CPAR
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
MAS 9206a
MANAGEMENT ADVISORY SERVICES
RESPONSIBILITY ACCOUNTING & TRANSFER PRICING
BASIC CONCEPTS
DEFINITION OF TERMS
RESPONSIBILITY ACCOUNTING –
A.K.A. ―Activity Accounting‖. A system of accounting
wherein costs and revenues are accumulated and
reported by levels of responsibility or by responsibility
centers within the organization.
GOAL CONGRUENCE
–
It is a condition where employees must work for the best
interest for the company as a whole.
MANAGERIAL EFFORT
–
The exertion of effort by the decision makers to reach a
common goal or objective.
MOTIVATION
–
A drive toward a goal that creates action and effort to
achieve that goal. (THIS IS THE BASIC PURPOSE OF
RESPONSIBILITY ACCOUNTING)
SUBOPTIMIZATION
–
Occurs when a division manager takes action for the
benefit of the segment but detrimental for the company
as a whole.
NOTE: To achieve goal congruence and managerial effort, the key is MOTIVATION.
ORGANIZATIONAL STRUCTURE
CENTRALIZATION
–
DECENTRALIZATION

CENTRALIZATION



DECENTRALIZATION

Happens when decision rest exclusively to top
management.
–
Power to make decision is entrusted to managers. The
product of decentralization is Responsibility Accounting.
ADVANTAGES
DISADVANTAGES
Goal congruence

Slower decision making

Employees are less
involved; thus less
committed.

Decisions are less guided
by invaluable worth of
technical expertise.
Decisions are quicker.
Employees are more involved

Lower level managers may
Improvement of employee's
lack necessary skills.
morale
Greater awareness of needs

Suboptimization
of the people involved in the

Job duplication or
subunit, such as the
overlapping of functions.
employees, suppliers, and
customers
MANAGEMENT BY OBJECTIVES
a behavioral, communications oriented, responsibility approach where a manager and his/her
subordinates agree upon objectives and the means on how such objectives can be attained.
RESPONSIBILITY CENTERS

Can be a DIVISION, SEGMENT or an ORGANIZATION UNIT headed by a responsible personnel.

A clearly identified part or segment of an organization that is accountable for a specified function
or set of activities.

Responsibility centers also called accountability centers, are output of decentralized organization.
TYPES OF RESPONSIBILITY CENTERS:
(1) COST CENTER - a responsibility center where a manager has control over the incurrence of costs but
not over revenues or investments. Example: Maintenance Department
(2)
REVENUE CENTER - the manager has control over revenues. Example: Sales Department
(3)
PROFIT CENTER - the manager has control over both costs and revenues. Example: A sales outlet
(4)
INVESTMENT CENTER - the manager has control over both costs and revenues, as well as over
investment in plant and equipment, receivable, inventory, and other assets. Example: Subsidiary
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 2 of 15
EVALUATING PERFORMANCE OF RESPONSIBILITY CENTERS
RESPONSIBILITY CENTERS
EVALUATION MODELS
Cost Center
Cost Variance Analysis
Revenue Center
Revenue Variance Analysis
Profit Center
Segment Margin
Investment Center
ROI , Residual Income & EVA
IMPORTANT REMINDERS:
(1)
The evaluation of the segment is based on its segment margin while the segment manager is
evaluated based on CONTROLLABLE MARGIN.
(2)
Simply stated, the manager is evaluated only to the extent that he can only control. Controllability
is the extent which a manager can influence.
(3)
Computation of segment margin and controllable margin are as follows:
Sales
xx
Variable costs
(xx)
Contribution margin
xx
Direct controllable fixed costs
(xx)
Controllable margin
xx
Direct non-controllable fixed costs
(xx)
Segment margin
xx
Allocated fixed costs
(xx)
Operating income
xx
RETURN ON INVESTMENT (ROI) – the most common measure of performance for investment centers.
ROI can be computed as follows:
Operating Income
ROI =
Average Operating Assets
NOTES:
(a)
If operating income is not given, segment margin can be used.
(b)
Operating income refers to EBIT (earnings before interest and taxes) and should exclude passive
income.
(c)
Operating assets includes all assets except marketable securities and investments.
(d)
The ROI formula can also be broken down into the product of profit margin and asset turnover.
Operating Income
Sales
ROI =
x
Sales
Average Operating Assets
Advantages
It encourages managers to pay careful
attention to the relationship among sales,
expenses and investment.
It encourages cost efficiency
Disadvantages
It discourages managers from investing in
projects that would decrease the divisional ROI
but would increase the profitability of the
company as a whole.
It can encourage myopic behaviour, in that
managers may focus on the short run at the
expense of the long run.
It discourages excessive investment in
operating assets
RESIDUAL INCOME (RI) – the difference between operating income and the minimum peso return
required on a company’s operating assets. The equation for RI can be expressed as follows:
RI = Operating Income – (Minimum required rate of return x Operating Assets)
ECONOMIC VALUE ADDED (EVA) – a more specific version of residual income. It represents the
segment’s true economic profit because it measures the benefit obtained by using resources in a
particular way.
After-tax operating income [EBIT x (1 – tax rate)]
Less desired income
[After-tax WACC x (Total assets – Non-interest bearing current liabilities)]
EVA
xx
(xx)
xx
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
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TRANSFER PRICING
Is the amount charged by one segment for goods or services transferred to another segment.
OBJECTIVES OF TRANSFER PRICING
(1)
To facilitate optimal decision-making.
(2)
To provide a basis in measuring divisional performance.
(3)
To motivate the different department heads in improving their performance and that of their
departments.
FACTORS IN DETERMINING TRANSFER PRICE
(A) GOAL CONGRUENCE – Does the transfer price beneficial for the company as a whole?
(B) SEGMENT PERFORMANCE – What is the benefit or loss for individual segment?
(C) CAPACITY – Does the selling segment is operating at full capacity?
(D) COST STRUCTURE – What cost are variable and fixed?
METHODS IN DETERMINING TRANSFER PRICE

Cost-based transfer price

Market-based transfer price

Negotiated transfer price
RULES IN TRANSFER PRICING

MAXIMUM TRANSFER PRICE
Determined by the buying DIVISION and should be NO GREATER than the lowest market price at
which the buying segment can acquire the goods externally.

