Question 1

Generally, the transfer price = outlay cost + opportunity cost.

Accepted Answer

Transfer price includes both the outlay cost (direct cost incurred) and opportunity cost (potential profits foregone from choosing one internal transfer over another or selling externally).

Question 2

Dysfunctional behavior is action taken in conflict with organizational goals.

Accepted Answer

Dysfunctional behavior refers to actions taken by individuals or groups in conflict with the goals and objectives of the organization. Such behavior may include negative attitudes towards workplace policies, resistance to change, gossip, bullying, and other forms of deviant behavior.

Question 3

Income taxes rarely influence the setting of transfer prices.

Accepted Answer

Income taxes can have a significant impact on the setting of transfer prices, as companies may attempt to manipulate them to lower their overall tax burden. Governments have regulations in place to prevent such manipulation and ensure fair pricing.

Question 4

It is recommended that budgeted or standard costs be used instead of actual costs for cost-based transfer prices.

Accepted Answer

Budgeted or standard costs are used for cost-based transfer pricing to eliminate the possibility of one division taking advantage of another through inflated or deflated costs. Actual costs may not accurately reflect the true cost of production and can lead to unfair transfer pricing.

Question 5

The time and effort spent negotiating a transfer price between a company's divisions add nothing directly to the profits of the company.

Accepted Answer

Negotiating a transfer price is an internal transaction within the company and does not generate any additional revenue or profits for the company. It is primarily done to allocate costs and resources between divisions and ensure that each division is operating efficiently.

Question 6

United States' multinational companies must use a transfer price that one division would pay another if they were independent companies.

Accepted Answer

This statement is true. Transfer pricing is used by multinational companies to determine the price at which goods, services, or intellectual property are transferred between different divisions or subsidiaries within the same company. The transfer price should be based on what the price would be if the divisions were independent companies dealing at arm's length. This is important for tax purposes and to ensure fair competition within the company.

Question 7

If using actual costs for cost-based transfer pricing, the supplying division lacks incentive to control its costs.

Accepted Answer

When using actual costs for cost-based transfer pricing, the supplying division will be reimbursed for its actual costs, regardless of whether they are efficiently managed or not. Therefore, the supplying division may not have an strong incentive to control its costs since it will be fully reimbursed regardless.

Question 8

Companies will not be harmed if they overemphasize meeting a budget when evaluating managers.

Accepted Answer

Overemphasizing meeting a budget can lead managers to neglect other important aspects of their job, such as improving processes, fostering innovation, and developing their team. This can ultimately harm the company's long-term success and competitiveness.

Question 9

A full-cost or full-cost plus profit transfer price would potentially create dysfunctional behavior.

Accepted Answer

A full-cost or full-cost plus profit transfer price can incentivize divisions to overstate their costs in order to receive a greater transfer price, leading to inefficiencies and reduced profitability for the company as a whole. It can also discourage divisions from improving their efficiency, as a lower cost base would lead to a lower transfer price, and potentially lower profits. Thus, it can create dysfunctional behavior within the company.

Question 10

When a division has idle production capacity, variable cost is the transfer price that leads to optimal decision making.

Accepted Answer

When a division has idle production capacity, the variable cost is generally the lowest cost the division can produce at. Setting the transfer price at the variable cost will ensure optimal decision-making, as it will not cause the selling division to lose money and the buying division to obtain the product at a fair price. Therefore, the statement is true.

Question 11

A management by objectives approach stresses budgeted results.

Accepted Answer

Management by objectives (MBO) is a performance management approach that emphasizes setting specific objectives that are measurable and time-bound. Budgeted results are an important aspect of MBO, as they help to ensure that the objectives are realistic and achievable within the allotted resources.

Question 12

Outlay cost is often the variable cost for producing the item transferred.

Accepted Answer

Outlay cost refers to the actual cash expenditure necessary to produce an item, which typically includes variable costs such as materials and labor directly associated with production.

Question 13

In cases of constrained capacity, the opportunity cost is zero.

Accepted Answer

In cases of constrained capacity, the opportunity cost is not zero as resources must be allocated and choices must be made about which products, services or activities to prioritize. Therefore, something must be forgone in order to utilize the limited capacity, resulting in an opportunity cost.

Question 14

A drawback to market-based prices is that in an imperfectly competitive market, the price of one division has to pay to buy an item may be less than the amount another division gets for selling the same item.

Accepted Answer

Market-based prices refer to prices determined by supply and demand in a competitive market. The scenario described is a transfer pricing issue within a company's divisions, not a drawback of market-based pricing itself.

Question 15

Opportunity cost is the minimum contribution to profit that the selling segment forgoes by transferring the item internally.

Accepted Answer

Opportunity cost refers to the benefit a person or business forgoes by choosing one alternative over another, not specifically to the minimum contribution to profit from internal transfers.

Question 16

When the selling division cannot sell an item on the external market, using either a market-based or cost-based transfer for the item can lead to dysfunctional decisions.

Accepted Answer

If the selling division cannot sell an item on the external market, using a market-based or cost-based transfer for the item can lead to dysfunctional decisions because it may not reflect the true value or cost of the item. This can lead to inefficient allocation of resources and negatively impact overall performance.

Question 17

Low transfer prices generally lead to low import duties.

Accepted Answer

Low transfer prices indicate that the value of imported goods is low, which leads to a lower assessment of import duties by customs authorities.

Question 18

If there is a competitive market for the product or service being transferred internally, using the cost-based price as a transfer price will generally lead to the desired goal congruence and managerial effort.

Accepted Answer

Using a cost-based transfer price may not account for supply and demand in a competitive market, leading to potential inefficiencies and conflicts between departments. In a competitive market, a market-based transfer price may be more appropriate to achieve goal congruence and encourage managerial effort.

Question 19

With no opportunity cost, using the market price as a transfer price will not create dysfunctional decisions.

Accepted Answer

The answer of With no opportunity cost, using the market...

Question 20

Top managers who wish to encourage decentralization will often make sure that both production and purchasing division managers understand all the facts and then allow the managers to negotiate a transfer price.

Accepted Answer

Decentralization involves delegating decision-making power to lower-level managers. Transferring goods or services between departments is an example of decentralized decision-making. To encourage this, top managers may allow division managers to negotiate a transfer price. This ensures that both parties understand the costs and benefits of the transfer and can come to a mutually beneficial agreement.

Quiz 10: Management Control in Decentralized Organizations