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TIPLE CHOICE

Which of the following is more characteristic of a decentralized than a centralized

business structure?

a. The firm's environment is stable.

b. There is little confidence in lower-level management to make decisions.
c. The firm grows very quickly.
d. The firm is relatively small.
Costs of decentralization include all of the following except:
a. More elaborate accounting control systems.
b. Potential costs of poor decisions.
c. Additional training costs.
d. Slow response time to changes in local conditions.
Transfer pricing is primarily incurred in:
a. Foreign corporations exporting their products.
b. Decentralized organizations.
c. Multinational corporations headquartered in the U.S.
d. Closely held corporations.
4. In a decentralized company in which divisions may buy goods from one another, the
transfer pricing system should be designed primarily to:
a. Increase the consolidated value of inventory.
b. Allow division managers to buy from outsiders.
c. Minimize the degree of autonomy of division managers.
d. Aid in the appraisal and motivation of managerial performance.
5. When the majority of authority is maintained by top management personnel, the
organization is said to be:
a. Centralized.

b. Decentralized.
c. Comp0sed of cost centers.
d. Engaged in transfer pricing activities.
6. What term identifies an accounting system in which the operations of the business
are broken down into reportable segments, and the control function of a foreperson,
sales manager, or supervisor is emphasized?
a. Responsibility accounting
b. Operations-research accounting
c. Control accounting
d. Budgetary accounting

7. In a responsibility accounting system, costs are classified into categories on the

basis of:
a. Fixed and variable costs.
b. Prime and overhead costs.
c. Administrative and non-administrative costs.
d. Controllable and noncontrollable costs.

8. When used for performance evaluation, periodic internal reports based on a

responsibility accounting system should not:
TRUE/FALSE
1. Decentralization is a transfer of authority from the bottom to the top of an
organization.

2. Decentralization is a transfer of authority from the top to the bottom of an

organization.

3. Decentralization can result in a lack of goal congruence among departments.

4. Decentralization increases the time required for decision-making.

5. Decentralization can lead to greater job enrichment and satisfaction.

6. Decentralization reduces the need for effective communication among an
organization's departments.

7. Decentralization means that a unit manager has the authority to make all decisions
concerning that specific unit.
8. A responsibility accounting system should include all revenues and costs of a
division.

9. A responsibility accounting system should include the revenues and costs under a
division manager's control.
10. Responsibility reports reflect the flow of information from operational units to top
management.

11. Responsibility reports at lower levels of the organization are less detailed than reports
at the higher levels.

12. A manager of a cost center is evaluated solely on the basis of how well costs are
controlled.

13. When management by exception is employed, favorable variances should not be

investigated.

14. When management by exception is employed, both favorable and unfavorable

variances should be investigated.

15. The manager of a revenue center has the authority to establish selling prices of a
product.

16. Aprofit center is typically an independent organizational unit.

17. The manager of a profit center has the ability to set selling prices.
18. The manager of an investment center is responsible for generating revenue as well as
controlling expenses.

19. Suboptimization occurs when a manager of a cost center focuses on the goals of the
cost center rather than on the goals of the organization as a whole.
20. An administrative department provides services that benefit other internal units of an
organization.

21 An administrative department provides services that benefit the entire organization.

22. A service department provides services that benefit other internal units of an
organization.
23. The most theoretically correct method of allocating service department costs is the
algebraic method.

24. 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.

25. The most straightforward method of assigning service department costs to revenue
producing areas is the direct method.

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

27. 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 externaly.
28. 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.
29. 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.

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

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

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

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

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

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

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

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

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

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

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

41. An advance pricing agreement can eliminate the possibility of double taxation on
multinational exchanges of goods.
MULTIPLE CHOICE

1. Which of the following is more characteristic of a decentralized than a centralized

business structure?
a, The firm's environment is stable.
b. There is little confidence in lower-level management to make decisions.
c. The firm grows very quickly.
d. The firm is relatively small.
2. Costs of decentralization include all of the following except:
a. More elaborate accounting control systems.
b. Potential costs of poor decisions.
c. Additional training costs.
d. Slow response time to changes in local conditions.