MINIMUM TRANSFER PRICE
Determined by the selling DIVISION and should be NO LESS than the sum of the selling segments
incremental costs associated with the goods or services plus any opportunity costs of the facility
used.
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 4 of 15
EXERCISES:
STRAIGHT PROBLEMS:
RESPONSIBILITY CENTERS
1.
Classify the following whether it is a Cost Center (CC), Revenue Center (RC), Profit Center (PC) or
Investment Center (IC).
1.
Accounting Department
6.
Repairs and Maintenance Department
2.
Car Park Ticket Outlets
7.
Sales Department
3.
Subsidiary
8.
Parts Department of Honda
4.
Recto Branch of Starbucks
9.
Convenience Store acting as separate
business
5.
College of Accountancy
10. Convenience Store acting as agent
RESPONSIBILITY ACCOUNTING; ROI, RI & EVA
2.
LEBRON DIVISION is one of the operating units of LA LAKERS INC. Some of this division's 2020
operating results follow:
Sales
P3,000,000
Profit margin
10%
Target return
15%
Residual income
P60,000
REQUIREMENTS: (a) What was the segment income of LEBRON DIVISION for 2020? (b) What was
the return on investment in the LEBRON DIVISION for 2020?
3.
The KOBE DIVISION of LAKERS INC. is planning the 20x3 operating budget. Average operating
assets of P1,500,000 will be used during the year and unit selling prices are expected to average
P100 each. Variable costs of the TIM DIVISIONre budgeted at P400,000, while fixed costs are set
at P250,000. The company's required rate of return is 18%.
REQUIREMENTS:
(a)
Compute the sales volume necessary to achieve a 20% ROI.
(b)
The division manager receives a bonus of 50% of residual income. What is his anticipated
bonus for 20x3, assuming he achieves the 20% ROI from part (a)?
4.
Fill in the blanks in the following schedule. Each case is independent of the others.
the minimum desired ROI is 20%.
Case
A
B
C
Sales
P 400
P____
P 700
Income
P____
P____
P 42
Investment
P____
P 300
P____
Margin
15%
8%
____%
Turnover
____times
3 times
____times
ROI
30%
____%
____%
RI
P____
P____
P
22
5.
In all cases,
D
P____
P 100
____
____%
4 times
40%
P____
TORONTO CORP. reported the following data at year-end of 2020:
Pre-tax operating income
P4,800,000
Current assets
5,000,000
Long-term assets
19,000,000
Current liabilities
2,400,000
Long-term liabilities
6,000,000
The long-term debt has an interest rate of 8% and its market value equalled its carrying amount at
year-end. The market value of equity capital is P1.6 million lower that its carrying amount.
TORONTO’s income tax rate is 30% and its cost of equity capital is 10%.
REQUIREMENT: Calculate TORONTO’s economic value added (EVA).
RESPONSIBILITY ACCOUNTING; TRANSFER PRICING
6.
KYRIE DIVISION of BROOKLYN INC. has a capacity of 200,000 units and expects the following
results.
Sales (160,000 units at P4)
P640,000
Variable costs, at P2
(320,000)
Fixed costs
(260,000)
Income
P 60,000
IRVING DIVISION of BROOKLYN INC. currently purchases 50,000 units of a part for one of its
products from an outside supplier for P4 per unit. IRVING's manager believes he could use a
minor variation of KYRIE's product instead, and offers to buy the units from KYRIE at P3.50.
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 5 of 15
Making the variation desired by IRVING would cost KYRIE an additional P0.50 per unit and would
increase KYRIE's annual cash fixed costs by P20,000. KYRIE'S MANAGER AGREES TO THE DEAL
OFFERED BY IRVING'S MANAGER.
REQUIREMENTS:
(a)
Find the effect of the deal on IRVING's income and circle the correct direction. (increase
decrease none)
(b)
Find the effect of the deal on KYRIE's income and circle the correct direction. (increase
decrease none)
(c)
Find the effect of the deal on the income of BROOKLYN INC. and circle the correct direction.
(increase decrease none)
7.
MIAMI INC. has a number of divisions including the DWAYNE TIM DIVISIONnd WADE DIVISION.
The WADE DIVISION owns and operates a line of budget inns located along major highways. Each
year, the WADE DIVISION purchases furniture for the inn rooms. Currently, it purchases a steel bed
from an outside supplier for P4,000. Mr. Erik, manager of DWAYNE DIVISION, has approached Ms.
Spoelstra, manager of WADE TIM DIVISIONbout selling beds to the WADE DIVISION. Mr. Erik
researched the bed costs and determined the following costs:
Direct materials
P500
Direct labor
1,000
Variable overhead
300
Fixed overhead
1,200
Total manufacturing cost
P3,000
Currently, the DWAYNE DIVISION has capacity to produce 500 beds but is only producing 400
beds. The WADE DIVISION needs 80 beds per year.
REQUIREMENTS:
(a)
What is the minimum transfer price? The maximum transfer price?
(b)
Suppose that the two managers agree on a transfer price of P3,000. What is the benefit to
each division?
(c)
Suppose that the DWAYNE DIVISION were operating at full capacity and it sells its beds to
outside market for P4,100 each. What would be the minimum transfer price? The maximum
transfer price? Should the transfer take place in this case? Why or why not?
8.
TIM DIVISION of SPURS CORP. expects the following results. ANSWER EACH QUESTION
INDEPENDENTLY.
To DUNCAN
To Outsiders
DIVISION
Sales (5,000 x P60)
P300,000
(25,000 x P72)
P1,800,000
Variable costs at P36
180,000
900,000
Contribution margin
P120,000
P 900,000
Fixed costs, all common, allocated on the
basis of relative units
60,000
300,000
Profit
P 60,000
P 600,000
DUNCAN DIVISION has the opportunity to buy its needs for 5,000 units from an outside supplier at
P45 each.
REQUIREMENTS:
(a.) TIM DIVISION refuses to meet the P45 price, sales to outsiders cannot be increased, and
