Question 1

Basing executive compensation on accounting earnings I. Is a popular practice in the United States
II. Is sharply criticized because of potential negative long-term effects
III. Leads to unbiased accounting practices
A) I and II only
B) I and III only
C) II and III only
D) I, II, and III

Accepted Answer

Basing executive compensation on accounting earnings is popular in the U.S. but criticized for encouraging short-term focus over long-term health, potentially leading to biased accounting practices.

Question 2

Use the following information for the next 3 questions.
Chicago Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for Chicago Divisions operations over the past 2 years follows. 
-What was the Chicago Division residual income for 20x5?
A) $(12,540)
B) $3,300
C) $15,300
D) $19,800

Accepted Answer

Residual income is calculated as the net operating income minus the product of the minimum required rate of return and the average operating assets. The correct choice is based on the given data and calculations.

Question 3

To protect shareholders from excessive compensation practices, executive compensation packages are best set by
A) The board of directors
B) A committee of primarily outside members of the board of directors
C) A committee of top management employees
D) The external auditors

Accepted Answer

A committee of primarily outside members of the board of directors is the best choice to set executive compensation packages. This helps to ensure that there is a level of independence and objectivity in the decision-making process, and that the interests of shareholders are represented. A committee of top management employees may be biased towards setting higher compensation packages, while external auditors are not involved in the day-to-day operations of the company and may not have the necessary information to make informed decisions about compensation.

Question 4

Setting transfer prices can be especially problematic when
A) Managers are evaluated based on non-financial factors
B) Compensation is tied to the financial performance of responsibility centers
C) Centralized decision making is the organizational norm
D) Compensation is tied to the financial performance of the organization as a whole

Accepted Answer

When compensation is tied to the financial performance of responsibility centers, managers may manipulate transfer prices to benefit their own center's performance, leading to conflicts and suboptimal decisions for the organization as a whole.

Question 5

"Reduce costs by 5%" is an example of a(n)
A) Measurement
B) Agency cost
C) Benchmark
D) Reward

Accepted Answer

A benchmark is a standard or point of reference against which things may be compared or assessed, such as a target to reduce costs by a certain percentage.

Question 6

Efficiency measures, such as number of new products developed, may be more useful than financial measures in
A) Profit centers.
B) Discretionary cost centers.
C) Revenue centers.
D) Investment centers.

Accepted Answer

Discretionary cost centers focus on controlling costs rather than generating revenue or profits, so non-financial measures like product development can be more relevant.

Question 7

Use the following information for the next 3 questions.
Chicago Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for Chicago Divisions operations over the past 2 years follows. 
-What was the Chicago Division ROI for 20x5 (rounded to nearest 0.1%)?
A) 11.2%
B) 13.2%
C) 15.5%
D) 16.0%

Accepted Answer

The Chicago Division ROI for 20x5 was 16.0%.

Question 8

A transfer pricing policy based on market price
A) Maximizes total organizational profit.
B) Is best because the market price is always objective and easily obtainable.
C) May result in suboptimal decision making for the company as a whole.
D) Is the only alternative accepted by the Internal Revenue Service.

Accepted Answer

A transfer pricing policy based on market price may lead to suboptimal decision making because it might not reflect the internal cost structures or strategic objectives of the company, potentially leading to decisions that do not maximize overall company profit.

Question 9

Which of the following transfer pricing systems potentially takes the most time to establish?
A) Market-based
B) Dual-rate
C) Negotiated
D) Full-cost

Accepted Answer

The negotiated transfer pricing system potentially takes the most time to establish because it involves discussions and negotiations between the different divisions or subsidiaries within a company to reach an agreement on the transfer price. This process can be time-consuming and may involve multiple rounds of discussions, making it a more complex system compared to the others listed.

Question 10

Managers are held responsible for revenues in I. Revenue centers
II. Profit centers
III. Investment centers
A) I and III only
B) II and III only
C) I only
D) I, II, and III

Accepted Answer

Managers are responsible for revenues in all three types of centers: Revenue centers focus solely on generating revenue, Profit centers are responsible for both revenues and costs, and Investment centers are accountable for revenues, costs, and investments.

Question 11

Use the following information for the next 3 questions.
Chicago Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for Chicago Divisions operations over the past 2 years follows. 
-What was the Chicago Division EVA for 20x5?
A) $3,960
B) $11,960
C) $20,460
D) $27,800

Accepted Answer

The Chicago Division EVA for 20x5 is $11,960. This is calculated by taking the net operating profit after taxes (NOPAT) of $27,800 and subtracting the weighted average cost of capital (WACC) of 15.9% multiplied by the invested capital of $10,840.

Question 12

Which of the following is an advantage of cost-based transfer prices? I. Managers do not have much incentive to reduce fixed costs
II. Managers may be motivated to purchase goods and services from outside the company
III. Contribution margins may be split between buying and selling divisions
A) I only
B) II only
C) III only
D) None of the above (I, II, and III are all disadvantages)

Accepted Answer

The answer of Which of the following is an advantage...