3. Transfer pricing is primarily incurred in:

a. Foreign corporations exporting their products.
b. Decentralized organizations.
c. Multinational corporations headquartered in the U.S.
d. Closely held corporations.
4. In a decentralized company in which divisions may buy goods from one another, the
transfer pricing system should be designed primarily to:
a. Increase the consolidated value of inventory.
b. Allow division managers to buy from outsiders.
c. Minimize the degree of autonomy of ivision managers.
d. Aid in the appraisal and motivation of managerial performance.
5. When the majority of authority is maintained by top management personnel, the
organization is said to be:
a. Centralized.
b. Decentralized.

c. Composed of cost centers.

d. Engaged in transfer pricing activities.
6. What term identifies an accounting system in which the operations of the business
are broken down into reportable segments, and the control function of a foreperson,
sales manager, or supervisor is emphasized?
a. Responsibility accounting
b. Operations-research accounting
c. Control accounting
d. Budgetary accounting

7. In a responsibility accounting system, costs are classified into categories on the

basis of:
a. Fixed and variable costs.
b. Prime and overhead costs.
c. Administrative and non-administrative costs.
d. Controllable and noncontrollable costs.
 8. When used for performance evaluation, periodic internal reports based on a
responsibility accounting system should not:
a. Be related to the organization chart.
b. Include allocated fixed overhead.
c. Include variances between actual and budgeted controllable costs.
d. Distinguish between controllable and noncontrollable costs.

9. A. is a document that reflects the revenues and/or costs that are under the
control of a particular manager.
a. Quality audit report
b. Responsibility report
c. Performance evaluation report
d. Project report

10. The cost object under the control of a manager is called a(n) center.

a. Cost
b. Revenue

c. Responsibility
d. Investment
11. In evaluating the performance of a profit center manager, he/she should be evaluated

a. All revenues and costs that can be traced directly to the unit.
b. All revenues and costs under his/her control.
c. The variable costs and the revenues of the unit.
d. The same costs and revenues on which the unit is evaluated.

12. If a division is set up as an autonomous profit center, then goods should not be
transferred:

a. In at a cost-based transfer price.

b. Out at a cost-based transfer price.
c. In or out at cost-based transfer price.
d. To other divisions in the same company.

13. Performance evaluation measures in an organization:

a. Affect the motivation of subunit managers to transact with one another.
b. Always promote goal congruence.
C. Are less motivating to managers than overall organizational goals.
d. Must be the same for all managers to eliminate suboptimization.
14. A management decision may be beneficial for a given profit center, but not for the
entire company. From the overall company viewpoint, this decision would lead to:
a. Goal congruence.
b. Centralization.

c. Suboptimization.
d. Maximization.

15. A major benefit of cost-based transfers is that:

a. It is easy to agree on a definition of cost.
b. Costs can be measured accurately.
c. Opportunity costs can be included.
d. They provide incentives to control costs.

16. An internal reconciliation account is not required for internal transfers based on:
a. Market value.
b. Dual prices.
c. Negotiated prices.
d. Cost.

17. The most valid reason for using something other than a full-cost-based transfer price
between units of a company is because a full-cost price:
a. Is typically more costly to implement.
b. Does not ensure the control of costs of a supplying unit.
c. Is not available unless market-based prices are available.
d. Does not reflect the excess capacity of the supplying unit.
18. To avoid waste and maximize efficiency when transferring products among divisions
in a competitive economy, a large diversified corporation should base transfer prices
on
a. Variable cost.
b. Market price.
c. Full cost.
d. Production cost.

19. Atransfer pricing system is also known as:

a. Investment center accounting.
b. A revenue allocation system.
c. Responsibility accounting.
d. A charge-back system.

20. The maximum of the transfer price negotiation range is:

a. Determined by the buying division.
b. Set by the selling division.
c. Influenced only by internal cost factors.
d. Negotiated by the buying and selling division.

