15 Responsibility Accounting and
15 Responsibility Accounting and
892-9793/95
1
c. opportunity costs can be included. a. corporate management.
d. they provide incentives to control costs. b. both divisional managers.
13. An internal reconciliation account is not required c. both divisional managers and corporate
for internal transfers based on management.
a. market value. d. corporate management and the manager of
b. dual prices. the buying division.
c. negotiated prices. 21. The minimum potential transfer price is
d. cost. determined by
14. The most valid reason for using something other a. incremental costs in the selling division.
than a full-cost-based transfer price between b. the lowest outside price for the good.
units of a company is because a full-cost price c. the extent of idle capacity in the buying
a. is typically more costly to implement. division.
b. does not ensure the control of costs of a d. negotiations between the buying and selling
supplying unit. division.
c. is not available unless market-based prices 22. As the internal transfer price is increased,
are available. a. overall corporate profits increase.
d. does not reflect the excess capacity of the b. profits in the buying division increase.
supplying unit. c. profits in the selling division increase.
15. To avoid waste and maximize efficiency when d. profits in the selling division and the overall
transferring products among divisions in a corporation increase.
competitive economy, a large diversified 23. In an internal transfer, the selling division records
corporation should base transfer prices on the event by crediting
a. variable cost. a. accounts receivable and CGS.
b. market price. b. CGS and finished goods.
c. full cost. c. finished goods and accounts receivable.
d. production cost. d. finished goods and intracompany sales.
16. A transfer pricing system is also known as 24. In an internal transfer, the buying division records
a. investment center accounting. the transaction by
b. a revenue allocation system. a. debiting accounts receivable.
c. responsibility accounting. b. crediting accounts payable.
d. a charge-back system. c. debiting intracompany CGS.
17. The maximum of the transfer price negotiation d. crediting inventory.
range is 25. Top management can preserve the autonomy of
a. determined by the buying division. division managers and encourage an optimal level
b. set by the selling division. of internal transactions by
c. influenced only by internal cost factors. a. selecting performance evaluation measures
d. negotiated by the buying and selling division. that are consistent with the achievement of
18. The presence of idle capacity in the selling overall corporate goals.
division may increase b. selecting division managers who are most
a. the incremental costs of production in the concerned about their individual performance.
selling division. c. prescribing transfer prices between segments.
b. the market price for the good. d. setting up all organizational units as revenue
c. the price that a buying division is willing to centers.
pay on an internal transfer. 26. To evaluate the performance of individual
d. a negotiated transfer price. departments, interdepartmental transfers of a
19. Which of the following is a consistently desirable product should preferably be made at prices
characteristic in a transfer pricing system? a. equal to the market price of the product.
a. system is very complex to be the most fair to b. set by the receiving department.
the buying and selling units c. equal to fully-allocated costs of the producing
b. effect on subunit performance measures is department.
not easily determined d. equal to variable costs to the producing
c. system should reflect organizational goals department.
d. transfer price remains constant for a period of 27. Allocating service department costs to revenue-
at least two years producing departments is an alternative to
20. With two autonomous division managers, the a. responsibility accounting.
price of goods transferred between the divisions b. the use of profit centers.
needs to be approved by c. the use of cost centers.
2
d. a transfer pricing system. d. actions of competitors of foreign subsidiaries.
28. External factors considered in setting transfer 29. Corporate taxes and tariffs are particular transfer-
prices in multinational firms typically do not pricing concerns of
include a. investment centers.
a. the corporate income tax rates in host b. multinational corporations.
countries of foreign subsidiaries. c. division managers.
b. foreign monetary exchange risks. d. domestic corporations involved in importing
c. environmental policies of the host countries of foreign goods.
foreign subsidiaries.
Computer Solutions Corporation
Computer Solutions Corporation 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:
Presently, the Computer Division purchases no chips from the Computer Chips Division, but instead pays P45
to an external supplier for the 4,000 chips it needs each month.
30. Refer to Computer Solutions Corporation. Assume b. P40,000 larger
that next month's costs and levels of operations c. P20,000 smaller
in the Computer and Computer Chip Divisions are d. the same
similar to this month. What is the minimum of the 33. Refer to Computer Solutions Corporation. If a
transfer price range for a possible transfer of the transfer between the two divisions is arranged
super chip from one division to the other? next period at a price (on 4,000 units of super
a. P50 chips) of P40, total profits in the Computer Chip
b. P45 division will
c. P20 a. rise by P20,000 compared to the prior period.
d. P35 b. drop by P40,000 compared to the prior
31. Refer to Computer Solutions Corporation. Assume period.
that next month's costs and levels of operations c. drop by P20,000 compared to the prior
in the Computer and Computer Chip Divisions are period.
similar to this month. What is the maximum of d. rise by P80,000 compared to the prior period.
the transfer price range for a possible transfer of 34. Refer to Computer Solutions Corporation.
the chip from one division to the other? Assume, for this question only, that the Computer
a. P50 Chip Division is selling all that it can produce to
b. P45 external buyers for P50 per unit. How would
c. P35 overall corporate profits be affected if it sells
d. P30 4,000 units to the Computer Division at P45?
32. Refer to Computer Solutions Corporation. Two (Assume that the Computer Division can purchase
possible transfer prices (for 4,000 units) are the super chip from an outside supplier for P45.)
under consideration by the two divisions: P35 and a. no effect
P40. Corporate profits would be ____ if P35 is b. P20,000 increase
selected as the transfer price rather than P40. c. P20,000 decrease
a. P20,000 larger d. P90,000 increase
Watts Corporation
Watts Corporation 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:
3
Total sales (all external) P250,000
Expenses (all on a unit base):
Variable manufacturing P0.50
Fixed manufacturing .25
Variable selling .30
Fixed selling .40
Variable G&A .15
Fixed G&A .50
Total P2.10
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.
35. Refer to Watts Corporation. A transfer price based 37. Refer to Watts Corporation. A transfer price based
on variable cost will be set at ____ per unit. on market price would be set at ____ per unit.
a. P0.50 a. P2.10
b. P0.80 b. P2.50
c. P0.95 c. P1.60
d. P0.75 d. P2.25
36. Refer to Watts Corporation. A transfer price based 38. Refer to Watts Corporation. If the Plumbing
on full production cost would be set at ____ per Division is operated as an autonomous investment
unit. center and its capacity is 100,000 fittings per
a. P0.75 month, the per-unit transfer price is not likely to
b. P2.10 be below
c. P1.45 a. P0.75.
d. P1.60 b. P1.60.
c. P2.10.
d. P2.50.
39. A company has two divisions, A and B; each are operated as a profit center. A charges B P35 per unit for each
unit transferred to B. Other data follow:
A is planning to raise its transfer price to P50 per unit. Division B can purchase units at P40 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
40. A service department includes which of the d. compare alternatives for decision making.
following? 42. A service department provides specific functional
tasks for other internal units. Which of the
Payroll Production following activities would not be engaged in by a
a. yes no service department?
b. yes yes a. purchasing
c. no yes b. warehousing
d. no no c. distributing
41. Indirect costs should be allocated for all of the d. manufacturing
following reasons except to 43. All of the following objectives are reasons to
a. motivate managers. allocate service department costs to compute full
b. determine the full cost of a product. cost except to
c. motivate general administration. a. provide information on cost recovery.
4
b. abide by regulations that may require full d. direct method
costing in some instances. 50. The overhead allocation method that allocates
c. provide information on controllable costs. service department costs without consideration of
d. reflect production's "fair share" of costs. services rendered to other service departments is
44. Which of the following is a reason for allocating the
service department costs and thereby motivating a. step method.
management? b. direct method.
a. provides for cost recovery c. reciprocal method.
b. provides relevant information in determining d. none of the above.
corporate-wide profits generated by 51. Which service department cost allocation method
alternative actions assigns indirect costs to cost objects after
c. meets regulations in some pricing instances considering some of the interrelationships of the
d. reflects usage of services on a fair and cost objects?
equitable basis a. step method
45. Service departments provide functional tasks for b. indirect method
which of the following? c. algebraic method
d. direct method
Internal units External units 52. Which service department cost allocation method
a. no no utilizes a "benefits-provided" ranking?
b. yes no a. algebraic method
c. no yes b. indirect method
d. yes yes c. step method
46. After service department costs have been d. direct method
allocated, what is the final step in determining full 53. Which service department cost allocation method
product cost? assigns indirect costs to cost objects after
a. determine direct material cost considering interrelationships of the cost objects?
b. determine overhead application rates for
revenue-producing areas Algebraic method Step method
c. determine direct labor cost a. no no
d. determine total service department costs b. no yes
47. Which of the following is not an objective for c. yes yes
computing full cost? d. yes no
a. to reflect production's "fair share" of costs 54. Which of the following methods of assigning
b. to instill a consideration of support costs indirect service department costs recognizes on a
c. to reflect usage of services on a fair and partial basis the reciprocal relationships among
equitable basis the departments?
d. to provide for cost recovery a. step method
48. A rational and systematic allocation base for b. direct method
service department costs should reflect the cost c. indirect method
accountant's consideration of all of the following d. algebraic method
except 55. The most accurate method for allocating service
a. the ability of revenue-producing departments department costs is the
to bear the allocated costs. a. step method.
b. the benefits received by the revenue- b. direct method.
producing department from the service c. algebraic method.
department. d. none of the above.
c. a causal relationship between factors in the
56. The criteria that are most often used to decide on
revenue-producing department and costs
allocation bases are?
incurred in the service department.
d. all of the above are considerations.
Benefits received Fairness Causal
49. Which service department cost allocation method relationships
assigns costs directly to revenue-producing areas a. yes yes no
with no other intermediate cost pools or b. yes yes yes
allocations? c. no yes yes
a. step method d. no no no
b. indirect method
57. To identify costs that relate to a specific product,
c. algebraic method
an allocation base should be chosen that
5
a. does not have a cause-and-effect relationship. a. considers all interrelationships of the
b. has a cause-and-effect relationship. departments and reflects these relationships
c. considers variable costs but not fixed costs. in equations.
d. considers direct material and direct labor but b. does not consider interrelationships of the
not manufacturing overhead. departments nor reflect these relationships in
58. The fixed costs of service departments should be equations.
allocated to production departments based on c. is also referred to as the "benefits-provided"
a. actual short-run utilization based on ranking method.
predetermined rates. d. is not a service department cost allocation
b. actual short-run units based on actual rates. method.
c. the service department's expected costs 61. Which service department cost allocation method
based on expected long-run use of capacity. considers all interrelationships of the departments
d. the service department's actual costs based and reflects these relationships in equations?
on actual utilization of services. a. step method
59. Which service department cost allocation method b. indirect method
provides for reciprocal allocation of service costs c. algebraic method
among the service department as well as to the d. direct method
revenue producing departments? 62. The allocation of general overhead control costs to
a. algebraic method operating departments can be least justified in
b. indirect method determining
c. step method a. income of a product or functional unit.
d. direct method b. costs for making management's decisions.
60. The algebraic method c. costs of products sold.
d. costs for government's "cost-plus" contracts.
Diller Corporation
Diller Corporation has three production departments A, B, and C. Diller Corporation 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.
6
c. P145,946 71. Refer to Diller Corporation. Assume that
d. P389,189 Administration costs have been allocated and the
69. Refer to Diller Corporation. Using the step balance in Personnel is P860,000. What amount is
method, what amount of Administration costs is allocated to B (round to the nearest peso)?
allocated to C (round to the nearest peso)? a. P213,964
a. P389,189 b. P430,000
b. P145,946 c. P106,982
c. P291,892 d. P143,333
d. P72,973 72. Refer to Diller Corporation. Assume that
70. Refer to Diller Corporation. Assume that Administration costs have been allocated and the
Administration costs have been allocated and the balance in Personnel is P860,000. What amount is
balance in Personnel is P860,000. What amount is allocated to C (round to the nearest peso)?
allocated to A (round to the nearest peso)? a. P213,964
a. P213,964 b. P430,000
b. P106,982 c. P286,667
c. P430,000 d. P143,333
d. P0
Albert Corporation
Albert Corporation 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.
7
Baretta Corporation has two service departments: Data Processing and Personnel. Data Processing provides
more service than does Personnel. Baretta 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.
Grant Corporation 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 P18,700 P9,000
Service provided to:
Maintenance Dept. 10%
Utilities Dept. 20%
Producing Dept. A 40% 30%
Producing Dept. B 40% 60%
81. Refer to Grant Corporation. The amount of d. None of the above.
Utilities Department costs distributed to Dept. B 83. Refer to Grant Corporation. Using the step
for January should be (rounded to the nearest method, how much of Grant Corporation’s Utilities
peso) Department cost is allocated between
a. P3,600. Departments A and B?
b. P4,500. a. P9,900
c. P5,400. b. P10,800
d. P6,000. c. P12,740
82. Refer to Grant Corporation. Assume instead Grant d. P27,700
Corporation distributes the service department's 84. Refer to Grant Corporation. Assume that Grant
overhead costs based on the step method. Corporation distributes service department
Maintenance provides more service than does overhead costs based on the algebraic method.
Utilities. Which of the following is true? What would be the formula to determine the total
a. Allocate maintenance expense to Departments maintenance costs?
A and B. a. M = P18,700 + .10U
b. Allocate maintenance expense to Departments b. M = P9,000 + .20U
A and B and the Utilities Department. c. M = P18,700 + .30U + .40A + .40B
c. Allocate utilities expense to the Maintenance d. M = P27,700 + .40A + .40B
Department and Departments A and B.
Problem
Ecological Products Corporation Unfortunately, the Ball Bearing Division is
operating at capacity and will need to reduce
The Electric Division of Ecological Products Co. production of another existing product, the "T"
has developed a wind generator that requires a bearing, by 1,000 units per month to provide the
special "S" ball bearing. The Ball Bearing Division 600 "S" bearings needed each month by the
of Ecological Products Co. has the capability to Electric Division. The "T" bearing currently sells
produce such a ball bearing. for P50 per unit. Variable costs incurred to
produce the "T" bearing are P30 per unit; variable
8
costs to produce the new "S" bearing would be 86. Refer to Ecological Products Co. What is the
P60 per unit. minimum price that Ball Bearing Division would
consider to produce the "S" bearing?
The Electric Division has found an external
supplier that would furnish the needed "S" 87. Refer to Ecological Products Co. What is the
bearings at P100 per unit. Assume that both the minimum price that Ball Bearing Division would
Electric Division and Ball Bearing Division are consider to produce the "S" bearing if the Ball
independent, autonomous investment centers. Bearing Division did not need to forfeit any of its
existing sales to produce the "S" bearing?
85. Refer to Ecological Products Co. What is the 88. Refer to Ecological Products Co. What factors
maximum price per unit that Electric Division besides price would Electric Division want to
would be willing to pay the Ball Bearing Division consider in deciding where it will purchase the
for the "S" bearing? bearing?
Sulphur Steel Corporation
The Wire Products Division of Sulphur Steel Corporation produces "bales" of steel wire that are used in various
commercial applications. The bales sell for an average of P20 each and The Wire Products Division has the
capacity to produce 10,000 bales per month. The Consumer Products Division of Sulphur Steel Corporation
uses approximately 2,000 bales of steel wire each month in its production of various appliances. The operating
information for the Wire Products Division at its present level of operations (8,000 bales per month) follows:
The Consumer Products Division currently pays P15 per bale for wire obtained from its external supplier.
89. Refer to Sulphur Steel Corporation. If 2,000 bales
are transferred in one month to the Consumer 92. Refer to Sulphur Steel Corporation. If the
Products Division at P10 per bale, what would be Consumer Products Division agrees to pay the
the profit/loss of the Wire Products Division? Wire Products Division P16 for 2,000 bales this
month, what would be Consumer's change in total
90. Refer to Sulphur Steel Corporation. For the Wire profits?
Products Division to operate at break-even level,
what would it need to charge for the production 93. Refer to Sulphur Steel Corporation. Assuming, for
and transfer of 2,000 bales to the Consumer this question only, that the Wire Products Division
Products Division? Assume all variable costs would not incur any variable G&A costs on
indicated will be incurred by the Wire Products internal sales, what is the minimum price that it
Division. would consider accepting for sales of bales to the
Consumer Products Division?
91. Refer to Sulphur Steel Corporation. 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?
Floor Products Corporation
The Carpet Division of Floor Products Corporation manufactures a single grade of residential grade carpeting.
The division has the capacity to produce 500,000 square yards of carpet each year. Its current costs and
revenues are shown here:
9
SG&A 1.00
Fixed costs per square yard (based on 500,000 yard capacity)
Production P0.50
SG&A 1.00
The Housing Division currently purchases 40,000 yards of carpeting (of the grade produced by the Carpet
Division) each year at a cost of P6.50 per square yard from an outside vendor.
94. Refer to Floor Products Corporation. If the
autonomous Housing and Carpet Divisions enter 97. Refer to Floor Products Corporation. If the
negotiations on the internal transfer of 40,000 Housing and Carpet Divisions agree on the
square yards of carpeting, what is the maximum internal transfer of 40,000 square yards of carpet
price that will be considered? at a price of P4.00 per square yard, how will
overall corporate profits be affected?
95. Refer to Floor Products Corporation. If the
autonomous Housing and Carpet Divisions enter 98. Refer to Floor Products Corporation. Assume, for
negotiations on the internal transfer of 40,000 this question only, that the Carpet Division is
square yards of carpeting, what is the Carpet producing and selling 500,000 square yards of
Division's minimum price? carpet to external buyers at a price of P5 per
square yard. What would be the effect on overall
96. Refer to Floor Products Corporation. If the corporate profits if Carpet Division reduces
Housing and Carpet Divisions agree on the external sales of carpet by 40,000 square yards
internal transfer of 40,000 square yards of carpet and transfers the 40,000 square yards of carpet
at a price of P4.50 per square yard, how will the to the Housing Division?
profits of the Housing Division be affected?
