Question 1

Among the responsibility centres listed, which type of responsibility centre is most likely to use growth in sales as a performance measure?

Accepted Answer

Revenue centres are responsible for generating revenue for the organization. As such, growth in sales is a key performance measure for this type of responsibility centre. Cost centres, on the other hand, are responsible for controlling costs, profit centres are evaluated based on their profitability, and investment centres are focused on generating returns on investments.

Question 2

Budgets can be used to evaluate managerial performance in

Accepted Answer

The answer of Budgets can be used to evaluate managerial...

Question 3

A corporate accounting department would most often be considered a

Accepted Answer

A corporate accounting department would most likely be considered a cost centre because it is a support service that incurs costs but does not directly generate revenue. Its expenses would be allocated to other departments or cost centres within the organization. Upper management may control its costs, but that does not change its status as a cost centre. Additionally, while accountants may have input in pricing decisions, this alone would not make the accounting department a revenue centre.

Question 4

Specific knowledge is

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Question 5

Setting transfer prices can be especially problematic when

Accepted Answer

When compensation is tied to the financial performance of responsibility centres, managers may manipulate transfer prices to benefit their own centre's performance, leading to suboptimal decisions for the organisation as a whole.

Question 6

The price used to record exchanges of goods and services inside an organisation is called a

Accepted Answer

The price used to record exchanges of goods and services inside an organization is called a transfer price. It is the price at which one division or department of a company sells goods or services to another division or department of the same company.

Question 7

Which of the following transfer pricing systems potentially takes the most time to establish?

Accepted Answer

Negotiated transfer pricing system potentially takes the most time to establish as it involves a complex negotiation process between the two parties involved, which requires a lot of time and effort to reach a mutual agreement. Market-based and full-cost transfer pricing systems are relatively simple to establish, while a dual-rate transfer pricing system involves some complexity, but not as much as a negotiated system.

Question 8

Dual-rate transfer pricing systems are appropriate when the

Accepted Answer

Dual-rate transfer pricing systems are most appropriate when the selling department has excess capacity. This is because in such a scenario, the selling department can benefit from allocating some of its excess capacity to an internal customer at a lower transfer price without affecting its profitability. Dual-rate transfer pricing systems usually have a higher variable cost-based transfer price for the selling department when it is operating at full capacity and a lower market-based transfer price for the excess capacity. Options A, C, and D have no association with the appropriateness of a dual-rate transfer pricing system.

Question 9

Teresa's Taco Ltd had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The operating (pretax) profit was

Accepted Answer

Operating profit can be calculated using the Residual Income formula:

Residual Income = Operating Profit - (Required Rate of Return x Total Assets)
$5,000 = Operating Profit - (0.15 x Total Assets)

Investment turnover is calculated by dividing Sales by Total Assets:

Investment Turnover = Sales / Total Assets
2.5 = $500,000 / Total Assets
Total Assets = $200,000

Substituting Total Assets in the Residual Income formula, we get:

$5,000 = Operating Profit - (0.15 x $200,000)
Operating Profit = $5,000 + $30,000
Operating Profit = $35,000

Therefore, the operating (pretax) profit was $35,000. Option C is the best choice.

Question 10

Efficiency measures, such as number of new products developed, may be more useful than financial measures in

Accepted Answer

Efficiency measures like the number of new products developed are more useful in discretionary cost centres, where the focus is on the effectiveness and efficiency of operations rather than financial outcomes.

Question 11

The Geelong Division of the Wasson Widget Co. requires a 12% rate of return. During a recent year Shannon had a net profit of $400,000 and a residual income of $250,000. What was its ROI?

Accepted Answer

ROI = Residual Income / InvestmentInvestment = Net Profit / Rate of ReturnInvestment = $400,000 / 12% = $3,333,333.33ROI = $250,000 / $3,333,333.33 = 32%

Question 12

A transfer pricing policy based on market price

Accepted Answer

While a transfer pricing policy based on market price may seem reasonable and objective, it can lead to suboptimal decision making for the company as a whole. This is because market prices are influenced by various factors such as supply and demand, competition, and other market conditions, which may not necessarily reflect the costs and value of the goods or services being transferred within the company. Therefore, relying solely on market prices for transfer pricing can result in underestimating or overestimating the actual profitability of different business units, which can lead to inefficient resource allocation and overall loss of profits.

Question 13

Which of the following is an advantage of cost-based transfer prices?

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Question 14

Teresa's Taco Ltd had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The capital investment was

Accepted Answer

Using the formula for residual income:

Residual Income = Net Income - (Required Rate of Return x Capital Investment)

$5,000 = Net Income - (0.15 x Capital Investment)

Net Income = $5,000 + (0.15 x Capital Investment)

Also, we know that Investment Turnover = Sales / Capital Investment

2.5 = $500,000 / Capital Investment

Capital Investment = $500,000 / 2.5

Capital Investment = $200,000

Substituting this value into the first equation:

Net Income = $5,000 + (0.15 x $200,000)

Net Income = $35,000

Therefore, the capital investment for Teresa's Taco Ltd was $200,000.

Question 15

Managers are held responsible for revenues in

Accepted Answer

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Question 16

Responsibility accounting includes

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Question 17

When a company uses activity-based transfer prices

Accepted Answer

Activity-based transfer pricing encourages efficient use of resources by allocating costs based on actual activities and resource usage, which often includes reserving capacity for products or services transferred internally to ensure that resources are available where they are most needed.

Question 18

Problems with market-based transfer prices include

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Question 19

An advantage of centralised decision making is

Accepted Answer

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Question 20

Which prices are recorded by departments under a dual-rate transfer pricing system?

Accepted Answer

Under a dual-rate transfer pricing system, prices are recorded by departments based on market price and variable cost. Therefore, the best choice is D, which matches the two relevant cost categories. Options A and C include full cost, which is not typically used to calculate transfer prices. Option B includes market price and variable cost, but in the wrong order.

Quiz 17: Responsibility Accounting, Performance Evaluation and Transfer Pricing