CHAPTER 8
LEARNING OBJECTIVES
1. COMPUTE A TARGET COST WHEN THE MARKET
DETERMINES A PRODUCT PRICE.
2. COMPUTE A TARGET SELLING PRICE USING COSTPLUS PRICING.
3. USE TIME-AND-MATERIAL PRICING TO DETERMINE
THE COST OF SERVICES PROVIDED.
4. DETERMINE A TRANSFER PRICE USING THE
NEGOTIATED, COST-BASED, AND MARKET-BASED
APPROACHES.
*5. DETERMINE PRICES USING ABSORPTION-COST PRICING AND VARIABLE-COST PRICING.
*6. EXPLAIN ISSUES INVOLVED IN TRANSFERRING
GOODS BETWEEN DIVISIONS IN DIFFERENT
COUNTRIES.
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-1
CHAPTER REVIEW
External Sales
1.
(L.O. 1) Some of the many factors that can affect pricing decisions include:
a. Pricing Objectives
 Gain market share
 Achieve a target rate of return
b. Environment
 Political reaction to prices
 Patent or copyright protection
c. Demand
 Price sensitivity
 Demographics
d. Cost Considerations
 Fixed and variable costs
 Short-run or long-run
2.
In most cases, a company does not set prices. Instead the price is set by the competitive market
(laws of supply and demand). These companies are called price takers and price taking often
happens when the product is not easily differentiated from competing products, such as farm
products (corn or wheat) or minerals (coal or sand).
3.
Companies can set prices (1) where the product is specially made for a customer, (2) when there
are few or no other producers capable of manufacturing a similar item, or (3) when a company
can effectively differentiate its product or service from others.
Target Costing
4.
Once a company has identified its segment of the market, it does market research to determine
the target price. The target price is the price that the company believes would place it in the
optimal position for its target audience. Once the company has determined the target price, it can
determine its target cost by setting a desired profit. The difference between the target price and
the desired profit is the target cost of the product. The target cost includes all product and period
costs necessary to make and market the product.
Cost-Plus Pricing
5.
(L.O. 2) When the price is set by the company, price is commonly a function of the product or
service. Cost-plus pricing involves establishing a cost base and adding to this cost base a
markup to determine a target selling price. The size of the markup (the “plus”) depends on the
desired return on investment (ROI) for the product line, product, or service. The cost-plus pricing
formula is expressed as follows:
Target Selling Price = Cost + (Markup Percentage X Cost)
6.
The cost-plus approach has a major advantage: it is simple to compute. However, the cost model
does not give consideration to the demand side—that is, will the customers pay the price. In
addition, sales volume plays a large role in determining per unit costs. The lower the sales
volume, the higher the price a company must charge to meet its desired ROI (because fixed costs
are spread over fewer units and therefore the fixed costs per unit increases).
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-2
7.
Instead of using both fixed and variable costs to set prices, some companies simply add a markup
to their variable costs. Using variable-cost pricing avoids the problem of using poor cost
information related to fixed cost per unit computations.
Time-and-Material Pricing
8.
(L.O. 3) Under time-and-material pricing, the company sets two pricing rates—one for the labor
used on a job and another for the material. The labor rate includes direct labor time and other
employee costs. The material charge is based on the cost of direct parts and materials used and
a material loading charge for related overhead costs.
9.
Using time-and-material pricing involves three steps: (1) calculate the per-hour labor charge,
(2) calculate the charge for obtaining and holding materials, and (3) calculate the charges for a
particular job.
The per-hour labor charge typically includes the direct labor cost of an employee, selling,
administrative, and similar overhead costs, and an allowance for a desired profit per hour of
employee time. The charge for materials typically includes the invoice price of any materials used
on the job plus a material loading charge. The charges for any particular job are then a result of
(1) the labor charge, (2) the direct charge for materials, and (3) the material loading charge.
10.
