Question 1

Ecology Solutions Corporation
The Green Division of Ecology Solutions Co.has developed a wind generator that requires a special "S" ball bearing.The Ball Bearing Division of Ecology Solutions Co.has the capability to produce such a ball bearing.
Unfortunately,the Ball Bearing Division is operating at capacity and will need to reduce production of another existing product,the "T" bearing,by 1,000 units per month to provide the 600 "S" bearings needed each month by the Green Division.The "T" bearing currently sells for $50 per unit.Variable costs incurred to produce the "T" bearing are $30 per unit;variable costs to produce the new "S" bearing would be $60 per unit.
The Green Division has found an external supplier that would furnish the needed "S" bearings at $100 per unit.Assume that both the Green Division and Ball Bearing Division are independent,autonomous investment centers.
Refer to Ecology Solutions Co.What is the maximum price per unit that Green Division would be willing to pay the Ball Bearing Division for the "S" bearing?

Accepted Answer

The answer of Ecology Solutions Corporation
The Green Division of Ecology...

Question 2

What are four criteria that a valid base for allocating costs should consider?

Accepted Answer

The answer of What are four criteria that a valid...

Question 3

Ecology Solutions Corporation
The Green Division of Ecology Solutions Co.has developed a wind generator that requires a special "S" ball bearing.The Ball Bearing Division of Ecology Solutions Co.has the capability to produce such a ball bearing.
Unfortunately,the Ball Bearing Division is operating at capacity and will need to reduce production of another existing product,the "T" bearing,by 1,000 units per month to provide the 600 "S" bearings needed each month by the Green Division.The "T" bearing currently sells for $50 per unit.Variable costs incurred to produce the "T" bearing are $30 per unit;variable costs to produce the new "S" bearing would be $60 per unit.
The Green Division has found an external supplier that would furnish the needed "S" bearings at $100 per unit.Assume that both the Green Division and Ball Bearing Division are independent,autonomous investment centers.
Refer to Ecology Solutions Co.What is the minimum price that Ball Bearing Division would consider to produce the "S" bearing?

Accepted Answer

The answer of Ecology Solutions Corporation
The Green Division of Ecology...

Question 4

Lincoln Corporation
Lincoln Corporation distributes its service department overhead costs directly to producing departments without allocation to the other service departments.Information for January is presented here.
                                                    $\text {\underline{ Mantenance} }$ $\text {\underline{ Utilities} }$
$\begin{array}{lll}
\text { Overhead costsincurred } & \$ 18,700 & \$ 9,000 \
\text { Service provided to: } & \
\text { Maintenance Dept. }  && 10 \% \
\text { Utilities Dept. } & 20 \% &\
\text { Producing Dept. A } & 40 \% &30 \%\
\text { Producing Dept. B } & 40 \% & 60 \%
\end{array}$

Refer to Lincoln Corporation.Using the step method,how much of Lincoln Corporation's Utilities Department cost is allocated between Departments A and B?

Accepted Answer

First, allocate the Maintenance Department costs, including its own costs plus the Utilities Department's share. Then, allocate the Utilities Department costs, including the adjusted total after receiving Maintenance's allocation. Maintenance's overhead is $18,700. Utilities Department receives 20% of this, which is $3,740. Thus, the total Utilities cost before allocation is $9,000 + $3,740 = $12,740. This entire amount is then allocated to Departments A and B based on their respective percentages (30% and 60%), but the question asks for the total amount allocated from Utilities, not the breakdown, so the correct answer is $12,740.

Question 5

Why is "standard cost" a better measure for a transfer price than "actual cost"?

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Question 6

Describe the lowest internal transfer price that an autonomous division manager of an investment center would consider accepting for a product that his/her division produces.

Accepted Answer

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Question 7

Can the performance evaluation measures (for autonomous subunit managers)create goal congruence problems in transfer pricing situations? Explain.