DUNCAN DIVISION buys from the outside supplier. Compute the effect on the income of
SPURS CORP.
(b)
TIM DIVISION cannot increase its sales to outsiders, does meet the P45 price, and DUNCAN
DIVISION continues to buy from TIM. Compute the effect on the income of SPURS CORP.
(c)
Suppose that TIM DIVISION could sell the 5,000 units now taken by DUNCAN DIVISION to
outsiders at P57 each without disturbing sales at the regular P72 price. DUNCAN DIVISION
buys outside at P45 and TIM DIVISION increases its outside sales. Find the effect on the
income of SPURS CORP.
MULTIPLE CHOICE: (THEORIES)
1.
When managers of subunits throughout an organization strive to achieve the goals set by top
management, the result is:
A.
goal congruence.
D.
delegation of decision making.
B.
planning and control.
E.
strategic control.
C.
responsibility accounting.
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
2.
Controllable costs, as used in a responsibility accounting system, consist of:
A.
only fixed costs.
B.
only direct materials and direct labor.
C.
those costs that a manager can influence in the time period under review.
D.
those costs about which a manager has some knowledge.
E.
those costs that are influenced by parties external to the organization.
3.
Which of the following is not a correct match?
1.
Incurs costs
2.
Generates revenue
A.
Investment Center
B.
Cost Center
C.
Profit Center
D.
All are correct matches.
3.
Page 6 of 15
Controls investment funds
1, 2, 3
1
1, 2, 3
4.
Which statement is true?
A.
An investment center is responsible for revenues and expenses, as well as earning a return
on assets.
B.
An investment center is only responsible for its investments.
C.
An investment center is only responsible for revenues and expenses.
D.
A profit center is evaluated using contribution margin, while an investment center is
evaluated using ROI.
5.
The sequence that reflects increasing breadth of responsibility is
A.
cost center, investment center, profit center.
B.
cost center, profit center, investment center.
C.
profit center, cost center, investment center.
D.
investment center, cost center, profit center.
6.
Which of the following items is LEAST likely to appear on the performance report of the manager
of a product line?
A.
A share of company-wide advertising.
B.
Selling expenses for the line.
C.
Revenues from the line.
D.
Variable manufacturing costs for products in the line
7.
The criteria used for evaluating performance
A.
should be designed to help achieve goal congruence.
B.
can be used only with profit centers and investment centers.
C.
should be used to compare past performance with current performance.
D.
motivate people to work in the company's best interests.
8.
Which equation describes ROI? (I = investment, S = sales, and N = income)
A.
S/I
C.
S/I x S/N
B.
S/I x N
D.
N/S x S/I
9.
Residual income is:
A.
Net operating income plus the minimum required return on average operating assets.
B.
Net operating income less the minimum required return on average operating assets.
C.
Contribution margin plus the minimum required return on average operating assets.
D.
Contribution margin less the minimum required return on average operating assets.
10.
Which of the following segment performance measures will increase if there is a decrease in the
selling expenses for that segment?
Return on Investment
Residual Income
A.
Yes
Yes
B.
No
Yes
C.
Yes
No
D.
No
No
11.
As a general rule, the best transfer price to use to transfer the costs of a service center to an
operating department is
A.
the price charged by an outside company for the same service.
B.
the price that encourages goal congruence.
C.
one that is based on budgeted variable cost.
D.
one that is based on budgeted total cost.
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 7 of 15
12.
Market-based transfer prices are best for
A.
the company when the selling division is operating below capacity.
B.
the company when the selling division is operating at capacity.
C.
the buying division if it is operating at capacity.
D.
the buying division.
13.
The worst transfer-pricing method is to base the prices on
A.
market prices.
C.
budgeted total costs.
B.
budgeted variable costs.
D.
actual total costs.
14.
Suddath Corporation has no excess capacity. If the firm desires to implement the general transferpricing rule, opportunity cost would be equal to:
A.
zero.
B.
the direct expenses incurred in producing the goods.
C.
the total difference in the cost of production between two divisions.
D.
the contribution margin forgone from the lost external sale.
E.
the summation of variable cost plus fixed cost.
SELF-TESTS
RESPONSIBILITY ACCOUNTING & TRANSFER PRICING
THEORIES
1.
Richmond Enterprises is reviewing its policies and procedures in an effort to enhance goal
congruence throughout the organization. The processes that are most likely to encourage this
behavior are
A.
Reciprocal cost allocation, zero-base budgeting, and standard costing.
B.
Cost-based transfer pricing, imposed budgeting, and activity-based costing.
C.
Cost-based transfer pricing, management-by-objective performance evaluation, and
participatory budgeting.
D.
Participatory budgeting, reciprocal cost allocation, and management-by-objective
performance evaluation.
2.
An effective management by objectives (MBO) program can increase organizational effectiveness.
Which of the following contributes to an effective MBO program?
A.
Emphasis on "should do" rather than "must do" objectives.
B.
Objectives that are quantified, clearly measurable, and state target dates for completion.
C.