To illustrate a time-and-material pricing situation, assume the following data for Rancho Park Golf
Club Repair Service:
Rancho Park Golf Club Repair Service
Budgeted Costs for the Year 2017
Time
Charges
$26,000
1,950
Repair service employee wages
Administrative assistant salary
Other overhead (supplies, depreciation,
advertising, utilities)
Total budgeted costs
Material Loading
Charges
$ 5,000
1,000
4,940
$32,890
3,000
$ 9,000
Step 1: During 2017 Rancho Park budgets 1,300 hours for repair time, and it desires a profit
margin of $6 per hour of labor. Computation of the hourly charges are as follows:
Per Hour
Hourly labor rate for repairs
Repair service employee
Overhead costs
Administrative assistant
Other overhead
Total Cost
÷
Total Hours
=
Per Hour
Charge
$26,000
÷
1,300
=
$20.00
1,950
4,940
$32,890
÷
÷
÷
1,300
1,300
1,300
=
=
=
1.50
3.80
$25.30
6.00
Profit margin
Rate charged per hour
of labor
$31.30
Step 2: Rancho Park estimates that the total invoice cost of parts and materials used in 2017 will
be $30,000 and it desires a 10 percent profit margin markup on the invoice cost of parts and
materials. The computation of the material loading charge used by Rancho Park during 2017 is as
follows:
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-3
Material
Loading
Total Invoice
÷
Charge
Overhead costs
Repair service employee
Administrative assistant
Other overhead
Cost, Parts
Material
=
and Materials
Loading
Percentage
$5,000
1,000
6,000
÷
$30,000
=
20.00%
3,000
$9,000
÷
÷
30,000
30,000
=
=
10.00%
30.00%
10.00%
40.00%
Profit margin
Material loading percentage
Step 3: Rancho Park prepares a price quotation to estimate the cost to fix a set of woods for a
patron. Rancho Park estimates the job will require a half hour of labor and $150 in parts and
materials. Rancho Park’s price quotation is as follows:
Rancho Park Golf Club Repair Service
Time-and-Material Price Quotation
Job: Arnold Palmer, repair of set of woods
Labor charges: half hour @ $31.30..................
Material charges
Cost of parts and materials ............................
Material loading charge (40% X $150) ...........
Total price of labor and materials .....................
$ 15.65
$150.00
60.00
210.00
$225.65
Internal Sales
11.
(L.O. 4) Divisions within vertically integrated companies normally transfer goods or services to
other divisions within the same company, as well as to customers outside the company. When
goods are transferred internally, the price used to record the transfer between the two divisions
is called the transfer price. Three possible approaches for determining a transfer price are
(1) negotiated transfer prices, (2) cost-based transfer prices, and (3) market-based transfer prices.
Negotiated Transfer Prices
12.
The negotiated transfer price is determined through agreement of division managers. Using the
negotiated transfer pricing approach, a minimum transfer price is established by the selling
division, and a maximum transfer price is established by the purchasing division.
Calculating the minimum transfer price depends on whether the selling division has excess
capacity or not. If the selling division has no excess capacity, then the minimum transfer price is
the variable cost plus its lost contribution margin (also known as opportunity cost). If the selling
division has excess capacity, then the minimum transfer price is the variable cost.
Cost-Based Transfer Prices
13.
Another method of determining transfer prices is to base the transfer price on the costs incurred
by the division providing the goods. If a transfer price is used, the transfer price may be based on
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-4
variable costs alone, or on variable costs plus fixed costs. A markup may be added to these cost
numbers. This method, however, may lead to a loss of profitability for the company and unfair
evaluations of division performance.
Market-Based Transfer Prices
14.
The market-based transfer price is based on existing market prices of competing goods or
services. A market-based system is often considered the best approach because it is objective
and generally provides the proper economic incentives. Unfortunately, however, there is often not
a well-defined market for the good or service being transferred and thus companies resort to a
cost-based system.
Transfers Between Divisions in Different Countries
*Absorption Cost Pricing
*15. (L.O. 5) Absorption-cost pricing is consistent with generally accepted accounting principles
(GAAP) because it defines the cost base as the manufacturing cost. Both variable and fixed
selling and administrative costs are excluded from this cost base. Thus, selling and administrative
costs plus the target ROI must be provided for through the markup.
The steps in using absorption-cost pricing are as follows:
a.
Compute the unit manufacturing cost.
b.
Compute the markup percentage using the formula:
Desired
ROI Per Unit
c.
Selling and
Administrative
Expenses Per Unit
+
=
Markup
Percentage
X
Manufacturing
Cost Per Unit
=
Target
Selling Price
Set the target selling price using the formula:
Manufacturing
Cost Per Unit
+
Copyright © 2015 John Wiley & Sons, Inc.
