Exercise # 1

RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING

IN DECENTRALIZED ORGANIZATIONS

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 domiciled 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. 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 nonadministrative 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.

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 Responsibility Accounting and Transfer Pricing in Decentralized Organizations
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 on

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
Responsibility Accounting and Transfer Pricing in Decentralized Organizations

a. variable cost.
b. market price.
c. full cost.
d. production cost.

19. A transfer 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. system is very complex to be the most fair to the buying and selling units
b. effect on subunit performance measures is not easily determined
c. system should reflect organizational goals
d. 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 minimum 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.
 Responsibility Accounting and Transfer Pricing in Decentralized Organizations
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.

33. When managers attempt to cause actual results to conform to planned results, this is known as

a. efficiency.
b. effectiveness.
c. conformity.
d. goal congruence.

34. Which of the following would not be considered a critical success factor?

a. quality
b. cost control
c. customer service
d. all of the above are critical success factors

35. The costs of service departments can be assigned to other divisions through the use of

a. cost centers.
b. transfer prices.
c. goal congruence.
d. operational auditing techniques.

Use the following information for questions 36–40.

Office Products Inc. manufactures and sells various high-tech office automation products. Two divisions of Office
Products Inc. are the Computer Chip Division and the Computer Division. The Computer Chip Division manufactures one
product, a “super chip,” that can be used by both the Computer Division and other external customers. The following
information is available on this month’s operations in the Computer Chip Division:
Responsibility Accounting and Transfer Pricing in Decentralized Organizations

Selling price per chip $50

Variable costs per chip $20
Fixed production costs $60,000
Fixed SG&A costs $90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently the Computer Division purchases no chips from the Computer Chips Division, but instead pays $45 to an
external supplier for the 4,000 chips it needs each month.

36. 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

37. 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

38. 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

39. 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.

40. Assume, for this question only, that the Computer Chip Division is selling all that it can 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

Use the following information for questions 41–43.

The Motor Division of Super Truck Co. uses 5,000 carburetors per month in its production of automotive engines. It
presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100. The Carburetor
Division of Super Truck Co. manufactures the exact type of carburetor that the Motor Division requires. The Carburetor
Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car
manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:
 Responsibility Accounting and Transfer Pricing in Decentralized Organizations
Variable production costs $70
Variable selling costs 10
All fixed costs 10

Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally.

41. What is the maximum of the transfer price range for a transfer between the two divisions?

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

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

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

43. 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.

Use the following information for questions 44–47.

Bigole Corp. produces various products used in the construction industry. The Plumbing Division produces and sells
100,000 copper fittings each month. Relevant information for last month follows:

Total sales (all external) $250,000

Expenses (all on a unit base):
Variable manufacturing $0.50
Fixed manufacturing .25
Variable selling .30
Fixed selling .40
Variable G&A .15
Fixed G&A .50
Total $2.10

Top-level managers are trying to determine how a transfer price can be set on a transfer of 10,000 of the copper fittings
from the Plumbing Division to the Bathroom Products Division.

44. 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

45. 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

46. A transfer price based on market price would be set at ___________ per unit.

a. $2.10
b. $2.50
c. $1.60
d. $2.25

47. 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
Responsibility Accounting and Transfer Pricing in Decentralized Organizations

a. $0.75.
b. $1.60.
c. $2.10.
d. $2.50.

48. A company has two divisions, A and B, each operated as a profit center. A charges B $35 per unit for each unit
transferred to B. Other data follow:

A’s variable cost per unit $30

A’s fixed costs $10,000
A’s annual sales to B 5,000 units
A’s annual sales to outsiders 50,000 units

A is planning to raise its transfer price to $50 per unit. Division B can purchase units at $40 each from outsiders,
but doing so would idle A’s facilities now committed to producing units for B. Division A cannot increase its sales
to outsiders. From the perspective of the company as a whole, from whom should Division B acquire the units,
assuming B’s market is unaffected?

a. outside vendors
b. Division A, but only at the variable cost per unit
c. Division A, but only until fixed costs are covered, then should purchase from outside vendors
d. Division A, in spite of the increased transfer price

49. A service department includes which of the following?

Payroll Production
a. yes no
b. yes yes
c. no yes
d. no no

50. Indirect costs should be allocated for all of the following reasons except to

a. motivate managers.
b. determine the full cost of a product.
c. motivate general administration.
d. compare alternatives for decision making.

51. A service department provides specific functional tasks for other internal units. Which of the following activities
would not be engaged in by a service department?

a. purchasing
b. warehousing
c. distributing
d. manufacturing

52. All of the following objectives are reasons to allocate service department costs to compute full cost except to

a. provide information on cost recovery.

b. abide by regulations that may require full costing in some instances.
c. provide information on controllable costs.
d. reflect production’s “fair share” of costs.

53. All of the following objectives are reasons that service department allocations can motivate managers except to

a. instill a consideration of support costs in production managers.

b. encourage production managers to help service departments control costs.
c. encourage the usage of certain services.
d. determine divisional profitability.