Managers who hold their subordinates strictly accountable for achieving their objectives
precisely as they have been written.
D.
All of the answers are correct.
3.
Which of these assertions refer to responsibility accounting?
1.
Costs and revenues are identified with individuals for better control and performance
appraisal.
2.
Performance reports under this concept includes variances of actual amounts versus plan.
3.
Third parties who are external users are the main recipients of information.
4.
Only expenses which are directly under the control of managers should ideally be charged to
them.
A.
Assertions 1 and 2 only.
C.
Assertions 1, 2 and 4 only.
B.
Assertions 1 and 4 only.
D.
All four assertions.
4.
All of the following are elements of responsibility accounting except
A.
Control reports.
C.
Responsibility center definition.
B.
Chart of accounts classification.
D.
Planning
systems
and
systemic
approaches.
5.
Cost centers are
A.
Amounts of expenditure attributable to various activities.
B.
Units of product or service for which costs are ascertained.
C.
Functions or locations for which costs are ascertained for control purposes.
D.
A section of an organization for which budgets are prepared and control exercised.
6.
Which of the following types of responsibility centers has accountability for revenues?
A.
Cost centers and investment centers.
C.
Expense and investment centers.
B.
Cost centers and profit centers.
D.
Profit centers and investment centers.
7.
A formal report in responsibility accounting is covered by the guideline of
A.
GAAP
C.
PICPA
B.
Management
D.
SEC
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 8 of 15
8.
A responsibility reporting system
A.
Does not permit comparative evaluation of responsibility centers.
B.
Does not permit management by exception at each level of responsibility.
C.
Begins with the highest level of responsibility and moves downward to the lowest level.
D.
Involves the preparation of a report for each level of responsibility shown in the company’s
organization chart.
9.
Which of these are among the qualities of a good report under the concept of responsibility
accounting?
1.
It should be consistent in form and content for each issue.
2.
It should be prompt, timely and regularly issued.
3.
It should easily be understood by users as to the contents, their significance and how to use
them.
4.
It should be able to pinpoint who is to blame as a pre-requisite to explain variances.
5.
It should highlight efficiencies and inefficiencies.
6.
It should be comparative and analytical.
7.
It should be comprehensive as to include all details that can possibly be contained in the
report.
A.
All except 4 and 7.
C.
Statements 1, 2, 3, 4 and 7 only.
B.
All except 4, 5 and 6.
D.
All seven statements.
10.
In responsibility accounting, there are two (2) types of reports distinguished as to goals and
objectives
A.
Horizontal reporting and vertical reporting.
B.
Trends analysis reporting and comparative reporting.
C.
Operations reporting and financial condition reporting.
D.
Responsibility performance reporting and information reporting.
11.
Which of the following items of cost would be least likely to appear in a performance report based
on responsibility accounting technique for the supervisor of an assembly line in a large
manufacturing situation?
A.
Direct labor.
C.
Repairs and maintenance.
B.
Materials.
D.
Supervisor’s salary.
12.
Among the management accounting concepts is controllability which means (3)
A.
Accounting information must be of such quality that confidence can be placed in it.
B.
Management accounting must ensure that flexibility is maintained in assembling and
interpreting information.
C.
It is necessary at all times to identify the responsibilities and key result areas of the
individuals within the organization.
D.
Management accounting identified elements or activities which management can or cannot
influence, and seeks to arrest risks and sensitivity factors.
13.
The following costs may be controllable at certain levels within a manufacturing concern, except:
A.
Insurance costs of plant and equipment.
B.
Power rates imposed by government agency.
C.
Basic salary of permanent manufacturing personnel.
D.
Monthly maintenance cost of equipment covered by an annual contract.
14.
Managers are most likely to accept allocations of common costs based on
A.
Ability to bear.
C.
Cause and effect.
B.
Benefits received.
D.
Fairness.
15.
This practice is irrelevant in evaluating performance of an activity
A.
Planning for future activities
B.
Fixed budgets for mixed costs
C.
Flexible budget for mixed costs
D.
Difference between planned cost and actual
16.
The following information pertains to Bala Co. for the year ended December 31, 1991:
Sales
P600,000
Income
100,000
Capital investment
400,000
Which of the following equations should be used to compute Bala’s return on investment?
A.
(4/6) x (1/6) = ROI
C.
(6/4) x (1/6) = ROI
B.
(4/6) x (6/1) = ROI
D.
(6/4) x (6/1) = ROI
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 9 of 15
17.
Maplewood Industries wants its division managers to concentrate on improving profitability. The
performance evaluation measures that are most likely to encourage this behavior are
A.
Dividends per share, return on equity, and times interest earned.
B.
Turnover of operating assets, gross profit margin, and return on equity.
C.
Return on operating assets, the current ratio, and the debts-to-equity ratio.
D.
Turnover of operating assets, dividends per share, and times interest earned.
18.
Compared to a jewelry store, a supermarket has
A.
Higher margin and higher turnover.
