Question 1

Transfer pricing exists when one division of a company produces a product that can be used in the production by a different division.

Accepted Answer

Transfer pricing refers to the price at which goods or services are transferred between different divisions or subsidiaries within a company. It is used to determine the cost of goods sold and to allocate profits or losses between different parts of the company. Transfer pricing is often used in multinational corporations to minimize tax liabilities and to take advantage of lower labor costs or other benefits in different countries.

Question 2

Return on investment (ROI) refers to earnings before interest and income taxes.

Accepted Answer

True

Question 3

It is important for the multinational firm to separate the evaluation of a division manager from the division.

Accepted Answer

It is important to separate the evaluation of a division manager from the division because the division's performance may be influenced by external factors or other managers within the division, and it is important to assess the individual manager's performance on their own merits.

Question 4

In centralized organizations, lower-level managers are responsible only for implementing decisions.

Accepted Answer

In centralized organizations, higher-level managers make decisions and lower-level managers implement those decisions.

Question 5

Economic value added (EVA) is after-tax operating income minus the total annual cost of capital.

Accepted Answer

Economic value added (EVA) is a measure of financial performance calculated as after-tax operating income minus the total annual cost of capital. This is done to determine the value a company generates above and beyond the required minimum return on investment.

Question 6

A transfer price is the price charged by one division of a company to another company.

Accepted Answer

A transfer price is the price charged by one division of a company to another division within the same company, not to another company.

Question 7

Responsibility accounting is a system that measures the results of each responsibility center and compares those results with some expected or budgeted outcome.

Accepted Answer

Responsibility accounting is a system that measures the performance of individual managers or departments within an organization and compares their results with some expected or budgeted outcome, in order to hold them accountable for their performance.

Question 8

A responsibility center is a part of a business whose workers are accountable for specified activities.

Accepted Answer

The answer of A responsibility center is a part of...

Question 9

Local managers can make better decisions using distant information and outside managers can provide more timely responses to changing conditions.

Accepted Answer

Local managers are typically more attuned to the nuances of their specific environment, allowing them to provide more timely responses to changing conditions due to their proximity and familiarity. Conversely, outside managers might bring distant information or broader perspectives that can be valuable, but they may lack the immediacy in response that local conditions demand.

Question 10

The transfer pricing problem concerns finding a system that simultaneously satisfies the three objectives of the transfer pricing system.

Accepted Answer

The transfer pricing problem does indeed concern finding a system that satisfies the three objectives of the transfer pricing system simultaneously. These objectives are: (1) ensuring that the overall profits of the organization are maximized, (2) making sure that each division or department is treated fairly and equitably, and (3) complying with tax laws and regulations in different jurisdictions. Finding a transfer pricing system that can balance these objectives can be complex and challenging for multinational companies.

Question 11

Firms encourage goal congruence by constructing management early retirement programs.

Accepted Answer

Goal congruence refers to aligning the objectives of individuals or teams with the overall goals of the organization. Management early retirement programs are typically designed to reduce costs or manage workforce size, rather than to directly encourage goal congruence.

Question 12

Margin is the ratio of operating income to sales.

Accepted Answer

The answer of Margin is the ratio of operating income...

Question 13

The transfer price is revenue to the selling division and cost to the buying division.

Accepted Answer

This is because the selling division records the revenue from the transfer price and the buying division records the cost.

Question 14

The minimum transfer price is the absolute maximum price that can be accepted.

Accepted Answer

The minimum transfer price is the lowest price that can be accepted, not the absolute maximum.

Question 15

Cognitive limitations mean it is difficult for central managers to be fully knowledgeable about all products and markets.

Accepted Answer

Cognitive limitations refer to the finite capacity of human brains to process and store information. Therefore, it is difficult for central managers to have complete knowledge about all products and markets due to these cognitive limitations.

Question 16

In an investment responsibility center, the manager is only responsible for costs.

Accepted Answer

In an investment responsibility center, the manager is responsible for both costs and revenues. They are evaluated based on their ability to generate returns on the investments and manage the associated costs.

Question 17

One disadvantage of ROI in evaluating performance is that it encourages managers to slack off.

Accepted Answer

ROI is a useful metric in measuring the profitability of a company, but it should not be the only metric used to evaluate performance. Additionally, managers who are solely focused on ROI may be more likely to make short-term decisions that improve ROI, but are not necessarily in the best long-term interest of the company. Implementing a well-rounded performance evaluation system that takes into account a variety of metrics can help prevent managers from slacking off or making decisions solely based on ROI.

Question 18

Decentralization is the practice of delegating decision-making authority to the lower levels of management.

Accepted Answer

Decentralization involves giving decision-making power to lower levels of management, rather than keeping it centralized at the top.

Question 19

Goal congruence means that the goals of managers are aligned with the goals of the company.

Accepted Answer

Goal congruence is important for the success of the company as it ensures that the efforts of individual managers and employees are focused towards achieving the objectives of the organization. When the goals of the managers are aligned with those of the company, it leads to higher motivation, increased commitment, and better decision-making.

Question 20

Decentralization stimulates competition among the divisions of a firm.

Accepted Answer

Decentralization allows each division to have more control over their own decision-making and resources, which can lead to increased competition among divisions to perform better and achieve goals.

Quiz 10: Decentralization: Responsibility, Accounting, Performance Evaluation, and Transfer Pricing