TRUE/FALSE 1. Decentralization is a transfer of authority from the bottom to t he top of an organization.

ANS: F DIF: Easy OBJ: 13-1

2. Decentralization is a transfer of authority from the top to the bottom of an organization. ANS: T DIF: Easy OBJ: 13-1

3. epartments. ANS: . ANS: tion. ANS: T F 5. T 4.

Decentralization can result in a lack of goal congruence among d DIF: Moderate OBJ: 13-1

Decentralization increases the time required for decision-making DIF: Moderate OBJ: 13-1

Decentralization can lead to greater job enrichment and satisfac DIF: Easy OBJ: 13-1

6. Decentralization reduces the need for effective communication am ong an organization s departments. ANS: F DIF: Moderate OBJ: 13-1

7. Decentralization means that a unit manager has the authority to make all decisions concerning that specific unit. ANS: F DIF: Easy OBJ: 13-1

8. A responsibility accounting system should include all revenues a nd costs of a division. ANS: F DIF: Easy OBJ: 13-2

9. A responsibility accounting system should include the revenues a nd costs under a division manager s control. ANS: T DIF: Easy OBJ: 13-2

10. Responsibility reports reflect the flow of information from oper ational units to top management. ANS: T DIF: Easy OBJ: 13-2

11. Responsibility reports at lower levels of the organization are l ess detailed than reports at the higher levels. ANS: F DIF: Moderate OBJ: 13-2

12. A manager of a cost center is evaluated solely on the basis of h ow well costs are controlled.

ANS: T DIF: Easy OBJ: 13-4 22. ANS: ices. ANS: T DIF: Moderate OBJ: 13-3 24. ANS: T DIF: Easy OBJ: 13-3 T 17. Suboptimization occurs when a manager of a cost center focuses o n the goals of the cost center rather than on the goals of the organization as a whole. favorable variances sh ould not be investigated. ANS: T DIF: Moderate OBJ: 13-3 15. DIF: Moderate OBJ: 13-3 The manager of a profit center has the ability to set selling pr 18. . When management by exception is employed. An administrative department provides services that benefit the entire organization. The direct method of service department cost allocation allows a partial recognition of reciprocal relationships among service departments befor e assigning costs to revenue-producing areas. ANS: F DIF: Moderate OBJ: 13-3 14. The manager of a revenue center has the authority to establish s elling prices of product. DIF: Moderate OBJ: 13-3 A profit center is typically an independent organizational unit. The manager of an investment center is responsible for generatin g revenue as well as controlling expenses ANS: T DIF: Easy OBJ: 13-3 19.ANS: T DIF: Easy OBJ: 13-3 13. both favorable and unf avorable variances should be investigated. ANS: F DIF: Easy OBJ: 13-4 21. When management by exception is employed. An administrative department provides services that benefit othe r internal units of an organization. The most theoretically correct method of allocating service depa rtment costs is the algebraic method. ANS: T DIF: Easy OBJ: 13-4 23. ANS: T DIF: Moderate OBJ: 13-3 20. ANS: F 16. An service department provides services that benefit other inter nal units of an organization.

In computing a transfer price. ANS: F DIF: Moderate OBJ: 13-5 32. Transfer prices can be used to promote goal congruence among ope rating segments of an organization. the maximum price should be no hi gher than the highest market price at which the buying segment can obtain the go od or service externally. ANS: T DIF: Moderate OBJ: 13-5 27. When using a market-based transfer price. When using a negotiated transfer price. ANS: T DIF: Moderate OBJ: 13-5 35. a decision must be mad e which market price to use. the minimum price should be no l ower than the incremental costs associated with the goods plus the opportunity c ost of the facilities used.ANS: F DIF: Moderate OBJ: 13-4 25. a decision must be made which market price to use. the maximum price should be no hi gher than the lowest market price at which the buying segment can obtain the goo d or service externally. ANS: F DIF: Moderate OBJ: 13-5 29. In computing a transfer price. ANS: T DIF: Moderate OBJ: 13-5 31. ANS: F DIF: Moderate OBJ: 13-5 34. a determination must be made if comparable substitutes are available externally. When using a market-based transfer price. One of the main factors to consider when using a cost-based tran sfer price is whether to use actual or standard costs. The most straight-forward method of assigning service department costs to revenue-producing areas is the direct method. ANS: T DIF: Moderate OBJ: 13-5 . ANS: T DIF: Moderate OBJ: 13-5 30. ANS: T DIF: Moderate OBJ: 13-5 33. Market based transfer prices are most effective for common highcost and high-volume standardized services. ANS: T DIF: Moderate OBJ: 13-5 28. ANS: T DIF: Easy OBJ: 13-4 26. In computing a transfer price. When using a negotiated transfer price. a decision must be mad e how price disputes will be handled.