B.
Higher margin and lower turnover.
C.
D.
Lower margin and higher turnover.
Lower margin and lower turnover.
19.
Presently, the Alligator Division of Animal Crackers Co. has a profit margin of 30 percent. If total
sales rise by P100,000, both the numerator and the denominator of the profit margin will increase.
The net result will be
A.
no change in the profit margin ratio.
B.
a decrease in the profit margin ratio to below 30 percent.
C.
an increase in the profit margin ratio to above 30 percent.
D.
a change in the profit margin ratio that cannot be determined from this information.
20.
A subunit of an organization is evaluated on the basis of its ROI. If this subunit's sales and
expenses both increase by P30,000, how will the following measures be affected?
A.
B.
C.
D.
ROI
Increase
Indeterminate
No change
No change
Asset turnover
Increase
Increase
Increase
Decrease
Profit margin
Increase
Decrease
Decrease
No change
21.
Which combination of changes in asset turnover and income as a percentage of sales will maximize
the return on investment?
A.
B.
C.
D.
Asset turnover
Increase
Increase
Decrease
Decrease
Income as a percentage of sales
Increase
Decrease
Increase
Decrease
22.
Which of the following changes would NOT change return on investment (ROI)?
A.
increase total assets
B.
increase sales and expenses by the same percentage
C.
decrease sales and expenses by the same percentage
D.
increase sales dollars by the same amount as total assets
E.
decrease sales and expenses by the same dollar amount
23.
ABC Corp. is composed of three operating divisions. Overall, the ABC Corp. has a return on
investment of 20 percent. Division A has a return on investment of 25 percent. If ABC Corp.
evaluates its managers on the basis of return on investment, how would the Division A manager
and the ABC Corp. president react to a new investment that has an estimated return on investment
of 23 percent?
A.
B.
C.
D.
Division A manager
Accept
Accept
Reject
Reject
ABC Corp. president
Accept
Reject
Accept
Reject
24.
Residual income is a better measure for performance evaluation of an investment center manager
than return on investment because
A.
Returns do not increase as assets are depreciated.
B.
Only the gross book value of assets needs to be calculated.
C.
The problems associated with measuring the asset base are eliminated.
D.
Desirable investment decisions will not be neglected by high return divisions.
25.
Delmar Corporation is considering the use of residual income as a measure of the performance of
its divisions. What major disadvantage of this method should the company consider before
deciding to institute it?
A.
opportunities may be undertaken which will decrease the overall return on investment.
B.
this method does not make allowance for difference in the size of compared divisions.
C.
residual income does not measure how effectively the division manager controls costs.
D.
the minimum required rate of return may eliminate desirable opportunities from
consideration.
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 10 of 15
26.
Power Corporation has two divisions, X and Y, Division X is evaluating a project that will earn a
return which is more than the imputed interest charged for the invested capital, but less than the
division’s historical return on invested capital. Division Y is considering a project that will earn a
rate of return which is greater than the division’s historical return on invested capital, but less than
the imputed interest charge for invested capital. If the corporate objective is to maximize residual
income, the division should decide as follows:
A.
Y accept and X accept.
C.
Y reject and X accept.
B.
Y accept and X reject.
D.
Y reject and X reject.
27.
A prospective project under consideration by P Division of C Co. has an estimated residual income
of a negative P20,000. If the project requires an investment of P400,000, the
A.
company's target rate is 15 percent.
B.
project's return on investment is zero.
C.
project generates a negative return on investment.
D.
project's return on investment is 5 percent less than the company's target rate.
28.
Suppose a manager is to be measured by residual income. Which of the following will not result in
an increase in the residual income figure for this manager, assuming other factors remain constant?
A.
An increase in sales.
B.
A decrease in expenses.
C.
A decrease in operating assets.
D.
An increase in the minimum required rate of return.
29.
In a decentralized company in which divisions may buy goods from one another, the transferpricing system should be designed primarily to
A.
Increase in the consolidated value of inventory.
B.
Allow division managers to buy from outsiders.
C.
Minimize the degree of autonomy of division managers.
D.
Aid in the appraisal and motivation of managerial performance.
30.
The minimum potential transfer price is determined by
A.
the lowest outside price for the good.
B.
incremental costs in the selling division.
C.
the extent of idle capacity in the buying division.
D.
negotiations between the buying and selling division.
31.
The maximum of the transfer price negotiation range is
A.
set by the selling division.
B.
determined by the buying division.
C.
influenced only by internal cost factors.
D.
negotiated by the buying and selling division.
32.
The optimal transfer price from the viewpoint of the corporation is
A.
variable cost
D.
absorption cost plus opportunity cost
B.
absorption cost plus markup
E.
absorption cost plus selling expenses
C.
variable cost plus opportunity cost
D.
absorption cost plus opportunity cost
