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08 X07 B Responsibility Accounting and TP Transfer Pricing
08 X07 B Responsibility Accounting and TP Transfer Pricing
24. Transfer prices are 34. The market price method satisfy a key objective of transfer pricing, namely:
A. necessary to calculate costs in a cost, profit, or investment center A. objectivity C. consistency
B. preferred by buying divisions are the lowest possible B. usability D. reliability
C. do not make any difference for the company's bottom-line no matter what number is used
D. all of the above Irrelevant costs
29. Which item is usually not relevant to a decision by a divisional manager to reduce a transfer
36. Which of the following is a key factor to consider in deciding whether to make internal price to meet a price offered to another division by an outside supplier?
transfers, and, if so, in setting the transfer price? A. opportunity cost
A. Is there an outside supplier? B. variable manufacturing costs
B. Is the seller's variable cost less than the market price/ C. fixed divisional overhead
C. Is the selling unit operating at full capacity? D. the price offered by the outside supplier
D. All of the above are key factors.
Minimum & Maximum Transfer Price
32. From the standpoint of the company, the important question in transfer pricing is General rule
A. what is fair to the divisions 9. The general rule in establishing transfer prices consistent with economic decision making is
B. how to determine the profit of the divisions the
C. whether or not the transfer should take place A. differential cost plus opportunity cost if goods are transferred internally.
D. when the transfer should be made B. actual cost plus opportunity cost if goods are transferred internally.
C. standard cost plus opportunity cost if goods are transferred internally.
Objectives D. all of the above.
1. The objective of a transfer pricing system should be to
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Responsibility Accounting and Transfer Pricing
(B. Transfer Pricing)
25. The minimum transfer price from the seller's standpoint is 12. To avoid waste and maximize efficiency when transferring products among divisions in a
A. market price when excess capacity exists competitive economy, a large diversified corporation should base transfer prices on:
B. market price when excess capacity does not exist A. full cost C. replacement cost
C. incremental costs when excess capacity exists B. variable cost D. market price
D. b and c
13. If an intermediate market exists, the optimal transfer price is the:
Buyer’s standpoint (maximum price) A. outlay cost for producing the goods.
7. Generally, the outside market price would be B. opportunity cost of not selling to the outside market.
A. a floor for internal transfer price. C. market price.
B. a ceiling for internal transfer price. D. variable costs associated with producing the product.
C. both a and b
D. none of the above. 16. If there is no excess capacity, the transfer price is often
A. market price
Methods of transfer pricing B. opportunity cost plus incremental cost
3. The basic methods used in transfer pricing are C. variable cost or variable cost plus profit
A. variable or full costs C. market price or negotiated price D. a or b
B. dual prices D. all of the above
20. Market pricing approach in transfer pricing
8. An example of a transfer price policy is A. helps to preserve unit autonomy
A. market price. B. provides incentive for the selling unit to be competitive with outside suppliers
B. actual cost plus markup. C. may be the most practical approach when there is significant conflict
C. standard cost plus markup. D. both a and b
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Responsibility Accounting and Transfer Pricing
(B. Transfer Pricing)
Variable costing
28. The best transfer price is usually 21. Variable costing method of transfer pricing is
A. actual cost plus a percentage markup A. easy to implement
B. a reliable market price B. intuitive and easily understood
C. budgeted full cost plus a percentage markup C. more logical when there is excess capacity
D. budgeted variable cost plus a percentage markup D. all of the above
30. Market-based transfer prices are best for the 22. A company may consider using variable costs in transfer pricing when there is
A. company when the selling division is operating below capacity. A. excess capacity because variable costs would stay the same
B. company when the selling division is operating at capacity. B. no excess capacity because variable costs would not stay the same
C. buying division if it is operating at capacity. C. excess capacity because fixed costs would stay the same
D. buying division. D. no excess capacity because fixed costs would stay the same
33. Which transfer price is ideal for the company when the selling division is at capacity? Full cost
A. Market price 18. If full cost is used in transfer pricing, it is preferable to use
B. Incremental cost A. standard full cost because the buyer does not wish to be stuck with unknowns
C. Budgeted full cost B. standard full cost because the seller does not wish to pass along the variations in cost
D. Actual variable cost plus a percentage profit C. actual full cost because the buyer is well-advised to deal with the real rather than
anticipated costs
Actual costs D. actual full costs because the seller is well-advised to deal with the real rather than
6. Disadvantages of transfer prices based on actual cost include: anticipated costs
A. reducing the incentive of managers of supplying divisions to control their costs.
B. passing on efficiencies or inefficiencies of supplying divisions to receiving divisions. Negotiated
C. both a and b. 11. Negotiated transfer prices are appropriate when:
D. none of the above. A. there are cost savings to the selling division.
B. there is no external market price.
15. Which of the following types of transfer prices do not encourage the selling division to be C. the internal market price reflects a bargain price.
efficient? D. all of the above.