Accepted Answer

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Question 8

Ecology Solutions Corporation
The Green Division of Ecology Solutions Co.has developed a wind generator that requires a special "S" ball bearing.The Ball Bearing Division of Ecology Solutions Co.has the capability to produce such a ball bearing.
Unfortunately,the Ball Bearing Division is operating at capacity and will need to reduce production of another existing product,the "T" bearing,by 1,000 units per month to provide the 600 "S" bearings needed each month by the Green Division.The "T" bearing currently sells for $50 per unit.Variable costs incurred to produce the "T" bearing are $30 per unit;variable costs to produce the new "S" bearing would be $60 per unit.
The Green Division has found an external supplier that would furnish the needed "S" bearings at $100 per unit.Assume that both the Green Division and Ball Bearing Division are independent,autonomous investment centers.
Refer to Ecology Solutions Co.What factors besides price would Green Division want to consider in deciding where it will purchase the bearing?

Accepted Answer

The answer of Ecology Solutions Corporation
The Green Division of Ecology...

Question 9

What are the two general rules that should be followed when computing a transfer price?

Accepted Answer

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Question 10

Corporate taxes and tariffs are particular transfer-pricing concerns of

Accepted Answer

Multinational corporations have to deal with the complexities of transfer pricing when it comes to corporate taxes and tariffs. They need to ensure that they are not overpaying or underpaying taxes and tariffs in each country where they operate or conduct business. Hence, transfer pricing is a significant concern for multinational corporations. Option A is incorrect because investment centers are internal divisions of an organization that make investments and generate profits, and transfer pricing may not be a significant concern for them. Option C is incorrect because division managers are responsible for managing a particular division of a company and may not necessarily deal with transfer pricing issues. Option D is incorrect because transfer pricing is not a significant concern for domestic corporations unless they import foreign goods and have to deal with customs duties and tariffs.

Question 11

Why don't upper-level managers simply dictate transfer prices to divisional managers,and thereby avoid all the hassles and expense of the negotiations between them (divisional managers)?

Accepted Answer

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Question 12

What are the advantages and disadvantages of decentralization within an organization?

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Question 13

Lincoln Corporation
Lincoln Corporation distributes its service department overhead costs directly to producing departments without allocation to the other service departments.Information for January is presented here.
                                                    $\text {\underline{ Mantenance} }$ $\text {\underline{ Utilities} }$
$\begin{array}{lll}
\text { Overhead costsincurred } & \$ 18,700 & \$ 9,000 \
\text { Service provided to: } & \
\text { Maintenance Dept. }  && 10 \% \
\text { Utilities Dept. } & 20 \% &\
\text { Producing Dept. A } & 40 \% &30 \%\
\text { Producing Dept. B } & 40 \% & 60 \%
\end{array}$

Refer to Lincoln Corporation.Assume that Lincoln Corporation distributes service department overhead costs based on the algebraic method.What would be the formula to determine the total maintenance costs?

Accepted Answer

Based on the algebraic method, the formula to determine the total maintenance costs would be:
M = Maintenance Department Costs Incurred + (Percentage of Maintenance Service Provided to Utilities Department × Utilities Department Costs Incurred) 
= $18,700 + (.10 × $9,000) 
= $18,700 + $900 
= $19,600 
Therefore, the correct choice is A, as it represents the formula for total maintenance costs incurred.

Question 14

Smith Corporation
Smith Corporation has two service departments: Data Processing and Personnel.Data Processing provides more service than does Personnel.Smith Corporation also has two production departments: A and B.Data Processing costs are allocated on the basis of assets used while Personnel costs are allocated based on the number of employees.
$\begin{array}{lccc}
\underline{\text { Department }}& \underline{\text { Direct costs }}&\underline{\text { Employeess }}&\underline{ \text { Assetsussec}}\
{\text { Data Processing }}& \$ 1,000,000 & 15 & {\$ 700,000} \
\text { Personnel } &300,000 & 8& 230,000 \
\text { A } &500,000 & 12 & 125,000 \
\text { B } &3300,000 & 20& 220,000
\end{array}$

Refer to Smith Corporation.Using the direct method,what amount of Personnel costs is allocated to B (round to the nearest dollar)?

Accepted Answer

Under the direct method, Personnel costs are allocated based on the number of employees. Since department B has 20 employees and the total number of employees in both departments A and B is 32 (12 + 20), the proportion of Personnel costs allocated to B is 20/32, or 0.625. 
Therefore, the amount of Personnel costs allocated to department B is:
0.625 x $300,000 = $187,500
Thus, the correct option is D.

Question 15

What are the four types of responsibility centers? What is the focus of each of these responsibility centers?

