Question 1

Transfer prices can be used to promote goal congruence among operating segments of an organization.

Accepted Answer

Transfer prices are used to incentivize operating segments to act in the best interest of the organization as a whole, instead of prioritizing their own goals. By setting transfer prices at a level that encourages efficient resource allocation and cooperation among segments, goal congruence can be promoted. This ultimately benefits the entire organization.

Question 2

Market based transfer prices are most appropriate for customized high-volume and high-cost services.

Accepted Answer

Market based transfer prices are more appropriate for standardized products where market prices can be easily determined. Customized high-volume and high-cost services require more complex considerations such as the cost of materials, labor, and overhead. Cost-based transfer pricing may be more appropriate in such cases.

Question 3

The most theoretically correct method of allocating service department costs is the algebraic method.

Accepted Answer

The algebraic method is the most theoretically correct as it takes into account the interdepartmental relationships and allows for the most precise allocation of service department costs.

Question 4

One of the main factors to consider when using a cost-based transfer price is whether to use actual or standard costs.

Accepted Answer

The choice between using actual or standard costs is an important factor to consider when using a cost-based transfer price. Actual costs are the actual costs incurred by the supplying division, while standard costs are predetermined costs that are often used for planning and control purposes. The choice between actual or standard costs will affect the transfer price calculation and should be carefully evaluated based on the specific circumstances of the organization.

Question 5

Negotiated transfer prices are most appropriate for low cost and low volume services.

Accepted Answer

Negotiated transfer prices are best suited for high-cost and high-volume services where there is room for negotiation between the buyer and seller. For low-cost and low-volume services, market-based transfer prices or cost-based transfer prices are more appropriate.

Question 6

The most straight-forward method of assigning service department costs to revenue-producing areas is the direct method.

Accepted Answer

The direct method involves allocating service department costs directly to revenue-producing departments based on specific usage or demand for the services provided. It is the most straightforward and simple method of assigning costs.

Question 7

In computing a transfer price,the minimum price should be no lower than the incremental costs associated with the goods plus the opportunity cost of the facilities used.

Accepted Answer

This is correct. A transfer price should at least cover the incremental costs and opportunity cost associated with the goods being transferred.

Question 8

Cost-based transfer prices are most effective for common high-cost and high-volume standardized services.

Accepted Answer

Cost-based transfer prices may not always be most effective for high-cost, high-volume standardized services because they do not necessarily encourage efficiency or cost control, and they may not reflect the market value of the services. Market-based or negotiated transfer prices might better incentivize performance and align with external market conditions.

Question 9

Market based transfer prices are most effective for common high-cost and high-volume standardized services.

Accepted Answer

Market based transfer prices work best for services that are standardized and have high volume and high cost, as they allow for a fair and competitive price to be determined through market forces.

Question 10

When using a market-based transfer price,a decision must be made which market price to use.

Accepted Answer

When using a market-based transfer price, a decision must be made about which market price to use. This decision can be based on factors such as the availability of comparable transactions, the level of competition in the market, and any other relevant information.

Question 11

An administrative department provides services that benefit the entire organization.

Accepted Answer

An administrative department is responsible for various administrative functions, such as human resources, finance, and IT, that benefit the entire organization. These services are essential for the smooth running of the organization and enabling other departments to function effectively.

Question 12

In computing a transfer price,the maximum price should be no higher than the highest market price at which the buying segment can obtain the good or service externally.

Accepted Answer

The maximum transfer price should be no higher than the lowest market price at which the buying segment can obtain the good or service externally, not the highest. This ensures the internal transfer price is competitive with external market options.

Question 13

When using a market-based transfer price,a decision must be made how price disputes will be handled.

Accepted Answer

The answer of When using a market-based transfer price,a decision...

Question 14

The direct method of service department cost allocation allows a partial recognition of reciprocal relationships among service departments before assigning costs to revenue-producing areas.

Accepted Answer

The direct method ignores reciprocal relationships among service departments and allocates costs directly to revenue-producing departments without recognizing any inter-service department exchanges.

Question 15

When using a negotiated transfer price,a decision must be made which market price to use.

Accepted Answer

In a negotiated transfer price arrangement, the price is determined through negotiation between the selling and buying divisions within the same company, rather than using an external market price.

Question 16

In computing a transfer price,the maximum price should be no higher than the lowest market price at which the buying segment can obtain the good or service externally.

Accepted Answer

This statement is true because if the transfer price is set higher than the lowest market price, it would not make sense for the buying segment to purchase the good or service internally and they would seek it externally instead. This can result in lost sales for the company and a loss of efficiency in their internal operations. The transfer price should be set at a level that encourages internal transactions while also being fair to both the buying and selling segments.

Question 17

Cost based transfer prices are most appropriate for low cost and low volume services.

Accepted Answer

Cost based transfer prices are calculated based on the cost of providing a service or producing a product. This method of transfer pricing is most appropriate for low cost and low volume services where there is no external market price to use as a reference. For high volume and high cost services or products, market-based pricing may be more appropriate.

Question 18

Negotiated transfer prices are most appropriate for customized high-volume and high-cost services.

Accepted Answer

Negotiated transfer prices are most suitable for situations where unique, high-cost services are being transferred between divisions within the same company. This is because negotiating a transfer price allows for flexibility in considering the unique costs and benefits of providing the service, particularly when high volumes are involved. For standardized or low-cost services, a cost-based transfer pricing method may be more appropriate.

Question 19

A service department provides services that benefit other internal units of an organization.

Accepted Answer

A service department is typically established within an organization to provide support and services to other internal units. Examples of service departments may include IT departments, HR departments, finance departments, and maintenance departments, among others. These departments exist to help other parts of the organization operate more effectively and efficiently by providing specialized services and expertise.

Question 20

When using a negotiated transfer price,a determination must be made if comparable substitutes are available externally.

Accepted Answer

When using a negotiated transfer price, it is important to determine if comparable substitutes are available externally as this helps in setting a fair and reasonable transfer price.

Quiz 13: Responsibility Accounting, support Department Allocations, and Transfer Pricing