Exam 16: Responsibility Accounting, Performance Evaluation and Transfer Pricing

Decision-making based on general knowledge is more likely to occur in this type of organisation:

Residual income is calculated as:

Which of the following best describes "general knowledge" in a decision-making context?

Economic value added uses "adjusted after-tax operating profit" as one of its inputs. One purpose of using after-tax profit, rather than operating profit, is to B:

Among the responsibility centres listed, which type of responsibility centre is most likely to use growth in sales as a performance measure?

Division A of a firm produces a single product, which is sold only to Division B Division A has a total investment of $1,000,000, while Division B has a total investment of $2,000,000. Division A annually sells 100,000 units of its product to Division B for $5 per unit and earns $150,000 in operating profit. Division B currently earns $250,000. If Division A raises its selling price to $6 per unit and nothing else changes:

Budgets can be used to evaluate managerial performance in: I Cost centres II Profit centres III Investment centres

Problems with market-based transfer prices include:

PNY Pty Ltd reported operating profit of $80,000 and average operating assets of $120,000 in a recent accounting period. Which of the following transactions would definitely increase PNY's return on investment?

Efficiency measures, such as number of new products developed, may be more useful than financial measures in:

A transfer price is required only when goods or services are transferred between cost centres in the same organisation.

Return on investment can be decomposed into two ratios: investment turnover and return on sales.

Investment centre managers are held responsible only for their costs.

Managers are held responsible for revenues in: I Revenue centres II Profit centres III Investment centres

Which of the following is an advantage of cost-based transfer prices? I $\quad$ Managers do not have much incentive to reduce fixed costs II $\quad$ Managers may be motivated to purchase goods and services from outside the company IV $\quad$ Contribution margins may be split between buying and selling divisions

Herbert Feigl Ltd had the following results during the most recent year: Sales $500,000; Residual income $5,000; investment turnover 2.5; and a required rate of return of 15%. The operating (pre-tax) profit was

If a product has an external market and divisions are treated as profit centres, cost-based transfer prices can often lead to suboptimal decisions.

PNY Pty Ltd reported operating profit of $30,000, revenue of $50,000, and average operating assets of $40,000 for a recent year. Which of the following is true?

A segment with an ROI of 30% has a profit of $84,000. The company's required rate of return on segment investments is 18%. The segment's residual income is:

Transfer pricing policies can affect a company's tax liability, particularly if it does business internationally.