the cost objective is referred to as a _____________________. An advance pricing agreement can eliminate the possibility of do uble taxation on multinational exchanges of goods. In a decentralized organization. ANS: F DIF: Moderate OBJ: 13-5 37. The accounting practices that are practiced by a decentralized o rganization are referred to as ___________________________. and decision-making r ights from the top to the bottom of an organization is referred to as __________ _________________. Market based transfer prices are most appropriate customized hig h-volume and high-cost services. Cost based transfer prices are most appropriate for low cost and low volume services. ANS: T DIF: Moderate OBJ: 13-5 38. responsibility. ANS: DIF: responsibility center Easy OBJ: 13-2 3. ANS: DIF: responsibility accounting Easy OBJ: 13-2 4. ANS: DIF: decentralization Easy OBJ: 13-1 2.36. Cost-based transfer prices are most effective for common high-co st and high-volume standardized services. ANS: T DIF: Moderate OBJ: 13-6 COMPLETION 1. ANS: T DIF: Moderate OBJ: 13-5 40. ANS: F DIF: Moderate OBJ: 13-5 41. Negotiated transfer prices are most appropriate customized highvolume and high-cost services. The transfer of authority. A responsibility center in which a manger has only the authority to control cost is referred to as a(n) ________________________________. . Negotiated transfer prices are most appropriate for low cost and low volume services. ANS: F DIF: Moderate OBJ: 13-5 39.

ANS: DIF: investment center Easy OBJ: 13-3 8. ANS: DIF: administrative department Easy OBJ: 13-4 11. An organizational unit that provides specific tasks for other in ternal units is referred to as a(n)________________________________. ANS: DIF: revenue center Easy OBJ: 13-3 6. using.ANS: DIF: cost center Easy OBJ: 13-3 5. that benefit the entire organization is referred to as a(n) _____________________________. When one responsibility center uses a transfer price to transfer goods or services to another responsibility center a __________________________ _ is created. An organizational unit that performs management activities. ANS: DIF: suboptimization Moderate OBJ: 13-3 9. An organizational unit whose manager is solely responsible for g enerating revenues is referred to as a ________________________________. ANS: DIF: service department Easy OBJ: 13-4 10. such as personnel services. and disposing of assets in order to maximize return on assets is refer red to as a(n) ______________________. ANS: DIF: profit center Easy OBJ: 13-3 7. ANS: DIF: pseudo-profit center Easy OBJ: 13-5 . A situation in which managers pursue goals and objectives that a re in the best interests of a particular segment rather than in the best interes ts of the organization as a whole is referred to as ____________________________ ____. A responsibility center whose manager is responsible for generat ing revenues and controlling expenses is referred to as a ______________________ __. An organizational unit whose manager is responsible for acquirin g.

