185% of total costs of the Stitching Division and 40,000 of shoes are produced and transferred to the Polishing Division. The Stitching Division's operating income is ________.

A) $1,632,000
B) $1,120,000
C) $1,400,000
D) $1,320,000

Question 65

Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $52. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-103,000 units. The fixed costs for the Polishing Division are assumed to be $24 per pair at 103,000 units.

What is the transfer price per pair of shoes from the Stitching Division to the Polishing Division if the method used to place a value on each pair of shoes is 175% of variable costs?

A) $36.75
B) $66.50
C) $94.50
D) $7.00

Question 66

Timekeeper Corporation has two divisions, Distribution and Manufacturing. The company's primary product is high-end watches. Each division's costs are provided below:

The Distribution Division has been operating at a capacity of 4,009,000 units a week and usually purchases 2,004,500 units from the Manufacturing Division and 2,004,500 units from other suppliers at $13.00 per unit.
Assume 110,000 units are transferred from the Manufacturing Division to the Distribution Division for a transfer price of $8.00 per unit. The Distribution Division sells the 110,000 units at a price of $18 each to customers. What is the operating income of both divisions together?

A) $347,600
B) $392,150
C) $997,700
D) $634,700

Question 67

Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $42. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-101,000 units. The fixed costs for the Polishing Division are assumed to be $23 per pair at 101,000 units.

If the Polishing Division sells 101,000 pairs of shoes at a price of $180 a pair to customers, what is the operating income of both divisions together?

A) $12,221,000
B) $9,595,000
C) $7,878,000
D) $6,363,000

Question 68

Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $60.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 8000-13,000 units. The fixed costs for the Fabrication Division are assumed to be $11.50 per unit at 13,000 units.

What is the transfer price per compressor from the Compressor Division to the Fabrication Division if the transfer price per compressor is 110% of full costs?

A) $19.80
B) $32.45
C) $47.30
D) $54.45

Question 69

Transfer prices do not affect managers whose compensation is directly dependent on an organization's operating income because transfer prices affect only divisional profits and not the organization's profit.

Question 70

Division A sells ground veal internally to Division B, which in turn, produces veal burgers that sell for $19 per pound. Division A incurs costs of $1.25 per pound while Division B incurs additional costs of $6.50 per pound.
Which of the following formulas correctly reflects the company's operating income per pound?

A) $19 - ($1.25 + $6.50) = $11.25
B) $19 - ($3.25 + $6.50) = $9.25
C) $19 - ($1.25 + $9.75) = $8.00
D) $19 - ($0.75 + $3.25 + $3.25) = $5.50

Question 71

Timekeeper Corporation has two divisions, Distribution and Manufacturing. The company's primary product is high-end watches. Each division's costs are provided below:

The Distribution Division has been operating at a capacity of 4,010,000 units a week and usually purchases 2,005,000 units from the Manufacturing Division and 2,005,000 units from other suppliers at $15.00 per unit.
What is the transfer price per watch from the Manufacturing Division to the Distribution Division, assuming the method used to place a value on each transfer is 125% of full costs?

A) $11.49
B) $14.36
C) $15.00
D) $19.25

Question 72

Division A sells ground veal internally to Division B, which in turn, produces veal burgers that sell for $12 per pound. Division A incurs costs of $5.25 per pound while Division B incurs additional costs of $11.50 per pound.
What is Division A's operating income per burger, assuming the transfer price of the ground veal is set at $7.00 per burger?

A) $1.75
B) $2.25
C) $8.75
D) $4.50

Question 73

Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $42.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 12,000-17,000 units. The fixed costs for the Fabrication Division are assumed to be $8.00 per unit at 17,000 units.

Assume the transfer price for a compressor is 145% of total costs of the Compressor Division and 1500 of the compressors are produced and transferred to the Fabrication Division. The Compressor Division's operating income is ________.

A) $128,325
B) $39,825
C) $42,188
D) $29,400

Question 74

Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $46. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-101,000 units. The fixed costs for the Polishing Division are assumed to be $14 per pair at 101,000 units.

What is the transfer price per pair of shoes from the Stitching Division to the Polishing Division if the transfer price per pair of shoes is 125% of full costs?

A) $15.00
B) $27.50
C) $37.50
D) $45.00

Question 75

Hybrid transfer prices take into account both cost and market information.

Question 76

Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $48. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-101,000 units. The fixed costs for the Polishing Division are assumed to be $17 per pair at 101,000 units.

What is the market-based transfer price per pair of shoes from the Stitching Division to the Polishing Division?

A) $23
B) $36
C) $48
D) $59

Question 77

Hybrid transfer prices can be arrived at through negotiations.

Question 78

Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $56.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 11,000-16,000 units. The fixed costs for the Fabrication Division are assumed to be $8.50 per unit at 16,000 units.

What is the transfer price per compressor from the Compressor Division to the Fabrication Division if the method used to place a value on each compressor is 115% of variable costs?

A) $28.50
B) $41.98
C) $43.00
D) $46.50

Question 79

Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $60.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 13,000-18,000 units. The fixed costs for the Fabrication Division are assumed to be $11.00 per unit at 18,000 units.

If the Fabrication Division sells 1000 air conditioners at a price of $475.00 per washing machine to customers, what is the operating income of both divisions together?

A) $167,500
B) $169,500
C) $151,000
D) $147,000

Question 80

The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions.