Fundementals Of Cost Accounting Seventh Edition-McGraw Hill- ACCT521 CH 15 QUESTIONS Week 7

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Apr 3, 2024

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The value assigned to goods or services sold or rented from one unit of an organization to another unit of the organization is called the transfer Blank 1 Blank 1 transfer , Correct Unavailable price Blank 2 Blank 2 price , Correct Unavailable. (Enter only one word per blank.) Correct Answer  Blank 1: transfer  Blank 2: price, prices, or pricing True or false: The transfer price selected impacts the profit of both the buying and selling division as well as the corporation overall. True false question. True Reason: The total profit for the corporation is the same regardless of the price selected. Falsecorrect Correct Answer False If a transaction is not profitable for the corporation, the optimal transfer price must make the sale Blank______ of the two transacting divisions. Multiple choice question. profitable for both unprofitable for at least one correct unprofitable for both profitable for at least one Correct Answer unprofitable for at least one

If a transfer between divisions can lead to an increase in firm profits, the optimal transfer price Blank______. Multiple choice question. will increase the profits of at least one of the divisions will increase the profits of both divisions correct does not have to increase division profits Correct Answer will increase the profits of both divisions A perfect intermediate market exists when Blank______. Multiple choice question. prices are unaffected by the quantity that buyers buy and sellers sell prices increase as the quantity that buyers buy and sellers sell increases incorrect prices decline as the quantity that buyers buy and sellers sell increases Correct Answer prices are unaffected by the quantity that buyers buy and sellers sell Transfer pricing is used for Blank______. Multiple select question. product costing correct decision making correct performance evaluation correct tax avoidance Correct Answer  product costing  decision making  performance evaluation

A buying division will refuse any transfer price Blank______. Multiple choice question. above the final market price correct that does not increase the division's overall profitability Reason: In some cases the transfer price may be the same as the external price, which would not impact profit. below the selling division's variable cost Reason: This would cause the selling division to refuse to make a sale. Correct Answer above the final market price When considering a transfer price decision from the corporation's point of view, Blank______. Multiple choice question. the price selected does not affect overall profit correct profits will increase if the transfer price selected increases the buying divisions profits profits will decrease if the transfer price selected decreases the buying divisions profits Correct Answer the price selected does not affect overall profit Assume a transfer price for an intermediate product has been set at $40. The buying division's final external selling price is $80 and the division earns a contribution margin of $15 per unit. If the external selling price falls to $60, the Blank______. Multiple choice question. transfer price for the intermediate product will not be impacted Reason: If the external selling price falls $20, the buying division will no longer be profitable and therefore will be unwilling to pay the $40 transfer price.

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buying division will no longer be willing to pay the $40 transfer price correct selling division will no longer be willing to sell at the $40 transfer price Reason: If the external selling price falls $20, the buying division will no longer be profitable and therefore will be unwilling to pay the $40 transfer price. Correct Answer buying division will no longer be willing to pay the $40 transfer price Transfer pricing affects managers' decisions because the manager of both the selling and the buying division are evaluated on Blank______. Multiple choice question. division profit only correct company profit only both division and company profit neither division nor company profit Correct Answer division profit only Choosing to transfer (sell) a product to an internal division and not sell it to an intermediate (outside) market is called the selling division's opportunity Blank 1 Blank 1 opportunity , Correct Unavailable cost. (Enter only one word per blank.) Correct Answer  Blank 1: opportunity Which of the following questions relate to a transfer price test for a company and the two divisions potentially involved with a transfer price transaction? Multiple select question.

Given the market prices and the costs in the firm, does the transfer increase firm profits? correct Given the market prices and the costs in the firm, does the transfer result in bonuses for division managers? Given the transfer price, the intermediate market prices, and the divisional costs, does the transfer increase the selling division profit? correct Given the transfer price, the final market prices, and the divisional costs, does the transfer increase buying division profit? correct Correct Answer  Given the market prices and the costs in the firm, does the transfer increase firm profits?  Given the transfer price, the intermediate market prices, and the divisional costs, does the transfer increase the selling division profit?  Given the transfer price, the final market prices, and the divisional costs, does the transfer increase buying division profit? One division in a company would like to purchase a product from another division in the company. Variable cost of the selling division is $40 per unit and its fixed cost is $10 per unit. If the selling unit is already operating at capacity, the transfer price should be equal to Blank______. Multiple choice question. variable cost + fixed cost incorrect variable cost market price Correct Answer market price According to economists, when buyers can buy and sellers can sell any quantity without affecting the price and the product being sold is not differentiated by quality, service, or other characteristics, a(n) a Blank 1 Blank

1 a , Incorrect Unavailable intermediate market exists. (Enter only one word per blank.) Correct Answer  Blank 1: perfect Suboptimal transfer prices include any transfer price Blank______. Multiple select question. above the intermediate market price for the buying division below the total production cost in the selling division below the variable cost in the selling division correct above the final market price for the buying division correct Correct Answer  below the variable cost in the selling division  above the final market price for the buying division According to the general principle to accept or reject a transfer price, if an intermediate market exists, the optimal transfer price is the a Blank 1 Blank 1 a , Incorrect Unavailable a Blank 2 Blank 2 a , Incorrect Unavailable. (Enter only one word per blank.) Correct Answer  Blank 1: market  Blank 2: price The only transfer price that will work for all possible external markets is the Blank______ division. Multiple choice question. current purchase price for the buying Reason:

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This would only be acceptable as long as the price doesn't change. current selling price of the selling variable cost in the selling correct full production cost in the selling Reason: Any price above the variable cost will potentially cause the buying division not to buy. Correct Answer variable cost in the selling Generalized approaches in a decentralized division to help managers make decisions in the best interest of the company include Blank______. Multiple select question. centrally established transfer price policies correct direct intervention by top management correct negotiated transfer prices correct focusing managers' attention on their divisional profits Correct Answer  centrally established transfer price policies  direct intervention by top management  negotiated transfer prices The incremental cost to produce a resource and bring it to the point of transfer is also called the outlay Blank 1 Blank 1 outlay , Correct Unavailable cost Blank 2 Blank 2 cost , Correct Unavailable (Enter only one word per blank.) Correct Answer  Blank 1: outlay

 Blank 2: cost Direct intervention in transfer pricing could be the best solution when Blank______. Multiple select question. there is a large order correct there are no intermediate markets internal transfers are rare correct Correct Answer  there is a large order  internal transfers are rare If a selling unit is operating at capacity, the optimal transfer price is the Blank______. Multiple choice question. full cost market price correct variable cost of selling unit Correct Answer market price A perfect intermediate market exists when Blank______. Multiple choice question. prices are unaffected by the quantity that buyers buy and sellers sell correct prices increase as the quantity that buyers buy and sellers sell increases prices decline as the quantity that buyers buy and sellers sell increases Correct Answer prices are unaffected by the quantity that buyers buy and sellers sell

The general rules for selling and buying units to engage in transfer pricing include Blank______. Multiple select question. if no intermediate market exists, the optimal transfer price is the selling unit's full cost (variable + fixed) if an intermediate market exists, the optimal price is the market price correct if no intermediate market exists, the optimal transfer price is the outlay cost (variable cost) correct Correct Answer  if an intermediate market exists, the optimal price is the market price  if no intermediate market exists, the optimal transfer price is the outlay cost (variable cost) In a decentralized organization, achieving goals that are in the best interest of both the managers and the organization include direct intervention by top management, centrally established transfer price policies, and negotiated Blank 1 Blank 1 negotiated , Correct Unavailable transfer prices. (Enter only one word per blank.) Correct Answer  Blank 1: negotiated A transfer pricing policy should Blank______. Multiple select question. encourage consistency in division goals correct allow divisional autonomy correct encourage division units to seek alternative markets

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Correct Answer  encourage consistency in division goals  allow divisional autonomy The disadvantages of using direct intervention to set transfer prices include that Blank______. Multiple select question. top management could become overwhelmed with pricing disputes correct individual managers lose autonomy correct it may increase the benefits from decentralization but not short-run profits Reason: It promotes short-term profits but reduces the benefits of decentralization. Correct Answer  top management could become overwhelmed with pricing disputes  individual managers lose autonomy From the company's perspective, it is acceptable when two divisions are indifferent between trading with each other or with outsiders as long as the supplying unit Blank______ operating at capacity. Multiple choice question. is correct is not Reason: As long as the supplying division is operating at capacity, it doesn't matter if the divisions trade internally or externally. Correct Answer is As a general rule, the guidelines of a market price-based transfer pricing policy are that the Blank______.

