Question 1

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

Accepted Answer

Negotiated transfer prices are most appropriate for high cost and high volume services as there is more room for negotiation and potential savings. For low cost and low volume services, using market-based transfer prices may be more appropriate.

Question 2

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

Accepted Answer

Cost based transfer prices are based on the actual cost incurred to provide a service, and are useful for low volume services where costs can be easily tracked and allocated to specific services. For low cost services, cost based transfer prices can help ensure that the service is priced appropriately to cover costs and provide a reasonable profit margin.

Question 3

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 4

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

Accepted Answer

Market based transfer prices are most appropriate for standardized, low-volume, and low-cost services or products, as they are determined by the market supply and demand. For customized high-volume and high-cost services, negotiated transfer prices or cost-based transfer prices are more appropriate.

Question 5

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

Accepted Answer

Transfer prices can be used to align the goals of different operating segments within the organization. By setting transfer prices at a level that encourages cooperation and collaboration between segments, rather than competition, goal congruence can be achieved. This can help to improve overall organizational performance and effectiveness.

Question 6

An administrative department provides services that benefit the entire organization.

Accepted Answer

An administrative department is responsible for providing support services to the entire organization. These services include human resources, finance, IT support, facilities management, and more. The goal is to ensure that the organization runs smoothly and efficiently. Hence, it is true that an administrative department provides services that benefit the entire organization.

Question 7

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

Accepted Answer

Choosing between actual and standard costs is an important decision when using a cost-based transfer price. Actual costs are the true, current costs incurred for producing a product or service, while standard costs are predetermined costs based on past experiences or estimates. The choice depends on factors such as the level of accuracy desired and the stability of the cost structure.

Question 8

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

Accepted Answer

The direct method assigns service department costs directly to the revenue-producing areas based on each area's usage of the services provided by the service departments. This method is simple and straightforward in its approach.

Question 9

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 10

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

The statement is true. A transfer price should not be set higher than the lowest market price that the buying segment can obtain externally, as this would result in the buying segment suffering losses and potentially losing business to external suppliers.

Question 11

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

Accepted Answer

The algebraic method is the most theoretically correct method for allocating service department costs, as it accounts for all interdepartmental interactions and ensures that each department is only charged for the specific services it receives.

Question 12

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 13

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 statement is true. The minimum transfer price should cover the incremental costs of the goods being transferred as well as the opportunity cost of the facilities used, which is the potential profit that could have been earned by using the facilities for other purposes.

Question 14

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

Accepted Answer

A service department is typically responsible for providing support and services to other units within an organization. This may include IT services, HR support, maintenance and repair, and other functions that help other departments operate effectively.

Question 15

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 16

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

Accepted Answer

Negotiated transfer prices allow for individualized agreements to be made between divisions and are most useful when dealing with high-volume and high-cost services that may have unique qualities or specifications. This allows for a more efficient transfer of goods or services while still maintaining a fair price for both parties involved.

Question 17

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...

Question 18

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

Accepted Answer

Market based transfer prices are most effective for common high-cost and high-volume standardized services because they allow for competition among internal departments and encourage cost efficiency.

Question 19

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 on which market price to use, as there may be multiple prices for the same product or service depending on the market it is being sold in.

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 consider if comparable substitutes are available externally to ensure that the price being negotiated is fair and reasonable.

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