33.
To avoid waste and maximize efficiency when transferring products among divisions in a
competitive economy, a large diversified corporation should base transfer prices on
A.
full cost.
C.
production cost.
B.
market price.
D.
variable cost.
34.
The Pro Division of Custom Industries is in need of a particular service. The service can be
obtained from another division of Custom at "cost," with cost defined as the summation of variable
cost (P9) and fixed cost (P3). Alternatively, Pro can secure the service from a source external to
Custom for P10. Which of the following statements is true?
A.
Pro should compare P10 vs. P3 in deciding where to acquire the service.
B.
Pro should compare P10 vs. P9 in deciding where to acquire the service.
C.
Pro should compare P10 vs. P12 in deciding where to acquire the service.
D.
From Custom's perspective, the proper decision is reached by comparing P10 vs. P9.
E.
Both "C" and "D" are true.
35.
In gross profit analysis, if the cost price variance is zero, such variance indicates that (3)
A.
Manufacturing management was able to control production costs at budgeted costs.
B.
Manufacturing management was unable to keep production costs at budgeted costs.
C.
Manufacturing management was able to control production cost below budgeted costs.
D.
Manufacturing management was not able to control production at budgeted costs but
purchasing was able to keep at budgeted price.
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 11 of 15
PROBLEMS
1.
The receipt of raw materials used in the manufacture of products and the shipping of finished
goods to customers is under the control of the warehouse supervisor, whose time is spent
approximately 60% on receiving and 40% on shipping activities. Separate staffs for these
operations are employed. The labor-related costs for the warehousing function are as follows:
Warehouse supervisor’s salary
P 40,000
Receiving clerk’s wages
75,000
Shipping clerk’s wages
55,000
Employee benefit costs (30% of wage and salary costs)
51,000
P221,000
The company employs a responsibility accounting system for performance reporting purposes.
Costs are classified as period or product costs. What is the total of labor-related costs reported as
product costs under the control of the warehouse supervisor?
A.
P97,500
C.
P130,000
B.
P128,700
D.
P169,000
2.
HORNETS CORP. has two divisions, O and E. During the year just ended, Division O had a segment
margin of P9,000 and variable costs equal to 70% of sales. Traceable fixed costs for Division E
were P19,000. HORNETS as a whole had a contribution margin of 40%, a segment margin of
P25,000, and sales of P200,000. Given this data, the sales for Division E for last year were:
A.
P50,000.
C.
P116,667.
B.
P87,500.
D.
P150,000.
3.
RAPTORS RETAIL INC. consists of two stores, A and B. Store A had sales of P80,000 during March,
a contribution margin ratio of 30%, and a segment margin of P11,000. The company as a whole
had sales of P200,000, a contribution margin ratio of 36%, and segment margins for the two
stores totaling P31,000. If net income for the company was P15,000 for the month, the traceable
fixed expenses in Store B must have been:
A.
P16,000.
C.
P28,000.
B.
P20,000.
D.
P31,000.
4.
MIAMI COMPANY has two divisions, L and M. During July, the contribution margin in Division L
was P60,000. The contribution margin ratio in Division M was 40% and its sales were P250,000.
Division M's segment margin was P60,000. The common fixed expenses were P50,000 and the
company net income was P20,000. The segment margin for Division L was:
A.
P0.
C.
P50,000.
B.
P10,000.
D.
P60,000.
5.
JAZZ INC. operates two plants, Plant A and Plant B. JAZZ reported for the year just ended a
contribution margin of P50,000 for Plant A. Plant B had sales of P200,000 and a contribution
margin ratio of 30%. Net income for the company was P20,000 and traceable fixed costs for the
two plants totaled P50,000. JAZZ INC.’s common fixed costs for last year were:
A.
P40,000.
C.
P70,000.
B.
P50,000.
D.
P90,000.
MEMPHIS CORP. reported a return on investment of 12%, a capital turnover of 5, and income of
P180,000. On the basis of this information, the company's invested capital was:
A.
P300,000.
D.
P7,500,000.
B.
P900,000.
E.
some other amount.
C.
P1,500,000.
6.
7.
WIZARDS CORP. reported a residual income of P200,000 for the year just ended. The division had
P8,000,000 of invested capital and P1,000,000 of income. On the basis of this information, the
imputed interest rate was:
A.
2.5%.
D.
20.0%.
B.
10.0%.
E.
some other figure.
C.
12.5%.
8.
CHARLOTTE INC. has an after-tax operating income of P3,200,000 and a 9% weighted-average
cost of capital. Assets total P7,000,000 and current liabilities total P1,800,000. On the basis of this
information, CHARLOTTE's economic value added is:
A.
P2,408,000.
D.
P3,992,000.
B.
P2,732,000.
E.
some other amount.
C.
P3,668,000.
MAS 9206a
9.
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 12 of 15
HOUSTON INC. increased its ROI from 20% to 25%. Net operating income and sales remained at
their previous levels of P40,000 and P1,000,000 respectively. The increase in ROI was attributed to
a reduction in operating assets brought about by the sale of obsolete inventory at cost (the
proceeds from the sale were used to reduce bank loans). By how much was inventory reduced?
A.
P8,000.
C.
P20,000
B.
P10,000.
D.
P40,000.
Use the following information in answering the next item(s):
The MINESSOTA DIVISION operating data for the past two years are provided below:
Year 1
Year 2
Return on investment
12%
36%
Stockholders' equity