(
Markup
Percentage
X
Manufacturing
Cost Per Unit
)
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-5
*Variable-Cost Pricing
*16. Under variable-cost pricing, the cost base consists of all of the variable costs associated with a
product, including variable selling and administrative costs. Because fixed costs are not included
in the base, the markup must provide for fixed costs (manufacturing and selling and administrative)
and the target ROI. Variable-cost pricing is more useful for making short-run decisions because it
displays variable cost and fixed cost behavior patterns separately.
The steps in using variable-cost pricing are as follows:
a.
b.
Compute the unit variable cost.
Compute the markup percentage using the formula:
Desired ROI Per Unit
+
Fixed Costs Per Unit
c.
= Markup Percentage X
Variable Costs
Per Unit
Set the target selling price using the formula:
Variable
Cost Per Unit
+
(
Markup
Percentage
X
Variable
Cost Per Unit
)
=
Target
Selling Price
*17. (L.O. 6) As more companies “globalize” their operations, an increasing number of transfers are
between divisions that are located in different countries. Companies must pay income tax in
the country where income is generated. In order to maximize income, and minimize income tax,
many companies prefer to report more income in countries with low tax rates, and less income in
countries with high tax rates. This is accomplished by adjusting the transfer prices they use on
internal transfers between divisions located in different countries. The division in the low-tax-rate
country is allocated more contribution margin, and the division in the high-tax-rate country is
allocated less.
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-6
LECTURE OUTLINE
A.
External Sales.
1. Establishing the price for any good or service is affected by the following
factors: pricing objectives, environment, demand, and cost considerations.
2. In the long run a company must price its product to cover its costs and
earn a reasonable profit. In most cases, a company does not set the
price—it is set by the competitive market (laws of supply and demand).
In this situation, companies are called price takers because the price of
the product is set by market forces.
3. In some situations the company does set the price. This occurs where
the product is specially made for a customer or when there are few or no
other producers capable of manufacturing a similar item. It also occurs
when a company can effectively differentiate its product from others.
MANAGEMENT INSIGHT
At one time, Apple’s iPad represented 75% of tablets being sold. And, about
50% of consumers read newspapers and magazines on their tablets. This
commanding share of the market made Apple feel like it had publishers right
where it wanted them. However, when Apple announced that it would charge
publishers a fee of 30% of subscription revenue for subscriptions sold through
Apple’s App store, Google announced it would only charge a fee of about 10% of
subscription revenue for users of its Android system.
Do the substantially different prices that Apple and Google charge for a similar
service reflect different costs incurred by each company, or is the price difference
due to something else?
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-7
Answer: While it is possible that the companies incur different costs to
provide this service, that would not explain this huge price
difference. Instead, Apple apparently felt that its commanding lead
in terms of the percentage of tablet computer users enabled it to
charge a substantial premium for subscription services. On the
other hand, Google’s decision most likely reflects a strategic
decision to try to grow its market share by providing a substantially
lower price
B.
Target Costing.
1. In a competitive market, the price of a product is greatly affected by
supply and demand. No company in the market can affect the price to a
significant degree.
2. A company chooses the segment of the market it wants to compete in
(its market niche) in a competitive market.
3. Once the company has identified its market segment, it conducts market
research to determine the target price. The target price is the price
the company believes would place it in the best position for its target
audience.
4. Once the company determines the target selling price it determines its
target cost by setting a desired profit.
5. The difference between the target price and the desired profit is the
target cost of the product. The target cost includes all product and period
costs necessary to make and market the product.
MANAGEMENT INSIGHT
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-8
Wal-Mart told jean maker Levi Strauss “the price should be $19 per pair of jeans
instead of $23.” Wal-Mart often sets the price, and the manufacturer has to find
out how to make a profit at that price. Levi Strauss revamped its distribution and
production to improve its overall record of timely deliveries. The chief executive
of Levi Strauss stated “we had to change people and practice.”
What are some issues that Levi Strauss should consider in deciding whether it
should agree to meet Wal-Mart’s target price?