A. transfer prices based upon market prices
B. transfer prices based upon actual costs 17. A negotiated transfer pricing system is set up where
C. transfer prices based upon standard costs A. the two sides cannot agree on a price and the difference between the two sides is
D. transfer prices based upon standard costs plus a markup for profit absorbed by the home office
B. a ready market price is not available and the two sides must come up with an agreeable
31. The worst transfer-pricing method is to base the prices on price
A. market prices C. budgeted variable costs C. the buyer buys at variable cost and the seller only sells at full cost
B. budgeted total costs D. actual total costs D. the two sides agree to use a cost basis for transfer pricing
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Responsibility Accounting and Transfer Pricing
(B. Transfer Pricing)
outside price and Motor decides to buy inside? The Mining Division can sell all of its output outside the company for P4 per unit. The
A. no change C. P35,000 decrease in XYZ profits Builders Division can buy the black steel from other firms for P4. The Builders Division sells
B. P20,000 decrease in XYZ profits D. P10,000 increase in XYZ profits its product for P12.
What is the optimal transfer price in this case?
At capacity A. P2 per unit C. P7 per unit
Minimum transfer price B. P4 per unit D. P9 per unit
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. Company Y is highly decentralized. Division X, which is operating at capacity, produces a
component that it currently sells in a perfectly competitive market for P13 per unit. At the x
. Assume that Steel Division has a product that can be sold either to outside customers on an
current level of production, the fixed cost of producing this component is P4 per unit and the intermediate market or to Fabrication Division of the same company for use in its production
variable cost is P7 per unit. Division Z would like to purchase this component from Division process. The managers of the division are evaluated based on their divisional profits.
X. What would be the price that Division X should charge Division Z? Steel Division:
A. P 7 C. P 11 Capacity in units 200,000
B. P 13 D. P 9 Number of units being sold on the intermediate market 200,000
Selling price per unit on the intermediate market P90
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. The Black Division of Pluma Company produces a high quality marker. Unit production Variables costs per unit (including P3 of avoidable selling expense) 70
costs (based on capacity production of 100,000 units per year) follow: Fixed costs per unit (based on capacity) 13
Direct materials P 60
Direct labor 25 Fabrication Division:
Overhead (20% variable) 15 Number of units needed for production 40,000
Other information Purchase price per unit now being paid to an outside supplier P86
Sales price 120 The appropriate transfer price should be:
The Black Division is producing and selling at capacity. A. P90 C. P70
What is the minimum selling price that the division would consider as a “transfer price” to the B. P87 D. P86
Red Division on which no variable period costs would be incurred?
A. P120 C. P 88 Partial excess capacity
B. P 91 D. P117 (?) Decision
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. Chips Division manufacturers electronic circuit boards. The boards can be sold either to
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. Harem Corporation consists of two divisions, Mining and Builders. The Mining makes black Compo Division of the same company or to outside customers. Last year, the following
steel, a product that can be used in the product that the Builders division makes. Both activity occurred in division A:
divisions are considered profit centers. The following data are available concerning black
steel and the two divisions: Selling price per circuit board P125
Mining Builders Production cost per circuit board 90
Average units produced 150,000 Numbers of circuit boards:
Average units sold 150,000 Produced during the year 20,000
Variable mfg cost per unit P2 Sold to outside customers 16,000
Variable finishing cost per unit P5 Sold to Compo Division 4,000
Fixed divisional costs P75,000 P125,000
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Responsibility Accounting and Transfer Pricing
(B. Transfer Pricing)
Sales to Compo Division were at the same price as sales to outside customers. The circuit its workers to work overtime. Chips Division indicated that the transfer price may be
boards purchased by Compo Division were used in an electronic instrument manufactured unreasonably high because of the overtime premium.
by that division (one board per instrument). Compo Division incurred P100 in additional cost
per instrument and then sold the instrument for P300 each. What is the maximum transfer that Compo Division will accept for the additional 1,000 units?