Question 13

Dual-rate transfer pricing systems are appropriate when the
A) Market price is unknown
B) Selling department has excess capacity
C) Market price is higher than the variable cost
D) Market price is higher than the full cost

Accepted Answer

A dual-rate transfer pricing system is appropriate when the selling department has excess capacity, as it allows the buying department to purchase the product at a lower variable cost rate, while still providing the selling department with a contribution towards their full costs at a higher fixed cost rate. This incentivizes the selling department to continue producing, even when they have excess capacity, and benefits the buying department by allowing them to purchase at a lower price.

Question 14

Stock-based compensation has been used to encourage
A) Focus on long-range results
B) Focus on short-term results
C) Higher compensation for executives
D) Lower compensation for executives

Accepted Answer

Stock-based compensation is typically used to incentivize employees to focus on long-range results, as the value of the stock will increase over time if the company performs well. It is not typically used to incentivize short-term results or to provide higher or lower compensation for executives.

Question 15

A corporate accounting department would most often be considered a
A) Cost center, because it is typically a high cost operation
B) Cost center, because its costs can be controlled by upper management
C) Revenue center, if accountants have input in pricing decisions
D) Cost center, because it is a support service

Accepted Answer

A corporate accounting department is typically considered a cost center because it provides essential support services to the organization without directly generating revenue.

Question 16

Compensation contracts that provide incentives for agents to increase organizational value might include I. Cash-based bonuses
II. Stock options
III. Cash bonuses based on stock price increases or targets
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Accepted Answer

All three options can provide incentives for agents to increase organizational value. Cash-based bonuses can be tied to performance metrics, stock options align agents' interests with shareholders, and cash bonuses based on stock price increases directly incentivize agents to enhance stock performance.

Question 17

Which prices are recorded by departments under a dual-rate transfer pricing system?

Accepted Answer

The answer of Which prices are recorded by departments under...

Question 18

Problems with market-based transfer prices include
A) Lack of knowledge about underlying costs
B) Lack of objectivity
C) Their impact on corporate profitability
D) Their lack of reliance on supply-and-demand relationships

Accepted Answer

The answer of Problems with market-based transfer prices include
A) Lack...

Question 19

When a company uses activity-based transfer prices
A) The internal buyer is motivated to overstate the number of units to buy internally
B) The internal buyer is motivated to understate the number of units to buy internally
C) Capacity is usually reserved for products or services that are transferred internally
D) Batch-level costs are excluded from the computation

Accepted Answer

Activity-based transfer pricing encourages efficient use of resources by allocating costs based on actual activities and resource usage, which often includes reserving capacity for products or services transferred internally to ensure that resources are available where they are most needed.

Question 20

The price used to record exchanges of goods and services inside an organization is called a
A) Transfer price
B) Exchange price
C) Full price
D) Suboptimal price

Accepted Answer

A transfer price is the price used to record exchanges of goods and services between different departments or units within an organization. This price is necessary to accurately reflect the true cost of producing goods or providing services within the organization, and to prevent the transfer of goods or services from one unit to another from distorting profits or performance metrics. The other choices (B, C, and D) are not specific to internal transfers within an organization, and are less relevant to the concept of transfer pricing.

Quiz 15: Performance Evaluation and Compensation

Basing executive compensation on accounting earnings I. Is a popular practice in the United States II. Is sharply criticized because of potential negative long-term effects III. Leads to unbiased accounting practices

Use the following information for the next 3 questions. Chicago Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for Chicago Divisions operations over the past 2 years follows. -What was the Chicago Division residual income for 20x5?

To protect shareholders from excessive compensation practices, executive compensation packages are best set by

Setting transfer prices can be especially problematic when

"Reduce costs by 5%" is an example of a(n)

Efficiency measures, such as number of new products developed, may be more useful than financial measures in

A transfer pricing policy based on market price

Which of the following transfer pricing systems potentially takes the most time to establish?

Managers are held responsible for revenues in I. Revenue centers II. Profit centers III. Investment centers

Use the following information for the next 3 questions. Chicago Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for Chicago Divisions operations over the past 2 years follows. -What was the Chicago Division EVA for 20x5?

Which of the following is an advantage of cost-based transfer prices? I. Managers do not have much incentive to reduce fixed costs II. Managers may be motivated to purchase goods and services from outside the company III. Contribution margins may be split between buying and selling divisions

Dual-rate transfer pricing systems are appropriate when the

Stock-based compensation has been used to encourage

A corporate accounting department would most often be considered a

Compensation contracts that provide incentives for agents to increase organizational value might include I. Cash-based bonuses II. Stock options III. Cash bonuses based on stock price increases or targets

Which prices are recorded by departments under a dual-rate transfer pricing system?

Problems with market-based transfer prices include

When a company uses activity-based transfer prices

The price used to record exchanges of goods and services inside an organization is called a