decentralized organizations. aid in the appraisal and motivation of managerial performance. ___ ___________________. d. ANS: D DIF: Easy OBJ: 13-1 5. b. Costs of decentralization include all of the following except more elaborate accounting control systems. d. D DIF: Easy OBJ: 13-1 3. and negotiated Moderate OBJ: 13-5 13. centralized. c.S. b. ANS: DIF: cost based. The firm's environment is stable. potential costs of poor decisions. In a decentralized company in which divisions may buy goods from one another. b. When the majority of authority is maintained by top management p ersonnel. Which of the following is more characteristic of a decentralized than a centralized business structure? a. allow division managers to buy from outsiders. market based. ANS: a. and ________________________. There is little confidence in lower-level management to make decisions. The firm grows very quickly. B DIF: Easy OBJ: 13-1 4. multinational corporations headquartered in the U. c. decentralized. c. ANS: a. Transfer pricing is primarily incurred in foreign corporations exporting their products.12. the transfer pricing system should be designed primarily to a. A binding contract between a company and one or more national ta xing authorities that provides the details of how transfer prices will be set is referred to as a(n) ________________________________. minimize the degree of autonomy of division managers. ANS: C DIF: Easy OBJ: 13-1 2. Three types of transfer prices are ________________________. b. d. d. slow response time to changes in local conditions. The firm is relatively small. c. b. . ANS: DIF: advance pricing agreement Moderate OBJ: 13-6 MULTIPLE CHOICE 1. additional training costs. the organization is said to be a. increase the consolidated value of inventory. closely held corporations.

The cost object under the control of a manager is called a(n) __ ________________ center. performance evaluation report d. ANS: B DIF: Easy OBJ: 13-2 9. b. When used for performance evaluation. project report ANS: B DIF: Easy OBJ: 13-2 10. administrative and nonadministrative costs. include allocated fixed overhead. In a responsibility accounting system. and the control func tion of a foreperson. quality audit report b. operations-research accounting c. fixed and variable costs. DIF: Easy OBJ: 13-2 In evaluating the performance of a profit center manager. ANS: D DIF: Easy OBJ: 13-2 8. or supervisor is emphasized? a. costs are classified into categories on the basis of a. prime and overhead costs. What term identifies an accounting system in which the operation s of the business are broken down into reportable segments. A DIF: Easy OBJ: 13-1 6. b. c. periodic internal reports based on a responsibility accounting system should not a. revenue c. a. d. cost b. be related to the organization chart. sales manager. control accounting d. budgetary accounting ANS: A DIF: Easy OBJ: 13-2 7.c. responsibility report c. include variances between actual and budgeted controllable costs. responsibility d. responsibility accounting b. ANS: composed of cost centers. a. investment ANS: C 11. A ___________ is a document that reflects the revenues and/or co sts that are under the control of a particular manager. d. c. he/she . controllable and noncontrollable costs. d. engaged in transfer pricing activities. distinguish between controllable and noncontrollable costs.

B DIF: Easy OBJ: 13-3 12. in at a cost-based transfer price. centralization. b. out at a cost-based transfer price. ANS: D 17. d. maximization. d. c. From the overall company viewpoint. opportunity costs can be included. negotiated prices. in or out at cost-based transfer price. DIF: Moderate OBJ: 13-5 The most valid reason for using something other than a full-cost . to other divisions in the same company. but not for the entire company. all revenues and costs under his/her control. the same costs and revenues on which the unit is evaluated. A major benefit of cost-based transfers is that it is easy to agree on a definition of cost. b. ANS: be evaluated on all revenues and costs that can be traced directly to the unit. d. ANS: B DIF: Moderate OBJ: 13-3 13. c. If a division is set up as an autonomous profit center. c. An internal reconciliation account is not required for internal transfers based on a. this deci sion would lead to a. costs can be measured accurately. ANS: C DIF: Easy OBJ: 13-3 15. ANS: a. c. cost. b. A management decision may be beneficial for a given profit cente r. always promote goal congruence.should a. b. ANS: a. are less motivating to managers than overall organizational goals. d. must be the same for all managers to eliminate suboptimization. suboptimization. c. the variable costs and the revenues of the unit. d. Performance evaluation measures in an organization affect the motivation of subunit managers to transact with one another. b. then goo ds should not be transferred a. b. market value. c. A DIF: Moderate OBJ: 13-3 14. dual prices. they provide incentives to control costs. C DIF: Moderate OBJ: 13-5 16. d. goal congruence.