A. P 90 C. P200
Assume that Chips Division’s manufacturing capacity is 20,000 circuit boards. Next year B. P125 D. P300
Compo Division wants to purchase 5,000 circuits board from Chips Division rather than
4,000. (Circuit boards of this type are not available from outside sources.) Use the following data to answer questions 11 through 13.
N & R Company transfers a product from division N to division R. Variable cost of this product is
Should Chips Division sell 1,000 additional circuit boards to Compo Division or continue to anticipated to be P40 a unit and total fixed costs amount to P8,000. A total of 100 units are
sell them outside customers? anticipated to be produced. Actual cost, however, amounts to P50 for variable costs. Fixed costs
A. No, because the overall profit will decrease by P35,000. were same as budget. However, actual output was twice as many.
B. Yes, because the overall profit will decrease by P35,000.
C. No, because there is no change in the overall profit. xiii
. Actual cost per unit amounts to
D. Yes, because the overall profit will increase by P75,000. A. P90 C. P115
B. P92 D. P120
Maximum transfer price
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. Chips Division manufacturers electronic circuit boards. The boards can be sold either to xiv
. The transfer price based on actual variable costs plus 130% markup amounts to
Compo Division of the same company or to outside customers. Last year, the following A. P90 C. P115
activity occurred in division A: B. P92 D. P120
Selling price per circuit board P125
Production cost per circuit board 90 xv
. The transfer price based on budgeted full cost plus 30% markup amounts to
Numbers of circuit boards: A. P117 C. P150
Produced during the year 20,000 B. P140 D. P156
Sold to outside customers 16,000
Sold to Compo Division 4,000
Sales to Compo Division were at the same price as sales to outside customers. The circuit
boards purchased by Compo Division were used in an electronic instrument manufactured
by that division (one board per instrument). Compo Division incurred P100 in additional cost
per instrument and then sold the instrument for P300 each.
Assume that Chips Division’s manufacturing capacity is 20,000 circuit boards. Next year
Compo Division wants to purchase 5,000 circuits board from Chips Division rather than
4,000. (Circuit boards of this type are not available from outside sources.)
Chips Division proposed that a transfer for additional 1,000 units be produced by requiring
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.Answer: C
New Operating Profit (P200,000 + P40,000) P240,000
Less Required Returns (P1,250,000 x 0.12) 150,000
New Residual Income P 90,000
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.Answer: D
The Fabrication division has excess capacity, therefore the division can transfer the units at a minimum transfer price
of P50
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.Answer: D
The minimum Davy would accept is the opportunity cost to make the product, which would be the variable cost of P25.
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.Answer: A
The minimum transfer price is P60 because the Division X has excess capacity
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.Answer: C
The profit of the company will decrease by P35,000 which is the difference between the variable (relevant) cost and the
purchase price.
(P9.00 – P5.5) x 10,000 units = P35,000
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.Answer: A
There is no change in the profit because the Motor Division did not buy from the outside supplier
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.Answer: B
The division is operating at capacity (zero excess capacity). Any quantity of production to be transferred to the
Division Z must be at P13; Any price below P13, as transfer price, would decrease its profit.
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.Answer: D
Selling price (market price) P120
Less avoidable selling expense 15 x 20% 3
Minimum transfer price P117
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.Answer: B
The optimal transfer price is P4 per unit, which represents the value of using the black steel in the Builders Division
because the black steel will cost P2 to manufacture and each unit used internally is a unit that cannot be sold to
external buyers. If an intermediate market exists, the optimal transfer price is the market price.
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.Answer: B
The division is operating at capacity, therefore, the minimum transfer price must be the amount of selling price, less
avoidable selling expense.
Selling price P90
Avoidable selling expense 3
Net Price 87
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.Answer: D
Selling price charged by Compo Division P300
Selling price charge by Chips Division 125
Additional selling price P175
Less additional processing cost by Compo 100
Additional profit per unit P 75
Additional profit: 1,000 x P75 P75,000
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.Answer: C
Final selling price by Compo P300
Less additional processing cost 100
Maximum material cost (transfer price) P200
At a transfer price of P200, Compo will not realize any profit on the additional 1,000 units
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.Answer: A
The actual cost is the sum of unit variable cost plus fixed cost divided by actual units produced.
50 + (8000 ÷ 200) = P90
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.Answer: C
Variable cost P 50
Markup (P50 x 1.3) 65
Transfer price P115
xv
.Answer: D
Budgeted full cost P40 + (P8,000 ÷ 100) P120
Markup (P120 x 0.3) 36
Transfer price P156