Kingwood Corporation
Kingwood Corporation is comprised of two divisions: X and Y. X currently produces and sells a gear assembly
used by the automotive industry in electric window assemblies. X is currently selling all of the units it can
produce (25,000 per year) to external customers for P25 per unit. At this level of activity, X's per unit costs
are:
Variable:
Production P7
SG&A 2
Fixed:
Production 6
SG&A 5
Y Division wants to purchase 5,000 gear assemblies per year from X Division. Y Division currently purchases
these units from an outside vendor at P22 each.
99. Refer to Kingwood Corporation. What is the 100. Refer to Kingwood Corporation. What will be the
minimum price per unit that X Division could effect on overall corporate profits if the two
accept from Y Division for 5,000 units of the gear divisions agree to an internal transfer of 5,000
assembly and be no worse off than currently? units?
Acadian Savings and Loan has three departments that generate revenue: loans, checking accounts, and
savings accounts. Acadian Savings and Loan has two service departments: Administration/Personnel and
Maintenance. The service departments provide service in the order of their listing. The following information is
available for direct costs. Administration/ Personnel costs are best allocated based on number of employees
while Maintenance costs are best allocated based on square footage occupied.
10
each department from Administration/Personnel. 102.
Refer to Acadian Savings and Loan. Using the step
method, compute the amount allocated to each
department from Maintenance.
103. Welsh Medical Clinic has two service departments: Building Operations and Utilities, and three operating
departments: Rehabilitation, Preventative Medicine, and Geriatrics. Welsh Medical Clinic allocates the cost of
Building Services on the basis of square footage and Utilities on the basis of patient days. Fixed and variable
costs are not separated.
Budgeted operating data for the previous year are presented below:
Required:
11
Answer Section
MULTIPLE CHOICE
PROBLEM
85. ANS:
Electric Division would be willing to pay no more than P100 per unit, the price offered by the external supplier.
86. ANS:
The minimum price that Ball Bearing Division would accept is the one that would leave its profits at the same
level as if it only produced "T" bearings. To produce the "S" bearing, Ball Bearing Division must give up
production and sale of 1,000 "T" bearings. These 1,000 bearings generate P20,000 of contribution margin:
[1,000 ´ (P50 - P30) ]. The sales price would have to be high enough to recoup both the variable costs of the
"S" bearings and the contribution margin that is forfeited on the 1,000 units of "T" bearings: P60 +
(P20,000/600) = P93.33
87. ANS:
The minimum price would be P60, the incremental costs to produce the "S" bearing.
88. ANS:
In particular, Electric Division would want to consider the quality of both suppliers. The factors to be considered
would include: ability to meet delivery deadlines, quality of the product produced, ability to change as
environmental conditions change, willingness to work on future cost reductions/quality improvements, business
reputation, stability of the labor force, and possibility of future price increases.
89. ANS:
The P10 per unit would equal the Division's variable costs (P5 + 2 + 3 = P10), so the contribution margin per
unit is zero. Thus, only the 8,000 units of external sales would generate a contribution margin of P80,000
(8,000 ´ P10) to cover fixed costs of P90,000 (10,000 ´ P9). So the Division would show a P10,000 loss.
90. ANS:
Total fixed costs to Wire are:
Production P2 ´ 10,000 = P20,000
Selling P3 ´ 10,000 = 30,000
G&A P4 ´ 10,000 = 40,000
Total P90,000
VC: Production P7
SGA 2 P9
Contribution margin 16
Selling price P25
100. ANS:
Corporate profits will decrease by forcing the transfer.
CM per units earned by X is from external sales P25 - [P7 + P2] P16
Times units to be sold ´ 5,000
Decrease in CM to X and XY Corp. P80,000
Net savings to buy internally
rather than externally [P22 - P9] P13
Times units to be purchased ´ 5,000
Savings by buying internally P 65,000
Net effect on XY Corp. profits P(15,000)
101. ANS:
b. Step Method:
A B X Y
------- ------- ------- -------
Direct costs P400.00 P600.00
A's cost allocated (553.19) 165.96 P165.96 P221.27
B's costs allocated 153.19 (765.96) 536.17 76.60
------- -------
Allocated to X P702.13
Allocated to Y P297.87
105. ANS:
Allocated to X: P1,195.92
A = P400 + .1B A = 510.20
B = P1,000 + .2A B = 1,102.04
A B X Y
------- ------- ------- -------
Direct costs P400.00 P1,000.00
A's cost allocated (510.20) 102.04 P204.08 P204.08
B's costs allocated 110.20 (1,102.04) 0 991.84
------- -------
Allocated to y P1,195.92
Allocated to x P204.08