Answer: Levi may be tempted to reduce the quality of its product, or it may be
forced to move more of its operations to low-wage suppliers. A big
concern is that other retailers may complain that Levi is selling its
jeans to Wal-Mart at a price that is lower than they receive. Also,
customers may no longer be willing to pay for Levi’s other models of
higher-priced jeans that it sells in other stores because they can get
the low-price jeans (those with the lower gross margin) at Wal-Mart. All
of these are issues that a manufacturer must consider in deciding
whether to be a supplier to Wal-Mart.
C.
Cost-Plus Pricing.
1. In a noncompetitive environment, the company is faced with the task of
setting its own price, which is commonly a function of the cost of the
product.
2. The typical approach is to use cost-plus pricing which involves establishing a cost base and adding to this cost base a markup to determine a
target selling price.
3. The size of the markup depends on the desired return on investment
(ROI) for the product line or product.
4. The cost-plus pricing formula is expressed as follows:
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-9
Target Selling Price = Cost + (Markup Percentage X Cost).
Markup Percentage = Desired ROI Per Unit ÷ Total Unit Cost.
5. The cost-plus pricing approach’s major advantage is that it is simple to
compute. However, it does not give consideration to the demand side. In
addition, sales volume plays a large role in determining per unit costs
which in turn affect selling price.
6. The lower the sales volume, the higher the selling price the company
must charge to meet its desired ROI. This occurs because fixed costs
are spread over fewer units and the fixed cost per unit increase.
MANAGEMENT INSIGHT
For nearly 90 years Parker Hannifin calculated the production cost, then added
on a percentage of the cost to arrive at the price. If Parker reduced its production
costs, it also cut the price for the product. This approach made it difficult for the
company to ever substantially increase its profit margins. So the company’s CEO
decided to implement strategic pricing schemes similar to other retailers. It
decided to charge a higher markup for about a third of its products because it
had a competitive advantage.
What kind of help might the sales staff need in implementing this new approach?
Answer: Many customers might object to the price increase, and some might
even threaten to buy a competing product. The company needed to
provide the sales staff with justifications for the product. For example,
salespeople needed evidence to demonstrate that the superior quality
of the product justified the higher price.
D.
Time-and-Material Pricing.
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-10
1. Under time-and-material pricing, the company sets two pricing rates—
one for the labor used on a job and another for the material.
2. The labor rate includes direct labor time and other employee costs. The
material charge is based on the cost of direct parts and materials used
and a material loading charge for related overhead costs.
3. Using time-and-material pricing involves three steps:
a.
Calculate the per hour labor charge.
b.
Calculate the charge for obtaining and holding materials.
c.
Calculate the charges for a particular job.
4. The charge for labor time is expressed as a rate per labor hour which
includes:
a.
The direct labor cost of the employee (hourly rate or salary and
fringe benefits).
b.
Selling, administrative, and similar overhead costs.
c.
An allowance for a desired profit or ROI per hour of employee time.
5. The charge for materials typically includes a material loading charge
which covers the costs of purchasing, receiving, handling, and storing
materials, plus any desired profit margin on the materials themselves.
6. The material loading charge is expressed as a percentage of the total
estimated costs of parts and materials for the year. The company
determines this percentage by doing the following:
a.
Estimating the total annual costs for purchasing, receiving, handling,
and storing materials.
b.
Dividing the amount in a. by the total estimated cost of parts and
materials.
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-11
c.
Adding a desired profit margin on the materials themselves.
7. The charges for any particular job are the sum of the
a.
Labor charge,
b.
Charge for materials, and
c.
Material loading charge.
SERVICE COMPANY INSIGHT
For many decades, professionals in most service industries have used some
form of hourly based price, regardless of the outcome. Many customers are now
demanding that the bill be tied to actual performance instead of the amount of
hours of work provided.
What implications does this have for a service company’s need for managerial
accounting?
Answer: When service companies billed by the hour, they were better able to
ensure their profitability because labor hours is their primary cost. But
when billing schemes become performance-based, the company cannot
be assured that the bill will cover its hourly costs. As a consequence,
companies will need to be far more accurate in their estimates of the
likelihood of achieving desired outcomes, or their costs may well exceed
their revenues.
E.
Internal Sales.
1. The transfer of goods between divisions of the same company is called
internal sales. Divisions within vertically integrated companies normally
sell goods to other company divisions as well as to outside customers.
2. When companies transfer goods internally, the price used to record the
transfer between the divisions is the transfer price.