54. Which of the following is a reason for allocating service department costs and thereby motivating management?

a. provides for cost recovery

b. provides relevant information in determining corporate wide profits generated by alternative actions
c. meets regulations in some pricing instances
d. reflects usage of services on a fair and equitable basis
 Responsibility Accounting and Transfer Pricing in Decentralized Organizations

55. Service departments provide functional tasks for which of the following?

Internal units External units

a. no no
b. yes no
c. no yes
d. yes yes

56. After service department costs have been allocated, what is the final step in determining full product cost?

a. determine direct material cost

b. determine overhead application rates for revenue-producing areas
c. determine direct labor cost
d. determine total service department costs

57. Which of the following is not an objective for computing full cost?

a. to reflect production’s “fair share” of costs

b. to instill a consideration of support costs
c. to reflect usage of services on a fair and equitable basis
d. to provide for cost recovery

58. A rational and systematic allocation base for service department costs should reflect the cost accountant’s
consideration of all of the following except

a. the ability of revenue-producing departments to bear the allocated costs.

b. the benefits received by the revenue-producing department from the service department.
c. a causal relationship between factors in the revenue-producing department and costs incurred in the
service department.
d. all of the above are considerations.

59. Which of the following is not a method for allocating service department costs?

a. step method
b. indirect method
c. direct method
d. algebraic method

60. Which service department cost allocation method assigns costs directly to revenue-producing areas with no other
intermediate cost pools or allocations?

a. step method
b. indirect method
c. algebraic method
d. direct method

61. The overhead allocation method that allocates service department costs without consideration of services
rendered to other service departments is the

a. step method.
b. direct method.
c. reciprocal method.
d. none of the above.

62. Which service department cost allocation method assigns indirect costs to cost objects after considering some of
the interrelationships of the cost objects?

a. step method
b. indirect method
c. algebraic method
d. direct method

63. Which service department cost allocation method utilizes a “benefits-provided” ranking?

a. algebraic method
Responsibility Accounting and Transfer Pricing in Decentralized Organizations

b. indirect method
c. step method
d. direct method

64. Which service department cost allocation method assigns indirect costs to cost objects after considering
interrelationships of the cost objects?

Algebraic method Step method

a. no no
b. no yes
c. yes yes
d. yes no

65. Which of the following methods of assigning indirect service department costs recognizes on a partial basis the
reciprocal relationships among the departments?

a. step method
b. direct method
c. indirect method
d. algebraic method

66. The most accurate method for allocating service department costs is the

a. step method.
b. direct method.
c. algebraic method.
d. none of the above.

67. The criteria that are most often used to decide on allocation bases are?

Benefits received Fairness Causal relationships

a. yes yes no
b. yes yes yes
c. no yes yes
d. no no no

68. To identify costs that relate to a specific product, an allocation base should be chosen that

a. does not have a cause-and-effect relationship.

b. has a cause-and-effect relationship.
c. considers variable costs but not fixed costs.
d. considers direct material and direct labor but not manufacturing overhead.

69. The fixed costs of service departments should be allocated to production departments based on

a. actual short-run utilization based on predetermined rates.

b. actual short-run units based on actual rates.
c. the service department’s expected costs based on expected long-run use of capacity.
d. the service department’s actual costs based on actual utilization of services.

70. Which service department cost allocation method provides for reciprocal allocation of service costs among the
service department as well as to the revenue producing departments?

a. algebraic method
b. indirect method
c. step method
d. direct method

71. The algebraic method

a. considers all interrelationships of the departments and reflects these relationships in equations.
b. does not consider interrelationships of the departments nor reflect these relationships in equations.
c. is also referred to as the “benefits-provided” ranking method.
d. is not a service department cost allocation method.
 Responsibility Accounting and Transfer Pricing in Decentralized Organizations
72. Which service department cost allocation method considers all interrelationships of the departments and reflects
these relationships in equations?

a. step method
b. indirect method
c. algebraic method
d. direct method

73. An automotive company has three divisions. One division manufactures new replacements parts for
automobiles, another rebuilds engines, and the third does repair and overhaul work on a line of trucks. All three
divisions use the services of a central payroll department. The best method of allocating the cost of the payroll
department to the various operating divisions is

a. total labor hours incurred in the divisions.

b. value of production in the divisions.
c. direct labor costs incurred in the divisions.
d. machine hours used in the divisions.

74. The allocation of general overhead control costs to operating departments can be least justified in determining

a. income of a product or functional unit.

b. costs for making management’s decisions.
c. costs of products sold.
d. costs for government’s “cost-plus” contracts.

Use the following information for questions 75–84.

Gates Co. has three production departments A, B, and C. Gates also has two service departments, Administration and
Personnel. Administration costs are allocated based on value of assets employed, and Personnel costs are allocated
based on number of employees. Assume that Administration provides more service to the other departments than does
the Personnel Department.