Accepted Answer

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Question 16

Ecology Solutions Corporation
The Green Division of Ecology Solutions Co.has developed a wind generator that requires a special "S" ball bearing.The Ball Bearing Division of Ecology Solutions Co.has the capability to produce such a ball bearing.
Unfortunately,the Ball Bearing Division is operating at capacity and will need to reduce production of another existing product,the "T" bearing,by 1,000 units per month to provide the 600 "S" bearings needed each month by the Green Division.The "T" bearing currently sells for $50 per unit.Variable costs incurred to produce the "T" bearing are $30 per unit;variable costs to produce the new "S" bearing would be $60 per unit.
The Green Division has found an external supplier that would furnish the needed "S" bearings at $100 per unit.Assume that both the Green Division and Ball Bearing Division are independent,autonomous investment centers.
Refer to Ecology Solutions Co.What is the minimum price that Ball Bearing Division would consider to produce the "S" bearing if the Ball Bearing Division did not need to forfeit any of its existing sales to produce the "S" bearing?

Accepted Answer

The answer of Ecology Solutions Corporation
The Green Division of Ecology...

Question 17

What are four common methods used to allocate service department costs?

Accepted Answer

The answer of What are four common methods used to...

Question 18

Smith Corporation
Smith Corporation has two service departments: Data Processing and Personnel.Data Processing provides more service than does Personnel.Smith Corporation also has two production departments: A and B.Data Processing costs are allocated on the basis of assets used while Personnel costs are allocated based on the number of employees.
$\begin{array}{lccc}
\underline{\text { Department }}& \underline{\text { Direct costs }}&\underline{\text { Employeess }}&\underline{ \text { Assetsussec}}\
{\text { Data Processing }}& \$ 1,000,000 & 15 & {\$ 700,000} \
\text { Personnel } &300,000 & 8& 230,000 \
\text { A } &500,000 & 12 & 125,000 \
\text { B } &3300,000 & 20& 220,000
\end{array}$

Refer to Smith Corporation.Using the direct method,what amount of Data Processing costs is allocated to A (round to the nearest dollar)?

Accepted Answer

Data Processing costs are allocated on the basis of assets used. Department A has assets of $125,000, which is 125,000/700,000 = 17.86% of the total assets. Therefore, Department A is allocated 17.86% of the Data Processing costs, which is $1,000,000 * 0.1786 = $362,319.

Question 19

What are the advantages and disadvantages of market value as a transfer price?

Accepted Answer

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Question 20

Lincoln Corporation
Lincoln Corporation distributes its service department overhead costs directly to producing departments without allocation to the other service departments.Information for January is presented here.
                                                    $\text {\underline{ Mantenance} }$ $\text {\underline{ Utilities} }$
$\begin{array}{lll}
\text { Overhead costsincurred } & \$ 18,700 & \$ 9,000 \
\text { Service provided to: } & \
\text { Maintenance Dept. }  && 10 \% \
\text { Utilities Dept. } & 20 \% &\
\text { Producing Dept. A } & 40 \% &30 \%\
\text { Producing Dept. B } & 40 \% & 60 \%
\end{array}$

Refer to Lincoln Corporation.The amount of Utilities Department costs distributed to Dept.B for January should be (rounded to the nearest dollar)

Accepted Answer

60% of the Utilities Department's overhead costs ($9,000) is allocated to Producing Dept. B, which equals $5,400.

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

What are four criteria that a valid base for allocating costs should consider?

Why is "standard cost" a better measure for a transfer price than "actual cost"?

Describe the lowest internal transfer price that an autonomous division manager of an investment center would consider accepting for a product that his/her division produces.

Can the performance evaluation measures (for autonomous subunit managers)create goal congruence problems in transfer pricing situations? Explain.

What are the two general rules that should be followed when computing a transfer price?

Corporate taxes and tariffs are particular transfer-pricing concerns of

Why don't upper-level managers simply dictate transfer prices to divisional managers,and thereby avoid all the hassles and expense of the negotiations between them (divisional managers)?

What are the advantages and disadvantages of decentralization within an organization?

What are the four types of responsibility centers? What is the focus of each of these responsibility centers?

What are four common methods used to allocate service department costs?

What are the advantages and disadvantages of market value as a transfer price?