P 800,000
P 500,000
Net operating income
?
360,000
Turnover
?
3
Margin
?
?
Sales
3,200,000
?
MINESSOTA DIVISION’s margin in Year 2 was 150% of the margin in Year 1.
10.
The net operating income for Year 1 was:
A.
P240,000.
B.
P256,000.
C.
D.
P384,000.
P768,000.
The turnover for Year 1 was:
A.
1.2.
B.
1.5.
C.
D.
3.0.
4.0.
12.
The sales for Year 2 were:
A.
P1,200,000.
B.
P3,000,000.
C.
D.
P3,200,000.
P3,333,333.
13.
The average operating assets for Year 2 were:
A.
P1,000,000.
B.
P1,080,000.
C.
D.
P1,200,000.
P1,388,889.
11.
Use the following information in answering the next item(s):
MAVERICKS CORP. reported these data at year-end:
Pre-tax operating income
P4,000,000
Current assets
4,000,000
Long-term assets
16,000,000
Current liabilities
2,000,000
Long-term liabilities
5,000,000
The long-term debt has an interest rate of 8%, and its fair value equaled its book value at yearend. The fair value of the equity capital is P2 million greater than its book value. MAVERICKS’
income tax rate is 25%, and its cost of equity capital is 10%.
14.
What is the weighted-average cost of capital (WACC) to be used in the economic value added
(EVA) calculation?
A.
8.0%
C.
9%
B.
8.89%
D.
10%
15.
The EVA is
A.
P1,380,000
C.
P1,830,000
B.
P1,620,000
D.
P3,000,000
The KEVIN DIVISION of BROOKLYN CORP. produces Part 1 that is used by OEN’s as a key part in
their products. Costs and sales data of Part 1 are as follows:
Selling price per unit
P100
Variable cost per unit
60
Fixed cost per unit (Based on 40,000 units capacity per annum)
24
BROOKLYN’s DURANT DIVISION is introducing a new product that will use Part 1. An outside
supplier has quoted DURANT DIVISION a price of P96 per unit. This represents the usual P100
price less a quantity discount due to the large number of DURANT’s requirement.
If the DURANT DIVISION would buy 15,000 units of Part 1 from the KEVIN DIVISION, the effect
on the corporate profits would be
A.
Reduce by P60,000.
C.
Increase by P240,000.
B.
Increase by P210,000.
D.
Increase by P1,500,000.
16.
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 13 of 15
17.
Division A of HOUSTON CORP. has the capacity for making 3,000 motors per month and regularly
sells 1,950 motors each month to outside customers at a contribution margin of P62 per motor.
Division B of HOUSTON would like to obtain 1,400 motors each month from Division A. What
should be the lowest acceptable transfer price from the perspective of Division A?
A.
P15.50
C.
P35.70
B.
P26.57
D.
P62.00
18.
Division P of PELICANS CORP. has the capacity for making 75,000 wheel sets per year and
regularly sells 60,000 each year on the outside market. The regular sales price is P100 per wheel
set, and the variable production cost per unit is P65. Division Q of PELICANS CORP. currently buys
30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of
P90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually from Division
P at P87 per wheel set, the change in annual net operating income for the company as a whole,
compared to what it is currently, would be:
A.
P135,000.
C.
P600,000.
B.
P225,000.
D.
P750,000.
19.
For the period just ended, PISTONS CORP.’s BEN DIVISION reported profit of P49 million and
invested capital of P350 million. Assuming an imputed interest rate of 16%, which of the following
choices correctly denotes BEN's return on investment (ROI) and residual income?
Return on
Residual
Investment
Income
A.
14%
P7 million
B.
14%
P(7) million
C.
16%
P7 million
D.
P7 million
14%
E.
None of the above choices shows both the correct ROI and residual income.
20.
ATLANTA CORP. has two major business segments — East and West. In December, the East
business segment had sales revenues of P690,000, variable expenses of P352,000, and traceable
fixed expenses of P104,000. During the same month, the West business segment had sales
revenues of P140,000, variable expenses of P56,000, and traceable fixed expenses of P24,000. The
common fixed expenses totaled P162,000 and were allocated as follows: P89,000 to the East
business segment and P73,000 to the West business segment. A properly constructed segmented
income statement in a contribution format would show that the segment margin of the East
business segment is:
A.
P352,000
C.
P234,000
B.
P145,000
D.
P249,000
21.
If operating income is P60,000, average operating assets are P240,000, and the minimum required
rate of return is 20%, what is the residual income?
A.
40%
C.
P12,000
B.
25%
D.
P48,000
Use the following information in answering the next item(s):
22.
23.
24.
CELTICS DIVISION of the BOSTON CORP. reported the following data for last year:
Sales
P800,000
Operating expenses
P650,000
Interest expense
P50,000
Tax expense
P30,000
Stockholders’ equity
P200,000
Average operating assets
P600,000
Minimum required rate of return
12%
The residual income for the Hum Division last year was:
A.
P126,000
C.
P78,000
B.
P46,000
D.
P22,000
The return on investment last year for the Hum Division was:
A.
75%
C.
35%
B.
25%
D.
12%
OKLAHOMA PRODUCTS is a division of a major corporation. Last year the division had total sales of
P7,940,000, net operating income of P254,080, and average operating assets of P2,000,000. The
company's minimum required rate of return is 12%. The division's residual income is closest to:
A.
P(698,720)
C.
P254,080
B.
P494,080
D.
P14,080
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 14 of 15
25.
Product A, which is produced by the Parts Division of CLIPPERS CORP., sells for P14.25 on the
outside market. The costs to make Product A as recorded by the company's cost accounting system
are:
Direct materials