Multiple select question. buying unit may elect to reject the transfer price and purchase from the outside selling unit may elect to transfer or to continue to sell to the outside correct transfer price is usually set at a discount from the cost to acquire the item on the open market correct Correct Answer  selling unit may elect to transfer or to continue to sell to the outside  transfer price is usually set at a discount from the cost to acquire the item on the open market True or false: The cost-based transfer pricing policy restates the general rule for transfer pricing. True false question. Truecorrect False Reason: The cost-based transfer pricing policy restates the general rule for transfer prices. Correct Answer True The economic pricing rule states a seller operating Blank______. Multiple select question. below capacity should transfer at the differential cost of production (variable cost) correct below capacity should transfer at the full cost at capacity should transfer at the market price correct Correct Answer

 below capacity should transfer at the differential cost of production (variable cost)  at capacity should transfer at the market price The transfer pricing policy should be established keeping in mind Blank______. Multiple choice question. only the impact that alternative transfer prices will have on managerial performance evaluation both the performance evaluation system used and the impact that alternative transfer prices will have on managerial performance evaluation neither the performance evaluation system used nor the impact that alternative transfer prices will have on managerial performance evaluation only the performance evaluation system used incorrect Correct Answer both the performance evaluation system used and the impact that alternative transfer prices will have on managerial performance evaluation An advantage of using market prices for transfer pricing is both the buying and selling divisions Blank______. Multiple choice question. are indifferent between trading each other or outsiders correct would prefer to trade with outside markets would prefer to trade internally Correct Answer are indifferent between trading each other or outsiders The advantages of using full absorption cost-based transfers are that Blank______. Multiple select question. full costs are available in company records correct

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it will always lead to the profit-maximizing solution for the company Reason: This is not necessarily true. it provides the selling unit with a contribution equal to the excess of full absorption costs over variable costs correct Correct Answer  full costs are available in company records  it provides the selling unit with a contribution equal to the excess of full absorption costs over variable costs As a general rule, the transfer price is usually set at a discount, and the selling division may elect to transfer or continue to sell to the outside under a(n) market Blank 1 Blank 1 market , Correct Unavailable price Blank 2 Blank 2 price , Correct Unavailable-based transfer pricing policy. (Enter only one word per blank.) Correct Answer  Blank 1: market  Blank 2: price A cost-plus transfer pricing model Blank______ Multiple select question. does not consider fixed costs that will not change as a result of the transfer cannot be applied when intermediate markup prices are not available applies a normal markup to costs as a surrogate for market prices correct may be based on either variable or full absorption costing correct Correct Answer  applies a normal markup to costs as a surrogate for market prices  may be based on either variable or full absorption costing

Transferring at the differential outlay cost to the selling division plus the forgone contribution to the company making the internal transfers is referred to as the cost Blank 1 Blank 1 cost , Correct Unavailable- based Blank 2 Blank 2 based , Correct Unavailable transfer pricing policy. (Enter only one word per blank.) Correct Answer  Blank 1: cost  Blank 2: based Variances or inefficiencies in the selling division are passed to the buying division when Blank______ costs are used as the basis for the transfer. Multiple choice question. actual correct normal standard Correct Answer actual A seller operating at capacity should transfer at the market price and a seller operating below capacity should transfer at the differential cost of production under the economic Blank 1 Blank 1 economic , Correct Unavailable transfer pricing rule. (Enter only one word per blank.) Correct Answer  Blank 1: economic A supplier whose transfers are mostly internal should be organized as a Blank______ center. Multiple choice question. revenue

cost correct profit Correct Answer cost A transfer pricing policy should Blank______. Multiple select question. encourage consistency in division goals correct encourage division units to seek alternative markets allow divisional autonomy correct Correct Answer  encourage consistency in division goals  allow divisional autonomy The transfer pricing system that charges the buying division with cost and the selling division with cost plus some profit allowance is the Blank______ transfer pricing system. Multiple choice question. cost-plus full absorption cost-based market price-based dual correct Correct Answer dual Full absorption cost-based transfer prices Blank______. Multiple select question. are lower than market price correct

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are higher than variable costs correct are used when a company does not have a reliable estimate of differential cost correct give the buying division an incentive to buy internally Reason: They give the selling division an incentive to sell internally. Correct Answer  are lower than market price  are higher than variable costs  are used when a company does not have a reliable estimate of differential cost The primary disadvantages of using negotiated transfer pricing are that Blank______. Multiple select question. the negotiated price may not be in the best interest of the firm correct it requires a great deal of management time correct it eliminates the autonomy of the division managers Correct Answer  the negotiated price may not be in the best interest of the firm  it requires a great deal of management time The transfer pricing policy based on a measure of cost (full or variable costing, actual or standard cost) plus an allowance for profit is called the cost Blank 1 Blank 1 cost , Correct Unavailable- plus Blank 2 Blank 2 plus , Correct Unavailable transfer pricing method. (Enter only one word per blank.) Correct Answer  Blank 1: cost

