Cost-Based Transfer Pricing Quiz

Which of the following is the most significant disadvantage of a cost-based transfer price?

• Requires internally developed information.

• Imposes market effects on company operations.

• Requires externally developed information.

• May not promote long-term efficiencies.

Fairmount Inc. uses an accounting system that charges costs to the manager who has been delegated the authority to make the decisions incurring the costs. For example, if the sales manager accepts a rush order that will result in higher-than-normal manufacturing costs, these additional costs are charged to the sales manager because the authority to accept or decline the rush order was given to the sales manager. This type of accounting system is known as

• Responsibility accounting.

• Functional accounting.

• Reciprocal allocation.

• Transfer price accounting.

The Eastern division sells goods internally to the Western division of the same company. The quoted external price in industry publications from a supplier near Eastern is $200 per ton plus transportation. It costs $20 per ton to transport the goods to Western. Eastern's actual market cost per ton to buy the direct materials to make the transferred product is $100. Actual per ton direct labor is $50. Other actual costs of storage and handling are $40. The company president selects a $220 transfer price. This is an example of

• market-based transfer pricing.

• cost-based transfer pricing.

• negotiated transfer pricing.

• cost plus 20% transfer pricing.

A company expects its plant manager to control manufacturing costs and to set prices for the products manufactured. The company's plant manager is evaluated as directing which type of responsibility center?

• Profit center.

• Cost center.

• Revenue center.

• Investment center.

Which of the following is not true of responsibility accounting?

• Managers should only be held accountable for factors over which they have significant influence.

• The focus of cost center managers will normally be more narrow than that of profit center managers.

• Every factor that affects a firm's financial performance ultimately is controllable by someone, even if that someone is the person at the top of the firm.

• When a responsibility accounting system exists, operations of the business are organized into separate areas controlled by individual managers.

Rockford Manufacturing Corporation uses a responsibility accounting system in its operations. Which one of the following items is least likely to appear in a performance report for a manager of one of Rockford's assembly lines?

• Direct labor.

• Materials.

• Repairs and maintenance.

• Depreciation on the manufacturing facility.

Sara Bellows, manager of the telecommunication sales team, has the following department budget. Billings - long distance $350,000 Billings - phone card $75,000 Billings - toll free $265,000 Her responsibility center is best described as a

• cost center.

• revenue center.

• profit center.

• investment center.

Which of the following techniques would be best for evaluating the management performance of a department that is operated as a cost center?

• Return on assets ratio.

• Return on investment ratio.

• Payback method.

• Variance analysis.

When using a contribution margin format for internal reporting purposes, the major distinction between segment manager performance and segment performance is

• Unallocated fixed cost.

• Direct variable costs of producing the product.

• Direct fixed cost controllable by the segment manager.

• Direct fixed cost controllable by others.

When comparing the profitability of several investment centers, the validity of comparisons may be destroyed by

• peculiarities of each investment center.

• consistent use of an imputed interest rate.

• common amounts of invested capital for each investment center.

• none of the answers is correct.