B DIF: Moderate OBJ: 13-5 19. effect on subunit performance measures is not easily determined c. market price. B DIF: Moderate OBJ: 13-5 18. Which of the following is a consistently desirable characteristi c in a transfer pricing system? a. er. To avoid waste and maximize efficiency when transferring product divisions in a competitive economy. system is very complex to be the most fair to the buying and selling uni ts b. d. A DIF: Moderate OBJ: 13-5 22. The maximum of the transfer price negotiation range is determined by the buying division. d. production cost. b. b. a charge-back system. b. influenced only by internal cost factors. D DIF: Easy OBJ: 13-5 20. ANS: a. a revenue allocation system. does not ensure the control of costs of a supplying unit. b. is not available unless market-based prices are available. responsibility accounting. system should reflect organizational goals d. full cost.-based a. c. a large diversified corporation shou transfer prices on variable cost. d. b. negotiated by the buying and selling division. set by the selling division. ANS: s among ld base a. c. c. DIF: Easy OBJ: 13-5 The presence of idle capacity in the selling division may increa the incremental costs of production in the selling division. d. A 21. d. ANS: se a. ANS: a. c. ANS: transfer price between units of a company is because a full-cost price is typically more costly to implement. the price that a buying division is willing to pay on an internal transf a negotiated transfer price. transfer price remains constant for a period of at least two years ANS: C DIF: Moderate OBJ: 13-5 . the market price for the good. does not reflect the excess capacity of the supplying unit. c. A transfer pricing system is also known as investment center accounting.

d. in the selling division and the overall corporation increase. in the selling division increase. c. . the buying division records the transac tion by a. ANS: B DIF: Easy OBJ: 13-5 28. In an internal transfer. b. d. finished goods and intracompany sales. ANS: D DIF: Easy OBJ: 13-5 27. overall profits profits profits C DIF: Easy OBJ: 13-5 As the internal transfer price is increased. the price of goods transf erred between the divisions needs to be approved by a. ANS: a. With two autonomous division managers. CGS and finished goods. prescribing transfer prices between segments. both divisional managers. in the buying division increase. setting up all organizational units as revenue centers. d. b. c. d. In an internal transfer. c. b. finished goods and accounts receivable. both divisional managers and corporate management. The minimum potential transfer price is determined by incremental costs in the selling division. c. corporate profits increase. the extent of idle capacity in the buying division. corporate management and the manager of the buying division. corporate management. crediting inventory. debiting intracompany CGS. the selling division records the event by crediting a. d. DIF: Easy OBJ: 13-5 26. c. ANS: B DIF: Easy OBJ: 13-5 24. selecting performance evaluation measures that are consistent with the a chievement of overall corporate goals. debiting accounts receivable. the lowest outside price for the good. A 25. ANS: a. accounts receivable and CGS. d. crediting accounts payable. negotiations between the buying and selling division. Top management can preserve the autonomy of division managers an d encourage an optimal level of internal transactions by a. b. c. selecting division managers who are most concerned about their individua l performance. b. b.23.

c. ANS: A DIF: Easy OBJ: 13-5 30. a transfer pricing system. b. environmental policies of the host countries of foreign subsidiaries. d. actions of competitors of foreign subsidiaries. interdepa rtmental transfers of a product should preferably be made at prices a. the use of profit centers. External factors considered in setting transfer prices in multin firms typically do not include the corporate income tax rates in host countries of foreign subsidiaries foreign monetary exchange risks. b. c. equal to variable costs to the producing department. investment centers. equal to the market price of the product. b. multinational corporations. b. the use of cost centers. Corporate taxes and tariffs are particular transfer-pricing conc erns of a. equal to fully-allocated costs of the producing department. c. d. c. Allocating service department costs to revenue-producing departm ents is an alternative to a. ANS: ational a. C DIF: Moderate OBJ: 13-5 32. ANS: D DIF: Moderate OBJ: 13-4 31. ANS: B DIF: Easy OBJ: 13-6 . responsibility accounting. d.ANS: A DIF: Moderate OBJ: 13-5 29. To evaluate the performance of individual departments. set by the receiving department. division managers. d. . domestic corporations involved in importing foreign goods.