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-12
3. Setting a transfer price is often complicated because of competing
interests among divisions within the company. A transfer price that is too
high will benefit the selling division, but hurt the purchasing division.
4. There are three possible approaches for determining a transfer price:
F.
a.
Negotiated transfer prices.
b.
Cost-based transfer prices.
c.
Market-based transfer prices.
Negotiated Transfer Prices.
1. The negotiated transfer price is determined through agreement of
division managers. It will range between the external purchase price per
unit and the sum of the unit variable cost plus unit opportunity cost.
2. Opportunity cost is the contribution margin per unit of goods sold
externally.
3. The minimum transfer price equals variable cost plus opportunity cost
whether the seller is at full capacity or has excess capacity. However,
opportunity cost will vary depending on whether a division is at full
capacity or has excess capacity.
4. Given excess capacity (zero opportunity cost) to the selling division, it
would be in the company’s best interest for the buying division to purchase
goods internally as long as the selling division’s variable cost is less than
the outside price.
5. When the selling division has excess capacity, it will receive a positive
contribution margin from any transfer price above its variable cost while
the buying division will benefit from any price below the outside price.
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-13
6. In the minimum transfer price formula, variable cost is defined as the
variable cost of units sold internally which will differ from the variable cost
of units sold externally in some instances (i.e. reduced variable selling
expenses for internal sales).
7. Under negotiated transfer pricing, the selling division establishes a
minimum transfer price and the purchasing division establishes a
maximum transfer price.
8. Companies often do not use negotiated transfer pricing because:
G.
a.
Market price information is sometimes not easily obtainable.
b.
A lack of trust between the two negotiating divisions may lead to a
breakdown in negotiations.
c.
Negotiations often lead to different pricing strategies from division
to division which is sometimes costly to implement.
Cost-Based Transfer Prices.
1. One method of determining transfer prices is to base the transfer price
on the costs incurred by the division producing the goods.
2. A cost-based transfer price may be based on full cost, variable cost, or
some modification including a markup.
3. The cost-based approach often leads to poor performance evaluations
and purchasing decisions. Under this approach, divisions sometimes
use improper transfer prices which leads to a loss of profitability and
unfair evaluations of division performance.
4. The cost-based approach does not provide the selling division with
proper incentive. In addition, this approach does not reflect the selling
division’s true profitability, and doesn’t even provide adequate incentive
for the selling division to control costs since the division’s costs are
passed on to the buying division.
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-14
H.
Market-Based Transfer Prices.
1. The market-based transfer price is based on existing market prices of
competing goods. This system is often considered the best approach
because it is objective and generally provides the proper economic
incentives.
2. When the selling division has no excess capacity, it receives market
price and the purchasing division pays market price.
3. If the selling division has excess capacity, the market-based system can
lead to actions that are not in the best interest of the company.
4. In many cases, there is not a well-defined market for the good being
transferred. As a result, a reasonable market value cannot be developed,
and companies must resort to a cost-based system.
*I.
Absorption-Cost Pricing.
1. Absorption-cost pricing uses total manufacturing cost as the cost base
and provides for selling/administrative costs plus the target ROI through
the markup.
2. Absorption-cost pricing involves three steps:
a.
Compute the unit manufacturing cost.
b.
Compute the markup percentage (the percentage must cover both
the desired ROI and selling and administrative expenses).
c.
Set the target selling price.
3. The markup percentage is computed by dividing the sum of the desired
ROI per unit and selling and administrative expenses per unit by the
manufacturing cost per unit.
4. The target selling price is computed as: Manufacturing cost per unit +
(Markup percentage X Manufacturing cost per unit).
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-15
5. Most companies that use cost-plus pricing use either absorption cost or
full cost as the basis because:
a.
Absorption-cost information is most readily provided by a company’s
cost accounting system.
b.
Basing the cost-plus formula on only variable costs could encourage
managers to set too low a price to boost sales.
c.
Absorption-cost or full-cost pricing provides the most defensible base
for justifying prices to managers, customers, and government.
*J. Variable-Cost Pricing.
1. Variable-cost pricing uses all of the variable costs, including selling and
administrative costs, as the cost base and provides for fixed costs and
target ROI through the markup.
2. Variable-cost pricing is more useful for making short-run decisions
because it considers variable cost and fixed cost behavior patterns
separately.