Dept. Direct Costs Employees Asset Value

Admin. $900,000 25 $450,000
Personnel 350,000 10 600,000
A 700,000 15 300,000
B 200,000 5 150,000
C 250,000 10 800,000

75. 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

76. 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

77. Using the direct 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

78. Using the step method, what amount of Administration costs is allocated to Personnel (round to the nearest
dollar)?

a. $72,973
b. $291,892
Responsibility Accounting and Transfer Pricing in Decentralized Organizations

c. $145,946
d. $389,189

79. Using the step method, what amount of Administration costs is allocated to A (round to the nearest dollar)?

a. $72,973
b. $291,892
c. $145,946
d. $389,189

80. Using the step method, what amount of Administration costs is allocated to B (round to the nearest dollar)?

a. $72,973
b. $291,892
c. $145,946
d. $389,189

81. Using the step method, what amount of Administration costs is allocated to C (round to the nearest dollar)?

a. $389,189
b. $145,946
c. $291,892
d. $72,973

82. Assume that Administration costs have been allocated and the balance in Personnel is $860,000. What amount is
allocated to A (round to the nearest dollar)?

a. $213,964
b. $106,982
c. $430,000
d. $0

83. Assume that Administration costs have been allocated and the balance in Personnel is $860,000. What amount is
allocated to B (round to the nearest dollar)?

a. $213,964
b. $430,000
c. $106,982
d. $143,333

84. Assume that Administration costs have been allocated and the balance in Personnel is $860,000. What amount
is allocated to C (round to the nearest dollar)?

a. $213,964
b. $430,000
c. $286,667
d. $143,333

Use the following information for questions 85–90.

Brooks Co. has two service departments: Data Processing and Administration/Personnel. The company also has three
divisions: X, Y, and Z. Data Processing costs are allocated based on hours of use and Administration/Personnel costs are
allocated based on number of employees.

Direct costs Employees Hours of use

Admin/Per. $400,000 10 3,300
Data Pro. 850,000 5 1,100
X 450,000 30 1,800
Y 300,000 15 2,200
Z 550,000 25 4,500

Assume that Data Processing provides more service than Administration/Personnel.

85. Using the direct method, what amount of Data Processing costs is allocated to X (round to the nearest dollar)?

a. $180,000
b. $129,661
 Responsibility Accounting and Transfer Pricing in Decentralized Organizations
c. $0
d. $84,706

86. Using the direct method, what amount of Data Processing costs is allocated to Y (round to the nearest dollar)?

a. $158,475
b. $0
c. $220,000
d. $103,529

87. Using the direct method, what amount of Data Processing costs is allocated to Z (round to the nearest dollar)?

a. $211,765
b. $0
c. $152,542
d. $450,000

88. Assume that Data Processing costs have been allocated and the balance in Administration is $600,000. Using
the step method, what amount is allocated to X?

a. $257,143
b. $112,500
c. $200,000
d. $187,500

89. Assume that Data Processing costs have been allocated and the balance in Administration is $600,000. Using
the step method, what amount is allocated to Y?

a. $225,000
b. $128,571
c. $187,500
d. $200,000

90. Assume that Data Processing costs have been allocated and the balance in Administration is $600,000. Using
the step method, what amount is allocated to Z?

a. $200,000
b. $112,500
c. $214,286
d. $225,000

Use the following information for questions 91 and 92.

Blake Company has two service departments: Data Processing and Personnel. Data Processing provides more service
than does Personnel. Blake 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.

Direct costs Employees Assets used

Data Pro. $1,000,000 15 $700,000
Pers. 300,000 8 230,000
A 500,000 12 125,000
B 330,000 20 220,000

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

a. $362,319
b. $637,681
c. $253,623
d. $446,377

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

a. $123,750
b. $206,250
c. $112,500
d. $187,500
Responsibility Accounting and Transfer Pricing in Decentralized Organizations

Use the following information for questions 93–96.

Hartwell Company distributes its service department overhead costs directly to producing departments without allocation
to the other service departments. Information for January is presented here.

Maintenance Utilities
Overhead costs incurred $18,700 $9,000
Service provided to:
Maintenance Dept. 10%
Utilities Dept. 20%
Producing Dept. A 40% 30%
Producing Dept. B 40% 60%

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

a. $3,600.
b. $4,500.
c. $5,400.
d. $6,000.

94. Assume instead Hartwell Company distributes the service department’s overhead costs based on the step
method. Maintenance provides more service than does Utilities. Which of the following is true?

a. Allocate maintenance expense to Departments A and B.

b. Allocate maintenance expense to Departments A and B and the Utilities Department.
c. Allocate utilities expense to the Maintenance Department and Departments A
and B.
d. None of the above.

95. Using the step method, how much of Hartwell’s Utilities Department cost is allocated between Departments A
and B?

a. $9,900
b. $10,800
c. $12,740
d. $27,700

96. Assume that Hartwell Company distributes service department overhead costs based on the algebraic method.
What would be the formula to determine the total maintenance costs?

a. M = $18,700 + .10U
b. M = $9,000 + .20U
c. M = $18,700 + .30U + .40A + .40B
d. M = $27,700 + .40A + .40B