Responsibility Accounting and Performance Measures Paper 10
Bonnertís Finance Department has purchased a new color copier system for $10,000 that
will help with required reporting. Bonnertís IT Department was planning to purchase a
similar system for an additional $10,000 but has realized that there are enough system
resources from the Finance Departmentís purchase that both groups can share the new
equipment equally. In order to fairly allocate the common cost of the equipment, the
controller should use the
Answer (B) is correct.
Under the stand-alone method, the common cost is allocated to each cost
object on a proportionate basis. Because each department is going to
share the new equipment equally, each department should be allocated
50% of the cost.
An appropriate transfer price between two divisions of The Stark Company can be determined from the following data:
Market price of subassembly $50
Variable cost of subassembly $20
Excess capacity (in units) 1,000
Number of units needed 900
What is the natural bargaining range for the two divisions?
Answer (A) is correct. An ideal transfer price should permit each division to operate independently and achieve its goals while functioning in the overall best interest of the firm. The production capacity of the selling division is always a consideration in setting transfer price. If Fabricating had no excess capacity, it would charge Assembling the regular market price. However, since Fabricating has excess capacity of 1,000 units, negotiation is possible because any transfer price greater than the variable cost of $20 would absorb some of the fixed costs and result in increased divisional profits. Thus, any price between $20 and $50 is acceptable to Fabricating. Any price under $50 is acceptable to Assembling because that is the price that would be paid to an outside supplier.
A limitation of transfer prices based on actual cost is that they
Answer (B) is correct. The optimal transfer price of a selling division should be set at a point that will have the most desirable economic effect on the firm as a whole while at the same time continuing to motivate the management of every division to perform efficiently. Setting the transfer price based on actual costs rather than standard costs would give the selling division little incentive to control costs.
A proposed transfer price may be based upon the full-cost price. Full-cost price is the price
Answer (C) is correct. Full-cost price is the price usually set by an absorption-costing calculation and includes materials, labor, and a full allocation of manufacturing O/H. This full-cost price may lead to dysfunctional behavior by the supplying and receiving divisions, e.g., purchasing from outside sources at a slightly lower price that is substantially above the variable costs of internal production.
Division Z of a company produces a component that it currently sells to outside customers for $20 per unit. At its current level of production, which is 60% of capacity, Division Zís fixed cost of producing this component is $5 per unit and its variable cost is $12 per unit. Division Y of the same company would like to purchase this component from Division Z for $10. Division Z has enough excess capacity to fill Division Yís requirements. The managers of both divisions are compensated based upon reported profits. Which of the following transfer prices will maximize total company profits and be most equitable to the managers of Division Y and Division Z?
Answer (B) is correct. A unit price of $18 is less than Division Yís cost of purchase from an outside supplier but exceeds Division Zís production cost. Accordingly, both Y and Z benefit.
Division A of a company is currently operating at 50% capacity. It produces a single product and sells all its production to outside customers for $13 per unit. Variable costs are $7 per unit, and fixed costs are $6 per unit at the current production level. Division B, which currently purchases this product from an outside supplier for $12 per unit, would like to purchase the product from Division A. Division A will operate at 80% capacity to meet outside customersí and Division Bís demand. What is the minimum price that Division A should charge Division B for this product?
Answer (A) is correct. From the sellerís perspective, the price should reflect at least its incremental cash outflow (outlay cost) plus the contribution from an outside sale (opportunity cost). Because A has idle capacity, the opportunity cost is $0. Thus, the minimum price Division A should charge Division B is $7.00.
Which of the following is not true about international transfer prices for a multinational firm?
Answer (D) is correct. The calculation of transfer prices in the international arena must be systematic. A scheme for calculating transfer prices for a firm may correctly price the firmís product in Country A but not in Country B. The product may be overpriced in Country B, causing sales to be lower than anticipated; or, the product may be underpriced in Country B, and the authorities may allege that the firm is dumping its product there.
A variable-cost-plus price transfer is
Answer (C) is correct. The variable-cost-plus price is the price set by charging for variable costs plus an additional markup but less than the full (absorption) cost. This permits top management to enter the decision process and dictate that a division transfer at variable cost plus some appropriate amount.
Which one of the following is an incorrect description of transfer pricing?
Answer (C) is correct. Transfer prices are the amounts charged by one segment of an organization for goods and services it provides to another segment of the same organization. They are not for exchanges with external customers.
With respect to a firmís transfer pricing policy, an advantage of using a dual pricing arrangement is that it
Answer (C) is correct. Dual pricing promotes goal congruence because both units involved in the transfer get the price they find most advantageous