P7.25
Direct labor
P2.25
Variable manufacturing overhead
P1.50
Fixed manufacturing overhead
P2.50
The Assembly Division of CLIPPERS CORP. requires a part much like Product A to make one of its
products. The Assembly Division can buy this part from an outside supplier for P14.15. However,
the Assembly
Division could use Product A instead of this part purchased from an outside supplier. What is the
most the Assembly Division would be willing to pay the Parts Division for Product A?
A.
P13.50
C.
P14.15
B.
P14.25
D.
P14.00
26.
CELTICS INC. has a practical production capacity of two million units. The current year’s budget
was based on the production and sales of 1.4 million units during the current year. Actual statistics
came out to be production of 1.44 million units and sales of 1.2 million units. Selling price is at
P20 each and the contribution margin ratio is 30%. The peso value that best quantifies the
marketing division’s failure to achieve budgeted performance for the year is
A.
P4,000,000 unfavorable.
C.
P1,200,000 unfavorable.
B.
P4,800,000 unfavorable.
D.
P1,440,000 unfavorable.
27.
The income data of PACERS CORP. for the years 1984 and 1985 are as follows:
(in P000s)
1985
1984
Increase
Net Sales
6,900
5,100
1,800
Cost of Goods Sold
3,795
3,060
735
Gross Profit
3.105
2,040
1,065
If the sales prices in 1985 are approximately 20% higher than those of 1984, the P1,800,000
increase in net sales is accounted for as follows:
Increase(Decrease)
A.
B.
C.
D.
Sales Price
P 650,000
P 800,000
P1,000,000
P1,150,000
Sales Volume
P1,150,000
P1,000,000
P 800,000
P 650,000
28.
The budgeted sales of product YUM in August were 2,400 units. Beechcrafters, the company that
manufactures YUM, uses a standard costing system, and the standard cost per unit of product YUM
is P21.00. The company recorded the following variances for the month:
Sales price variance
P300 adverse
Sales volume profit variance
P1,200 favorable
During August, 2700 units of product YUM were actually sold. What was the budgeted profit for
product YUM in August?
A.
P6,300
C.
P9,600
B.
P7,200
D.
P10,800
29.
Mr. DOC RIVERS is the manager of CLIPPERS DIVISION. His unit reported the following the period
just ended:
Contribution margin:
P350,000
Period expenses:
Manager’s salary
P100,000
Depreciation expense
40,000
Allocated administrative costs
25,000
165,000
CLIPPERS DIVISION Income
P185,000
Of the foregoing, in all likelihood, MR. DOC RIVERS controls
A.
P100,000
C.
P185,000
B.
P165,000
D.
P350,000
30.
LAKERS RETAIN INC. has two Stores, M and N. Store N had sales of P180,000 during March, a
segment margin of 30%, and traceable fixed expenses of P26,000. The company as a whole had a
contribution margin ratio of 25% and P120,000 in total contribution margin. Based on this
information, total variable expenses in Store M for the month must have been:
A.
P140,000.
C.
P300,000.
B.
P260,000.
D.
P360,000.
MAS 9206a
RESPONSIBILITY ACCOUNTING &
TRANSFER PRICING
Page 15 of 15
31.
RUSSELL DIVISION of OKLAHOMA CORP. produces a small valve that is used by various companies
as a component part in their products. OKLAHOMA operates its divisions as autonomous units,
giving its divisional manager great discretion in pricing and other decisions. Each division is
expected to generate a rate of return of at least 14% on its operating assets. RUSSELL DIVISION
has average operating assets of P700,000. The valves are sold for P5. Variable costs are P3 per
valve, and fixed costs total P462,000 per year. The Division has a capacity of 300,000 units.
How many valves must the RUSSELL DIVISION sell each year to generate the desired rate of
return on its assets?
A.
255,885
C.
280,000
B.
265,000
D.
350,000
32.
BOBCATS INC. uses an imputed interest rate of 13% in the calculation of residual income. Division
X, which is part of BOBCAT, had invested capital of P1,200,000 and an ROI of 16%. On the basis
of this information, X's residual income was:
A.
P24,960.
D.
P192,000.
B.
P36,000.
E.
some other amount.
C.
P156,000.
33.
The following information relates to HOUSTON INC.:
Total assets
P9,000,000
After-tax operating income
1,500,000
Current liabilities
800,000
If the company has a 10% weighted-average cost of capital, its economic value added would be:
A.
P(200,000).
D.
P970,000.
B.
P530,000.
E.
some other amount.
C.
P680,000.
Use the following information in answering the next item(s):
LOS ANGELES INC. has two divisions: the Cologne Division and the Bottle Division. The Bottle
Division produces containers that can be used by the Cologne Division. The Bottle Division's
variable manufacturing cost is P2, shipping cost is P0.10, and the external sales price is P3. No
shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can
purchase similar containers in the external market for P2.60.
34.
Assume the Bottle Division has no excess capacity and could sell everything it produced externally.
Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:
A.
P2.00.
D.
P2.90.
B.
P2.10.
E.
P3.00.
C.
P2.60.
35.
The maximum amount the Cologne Division would be willing to pay for each bottle transferred
would be:
A.
P2.00.
C.
P2.60
B.
P2.10.
D.
P3.00.
KEY ANSWER TO SELF-TEST
THEORIES
1. C
2. B
3. C
4. D
5. C
6. D
7. B
8. D
9. A
10. D
11. D
12. D
13. B
14. C
15. B
16. C
17. B
18. C
19. A
20. C
21. A
22. E
23. C
24. D
25. B
26. C
27. D
28. D
29. D
30. B
31. B
32. C
33. B
34. E
35. A
PROBLEMS
1. A
2. A
3. C
4. B
5. A
6. C
7. B
8. B
9. D
10. B
11. B
12. B
13. A
14. C
15. A
- END -
16. A
17. A
18. B
19. A
20. C
21. C
22. C
23. B
24. D
25. C
26. C
27. D
28. C
29. D
30. B
31. C
32. B
33. C
34. D
35. C