21. The presence of idle capacity in the selling division may increase:
a. The incremental costs of production in the selling division.
b. The market price for the good.
c. The price that a buying division is willing to pay on an internal transfer.
d. A negotiated transfer price.
22. Which of the following is a consistently desirable characteristic in a transfer pricing
system?
a. The system is very complex to be the most fair to the buying and selling units.
b. The effect on subunit performance measures is not easily determined.
c. The system should reflect organizational goals.
d. The transfer price remains constant for a period of at least two years.
23. With two autonomous division managers, the price of goods transferred between the
divisions needs to be approved by:
a. Corporate management.
b. Both divisional managers.

c. Both divisional managers and corporate management.

d. Corporate management and the manager of the buying division.
24. The minimumn potential transfer price is determined by:
a. Incremental costs in the selling division.
b. The lowest outside price for the good.
c. The extent of idle capacity in the buying division.
d. Negotiations between the buying and selling division.
25. As the internal transfer price is increased:
a. Overall corporate profits increase.
b. Profits in the buying division increase.
c. Profits in the selling division increase.

d. Profits in the selling division and the overall corporation increase.

26. In an internal transfer, the selling division records the event by crediting:
a. Accounts receivable and CGS.

b. CGS and finished goods.

c. Finished goods and accounts receivable.
d. Finished goods and intracompany sales.

27. In an internal transfer, the buying division records the transaction by:
a. Debiting accounts receivable.
b. Crediting accounts payable.
c. Debiting intracompany CGS.
d. Crediting inventory.
28. Top management can preserve the autonomy of division managers and encourage an
optimal level of internal transactions by:
a. Selecting performance evaluation measures that are consistent with the
achievement of overall corporate goals.
b. Selecting division managers who are most concerned about their individual
performance.
c. Prescribing transfer prices between segments.
d. Setting up all organizational units as revenue centers.

29. To evaluate the performance of individual departments, interdepartmental transfers

of a product should preferably be made at prices:
a. Equal to the market price of the product.
b. Set by the receiving department.
c. Equal to fully-allocated costs of the producing department.
d. Equal to variable costs to the producing department.

30. Allocating service department costs to revenue-producing departments is an

alternative to:

a. Responsibility accounting.
b. The use of profit centers.
c. The use of cost centers.
d. A transfer pricing system.

31. External factors considered in setting transfer prices in multinational firms typically
do not include:

a. The corporate income tax rates in host countries of foreign subsidiaries.

b. Foreign monetary exchange risks.
c. Environmental policies of the host countries of foreign subsidiaries.
d. Actions of competitors of foreign subsidiaries.
32. Corporate taxes and tariffs are particular transfer-pricing concerns of:
a. Investment centers.

b. Multinational corporations.
c. Division managers.
d. Domestic corporations involved in importing foreign goods.
Computer Solutions Corporation
1. Assume that next month's costs and levels of operations in the Computer and
Computer Chip Divisions are similar to this month. What is the minimum of the
transfer price range for a possible transfer of the super chip from one division to the
other?

a. $50
b. $45
c. $20
d. $35

2. Assume that next month's costs and levels of operations in the Computer and
Computer Chip Divisions are similar to this month. What is the maximum of the
transfer price range for a possible transfer of the chip from one division to the other?
a. $50
b. $45
c. $35
d. $30

3. Two possible transfer prices (for 4,000 units) are under consideration by the two
divisions: $35 and $40. Corporate profits would be if $35 is selected as
the transfer price rather than $40.
a. $20,000 larger
b. $40,000 larger
c. $20,000 smaller
d. The same

4. If a transfer between the two divisions is arranged next period at a price (on 4,000
units of super chips) of $40, total profits in the Computer Chip division will:
a. Rise by $20,000 compared to the prior period.
b. Drop by $40,000 compared to the prior period.
c. Drop by $20,000 compared to the prior period.
d. Rise by $80,000 compared to the prior period.