 Blank 2: plus Imperfect markets complicate transfer pricing because Blank______. Multiple select question. the number of units being sold by the selling unit does not impact the market price there may be no outside market correct the market price may fluctuate depending on the number of units the division wants to buy or sell correct Correct Answer  there may be no outside market  the market price may fluctuate depending on the number of units the division wants to buy or sell To promote responsibility in the selling division and to isolate variances within divisions, transfer pricing in cost-based systems are generally based on standard Blank 1 Blank 1 standard , Correct Unavailable costs. (Enter only one word per blank.) Correct Answer  Blank 1: standard Because tax rates vary among countries, companies have incentives to set transfer prices that will increase Blank______ countries. Multiple choice question. revenues and costs in high-tax incorrect revenues and costs in low-tax revenues in low-tax countries and increase costs in high-tax

revenues in high-tax countries and increase costs in low-tax Correct Answer revenues in low-tax countries and increase costs in high-tax Which of the following are ways to rectify transfer pricing motivational problems? Multiple select question. By treating a supplying center as a profit center when the manager does not have price-setting power. By organizing a supplying center as a cost center and holding the center manager accountable for costs, not revenues. correct By treating every center as an investment center. By considering the artificial nature of the transfer price when evaluating the results of that center’s operations. correct Correct Answer  By organizing a supplying center as a cost center and holding the center manager accountable for costs, not revenues.  By considering the artificial nature of the transfer price when evaluating the results of that center’s operations. If a company has significant foreign operations (segments), it must disclose Blank______. Multiple select question. revenues correct identifiable assets by geographical regions correct operating profits or losses correct percentage of assets of foreign asset to total parent assets Correct Answer

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 revenues  identifiable assets by geographical regions  operating profits or losses A dual transfer pricing system Blank______. Multiple choice question. encourages internal transfers correct creates a profit for the selling division equal to the cost charged to the buying division strengthens the value of performance evaluations Reason: The opposite is true. Correct Answer encourages internal transfers The transfer pricing method used for performance evaluation will be reflected in reported segment income and can be Blank______. Multiple choice question. neither cost- nor market-based market-based only either cost- or market-based correct cost-based only Correct Answer either cost- or market-based The managers involved act in much the same way as the managers of independent companies when using a(n) negotiated Blank 1 Blank 1 negotiated , Correct Unavailable transfer pricing system. (Enter only one word per blank.) Correct Answer  Blank 1: negotiated

When imperfect markets exist Blank______. Multiple select question. it may be best to have buying and selling divisions report to a single manager who oversees transfers correct there may be no outside market available correct companies generally find that all transactions between divisions occur as top management prefers Reason: The opposite is true. transfer pricing is simplified Reason: Transfer pricing can be quite complex. Correct Answer  it may be best to have buying and selling divisions report to a single manager who oversees transfers  there may be no outside market available Due to different laws in different countries, international transactions involving transfer prices can affect tax liabilities by artificially Blank______ the transfer price to the U.S. subsidiary. Multiple choice question. deflating Reason: The foreign related party establishes a higher transfer price to reduce the U.S. company's profits thereby its tax liability. concealing inflating correct Correct Answer inflating

Principal items that must be disclosed about each segment include Blank______. Multiple select question. segment revenue from external customers only Reason: Segment revenue from both internal and external customers must be reported. interest revenue and expense correct segment operating profit or loss correct identifiable segment assets correct Correct Answer  interest revenue and expense  segment operating profit or loss  identifiable segment assets True or false: The transfer pricing method used for performance evaluation will be reflected in the reported segment income and can be either cost- based or market-based. True false question. Truecorrect False Reason: Firms can use different methods for transfer pricing when computing divisional profit for performance evaluation. Correct Answer True Because tax rates vary among countries, companies have incentives to set transfer prices that will increase Blank______ countries. Multiple choice question.

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revenues in high-tax countries and increase costs in low-tax revenues and costs in low-tax revenues in low-tax countries and increase costs in high-tax correct revenues and costs in high-tax Correct Answer revenues in low-tax countries and increase costs in high-tax

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Fundementals Of Cost Accounting Seventh Edition-McGraw Hill- ACCT521 CH 15 QUESTIONS Week 7

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