Responsibility Accounting and Performance Measures Paper 12
Kern Manufacturing has several divisions and evaluates performance using segment income. Since sales include transfers to other divisions, Kern has established a price for internal sales as cost plus 10%. Red Division has requested 10,000 units of Green Divisionís product. Green Division is selling its product externally at a 60% markup over cost. The corporate policy will encourage the Green Division to
Answer (D) is correct. External sales are clearly more profitable to the company because of the large markup the Green Division charges outside customers. Thus, the modest profit made on product transferred to the Red Division is acceptable only if no outside (i.e., more profitable) sales are given up.
Happy Time Industries uses segment reporting for all of its decentralized divisions. It has several products that are transferred from one division to other divisions. Happy Time wants to motivate the manager of the selling division to produce efficiently. Assuming the following methods are available, the optimal transfer pricing method should be a
Answer (D) is correct. Requiring the manufacturing division to charge a market-based transfer price forces the division to think competitively and keep costs under control.
Morrisonís Plastics Division, a profit center, sells its products to external customers as well as to other internal profit centers. Which one of the following circumstances would justify the Plastics Division selling a product internally to another profit center at a price that is below the market-based transfer price?
Answer (C) is correct. Sales commissions and collection costs on accounts receivable are inevitable results of selling to outside customers. Without having to factor in these costs, a selling division has the ability to charge a lower price to an internal division.
If a company allocates common costs by weighting the costs of each user as a separate entity, it is using which one of the following cost allocation methods?
Answer (C) is correct. Under the stand-alone method, the common costs are allocated by weighting the costs of each user as a separate entity. The common cost is allocated to each cost object on a proportionate basis.
Advantages of the full-cost method for determining transfer prices include all of the
following except that it
Answer (A) is correct.
The full-cost method does not lead to goal congruence among
departments. The full-cost method does benefit both departments but
does not align their goals. The selling department would have no special
incentive to sell in-house.
An advantage of using a cost-based transfer price is that it
Answer (D) is correct. A cost-based transfer price is easy to implement since the costs are already calculated for in the accounting records. This method would not need negotiations or compromises on what the price should be set at since it is already determined by the full cost of materials, labor, and manufacturing overhead.
Cogwin, Inc., operates under a decentralized structure. Cogwinís Western Division plans to purchase a needed component from the Eastern Division that is operating at capacity. Eastern incurs relevant costs of $4 to manufacture the component and $1 to ship each unit, and it can sell the unit externally at a price of $8 per unit. The Western Division incurs costs of $9 per unit and sells the finished goods for $18 each. According to the general guideline for transfer-pricing situations, the minimum transfer price per unit should be
Answer (D) is correct. Eastern Division is operating at capacity and selling its products at the full market price to outsiders. Eastern Divisionís profitable work should not be abandoned to produce for Western Division. The minimum price that a selling division is willing to accept is the sum of the incremental cost of producing the unit so far plus the opportunity cost of selling the unit internally.
What is the most important purpose of a balanced scorecard?
(b) The requirement is to identify the purpose of a balanced
scorecard. Answer (b) is correct because the balanced
scorecard uses financial and nonfinancial measures to measure
performance. Answer (a) is incorrect because strategic planning
is designed to develop strategy. Answer (c) is incorrect because
developing cause-and-effect linkages is an important part of developing
a balanced scorecard. Answer (d) is incorrect because
setting priorities is a part of strategic planning.
Which of the following is not one of the four perspectives of
the balanced scorecard?
(a) The requirement is to identify the item that is not
one of the four perspectives of the balanced scorecard. Answer
(a) is correct because investment in resources is not a perspective
of the balanced scorecard. The balanced scorecard deals
with performance measurement. Answer (b) is incorrect because
customer perspective is used in the balanced scorecard. Answer
(c) is incorrect because learning and growth perspective is
used in the balanced scorecard. Answer (d) is incorrect because
financial perspective is used in the balanced scorecard.
The balanced scorecard generally uses performance
measures with four different perspectives. Which of the following
performance measures would be part of those used for the
internal business processes perspective?
(a) The requirement is to identify the measure that is
related to internal business processes. Answer (a) is correct because
cycle time is the time it takes to manufacture a product and,
therefore, is an important part of the business processes perspective.
Answers (b) and (c) are incorrect because they are part of
the learning and growth perspective. Answer (d) is incorrect
because it is part of the customer perspective.