5. Assume, for this question only, that the Computer Chip Division is selling all that it car
produce to external buyers for $50 per unit. How would overall corporate profits be
affected if it sells 4,000 units to the Computer Division at $45? (Assume that the
Computer Division can purchase the super chip from an outside supplier for $45.)
a. No effect
b. $20,000 increase
c. $20,000 decrease
d. $90,000 increase
Dynamic Engine Corporation
6. What is the maximum of the transfer price range for a transfer between the two
divisions?

a. $106
b. $100
c. $90
d. $70

7. What is the minimum of the transfer price range for a transfer between the two
divisions?

a. $96
b. $90
c. $70
d. $106

8. If the two divisions agree to transact with one another, corporate profits will:
a. Drop by $30,000 per month.
b. Rise by $20,000 per month.
c. Rise by $50,000 per month.
d. Rise or fall by an amount that depends on the level of the transfer price.

Watts Corporation

9. A transfer price based on variable cost will be set at per unit.

a. $0.50
b. $0.80
c. $0.95

d. $0.75

10. A transfer price based on full production cost would be set at per unit.
a. $0.75
b. $2.10
c. $1.45
d. $1.60

11. Atransfer price based on market price would be set at per unit.
a. $2.10
b. $2.50
c. $1.60
d. $2.25

12. If the Plumbing Division is operated as an autonomous investment center and its
capacity is 100,000 fittings per month, the per-unit transfer price is not likely to be
below:

a. $0.75
b. $1.60
c. $2.10
d. $2.50
Diller Corporation
13. Using the direct method, what amount of Administration costs is allocated to A
(round to the nearest dollar)?
a. $216,000
b. $150,000
C. $288,000
d. $54,000

14. Using the direct method, what amount of Personnel costs is allocated to B (round to
the nearest dollar)?
a. $50,000
b. $43,750
c. $26,923
d. $58,333

15. Using the step method, what amount of Administration costs is allocated to C (round
to the nearest dollar)?
a. $576,000
b. $54,000
c. $108,000
d. $150,000

PROBLEM-SOLVING QUESTIONS
Ecological Products Corporation
16. What is the maximum price per unit that Electric Division would be willing to pay the
Ball Bearing Division for the "S bearing?
17. What is the minimum price that Ball Bearing Division would consider to produce the
"S bearing?
18. 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?
19. What factors besides price would Electric Division want to consider in deciding where
it will purchase the bearing?
Sulphur Steel Corporation
20. If 2,000 bales are transferred in one month to the Consumer Products Division at $10
per bale, what would be the profit/loss of the Wire Products Division?
21. For the Wire Products Division to operate at break-even level, what would it need to
charge for the production and transfer of 2,000 bales to the Consumer Products
Division? Assume all variable costs indicated will be incurred by the Wire Products
Division.

22. If Wire Products Division transferred 2,000 wire bales to the Consumer Products
Division at 200 percent of full absorption cost, what would be the transfer price?
23. If the Consumer Products Division agrees to pay the Wire Products Division $16 for
2,000 bales this month, what would be Consumer's change in total profits?
24. Assuming, for this question only, that the Wire Products Division would not incur any
variable G&A costs on internal sales, what is the minimum price that it would consider
accepting for sales of bales to the Consumer Products Division?

Floor Products Corporation

25. If the autonomous Housing and Carpet Divisions enter negotiations on the internal
transfer of 40,000 square yards of carpeting, what is the maximum price that will be
considered?

26. If the autonomous Housing and Carpet Divisions enter negotiations on the internal
transfer of 40,000 square yards of carpeting, what is the Carpet Division's minimum
price?
27. If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square
yards of carpet at a price of $4.50 per square yard, how will the profits of the Housing
Division be affected?

28. If the Housing and Carpet Divisions agree on the internal transfer of 40,000 square
yards of carpet at a price of $4.00 per square yard, how will overall corporate profits
be affected?

29. Assume, for this question only, that the Carpet Division is producing and selling
500,000 square yards of carpet to external buyers at a price of $5 per square yard.
What would be the effect on overall corporate profits if Carpet Division reduces
external sales of carpet by 40,000 square yards and transfers the 40,000 square yards
of carpet to the Housing Division?