3. Variable-cost pricing involves the following steps:
a.
Compute the unit variable cost.
b.
Compute the markup percentage.
c.
Set the target selling price.
4. The markup percentage is computed by dividing the sum of the desired
ROI per unit and fixed costs per unit by the variable cost per unit.
5. The target selling price is computed as: Variable cost per unit + (Markup
percentage X Variable cost per unit).
6. The specific reasons for using variable-cost pricing are:
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-16
a.
It is more consistent with cost-volume-profit analysis used to measure
the profit implications of changes in price and volume.
b.
This approach provides the type of data managers need for pricing
special orders.
c.
It avoids arbitrary allocation of common fixed costs to individual
product lines.
*K. Transfers Between Divisions in Different Countries.
1. An increasing number of transfers are between divisions that are located
in different countries. Differences in tax rates across countries can
complicate the determination of the appropriate transfer price.
2. Companies must pay income tax in the country where they generate the
income. Many companies prefer to report more income in countries with
low tax rates in order to maximize income, and minimize income tax.
3. Companies maximize income by adjusting the transfer prices they use
on internal transfers between divisions located in different countries. They
allocate more contribution margin to the division in the low-tax-rate country
while they allocate less to the division in the high-tax-rate country.
4. Adjusting the transfer prices to maximize income can result in inappropriate purchasing decisions and unfair evaluations. In addition, a company
must consider whether it is legal and ethical to use a lower transfer price
when the market price is clearly higher.
20 MINUTE QUIZ
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-17
Circle the correct answer.
True/False
1. Once a company has determined the target price, it can determine its target cost by setting a desired profit.
True
False
2. In a competitive, common-product environment the company must set a target selling price using cost-plus
pricing.
True
False
3. Under cost-plus pricing, the markup percentage is computed by dividing desired ROI per unit by variable
cost per unit.
True
False
4. The labor charge includes the direct labor cost of employees, selling, administrative, and similar overhead
costs; and an allowance for a desired profit per hour.
True
False
5. The charges for any particular job are the sum of the labor charge, the materials charge, and the material
loading charge.
True
False
6. An appropriate transfer price should assist the company in making proper purchasing decisions.
True
False
7. An advantage of the cost-based transfer price approach is that it can increase a division manager’s control
over the division’s performance.
True
False
8. The market-based transfer price approach provides a fairer allocation of the company’s contribution margin
to each division than the cost-based approach.
True
False
9. In order to maximize income, and minimize income tax, companies can adjust the transfer prices they use
on transfers between divisions located in different countries.
True
*10.
False
Absorption cost pricing is more consistent with cost-volume-profit analysis used to measure the profit
implications of changes in price and volume.
True
False
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-18
Multiple Choice
1.
The target cost of a product
a. includes product costs but not period costs.
b. is determined before the target price is established.
c. is the difference between the target price and the desired profit.
d. is determined by the target audience.
2.
In the cost-plus pricing approach, the markup percentage is computed by dividing the
a. desired ROI/unit by variable cost/unit.
b. desired ROI/unit by total unit cost.
c. total unit cost by desired ROI/unit.
d. selling price/unit by desired ROI/unit.
3.
All of the following are steps in the time-and-material pricing approach except calculating the
a. labor charge.
b. material loading charge.
c. manufacturing overhead charge.
d. charges for a particular job.
4.
The total contribution margin to a company in the market-based transfer price approach is
a. greater than in the cost-based approach.
b. less than in the cost-based approach.
c. the same as in the cost-based approach.
d. either greater than or less than in the cost-based approach.
*5.
Absorption-cost pricing
a. includes all variable costs in the cost base.
b. excludes fixed manufacturing overhead from the cost base.
c. provides the data needed for pricing special orders.
d. uses a markup percentage that covers the desired ROI and the selling and
administrative expenses.
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-19
ANSWERS TO QUIZ
True/False
1.
2.
3.
4.
5.
True
False
False
True
True
6.
7.
8.
9.
*10.
True
False
True
True
False
Multiple Choice
1.
2.
3.
4.
*5.
c.
b.
c.
c.
d.
Copyright © 2015 John Wiley & Sons, Inc.
Weygandt, Managerial Accounting, 7/e, Instructor’s Manual
(For Instructor Use Only)
8-20