Deck 22: Responsibility Accounting and Transfer Pricing

Question 1

A cost that is directly traceable to a particular center must be a variable cost.

Answer 1

False

Question 2

All costs become traceable at some level of the organization.

Answer 2

True

Question 3

Profit centers generate revenues and costs.

Answer 3

True

Question 4

Responsibility margin is useful in evaluating the consequences of short-run marketing strategies,while contribution margin is more useful in evaluating long-term profitability.

Question 5

An investment center is a profit center where management can make related capital investment choices.

Question 6

Performance margin is equal to controllable fixed costs minus the contribution margin.

Question 7

If a business activity qualifies as a profit center,it cannot also qualify as an investment center.

Question 8

An accounting system designed to measure the performance of each center within a business is

Question 9

Traceable fixed costs usually cannot be eliminated even if the center is closed.

Question 10

One purpose of a responsibility accounting system is to evaluate the performance of center managers.

Question 11

The contribution margin approach to preparing reports for managers classifies costs into fixed and variable costs.

Question 12

If operations at a center are discontinued,all traceable costs attributed to the cost would be discontinued.

Question 13

The responsibility margin is the contribution margin less common fixed costs.

Question 14

A responsibility income statement shows the revenue and expenses of each cost center within a particular part of a business.

Question 15

Revenue,less variable costs,less traceable fixed costs,is called the contribution margin.

Question 16

In responsibility income statements,revenue is first assigned to the centers responsible for creating that revenue.

Question 17

Evaluating the performance of cost centers involves subjective judgments as to the value of the services rendered by these centers.

Question 18

A common cost may become a traceable cost as it moves up to larger responsibility centers.

Question 19

Common fixed costs jointly benefit several parts of the business and would not change significantly even if one of the parts of the business were discontinued.

Question 20

In assigning costs to centers,each center is charged with costs attributed to the center and based on company-wide rates.

Question 21

Disneyland charges visitors for admission to the park but not for individual rides or attractions."Splash Mountain" is one of the rides in Disneyland.The Walt Disney Company should evaluate "Splash Mountain" as:

A)A revenue center.
B)A cost center.
C)An investment center.
D)A profit center (other than an investment center).

Question 22

When an external market exists for a transferred product or service,most companies use either negotiated transfer prices or cost-plus transfer prices.

Question 23

An investment center:

A)Is a profit center for which management is able to objectively measure the cost of the assets used in the center's operations.
B)Is a cost center for which management is able to identify the original amount invested.
C)May be either a cost center or a profit center.
D)Is a subunit of the organization that provides services to other centers within the organization.

Question 24

Disneyland is one of several theme parks owned by The Walt Disney Company.Disneyland should be evaluated as:

A)An investment center.
B)A cost center.
C)An entertainment center.
D)A profit center (other than an investment center).

Question 25

One of the unique services provided by San Francisco's St.Francis Hotel is cleaning and polishing coins (pocket change)for the guests.From the standpoint of hotel management,this "money laundry" should be viewed as:

A)A contribution center.
B)A cost center.
C)An investment center.
D)A profit center (other than an investment center).

Question 26

Carrier Corporation produces heating and air conditioning equipment at a number of plants throughout the United States including one in Syracuse,New York.Carrier should evaluate its Syracuse plant as:

A)A cost center.
B)An investment center.
C)A profit center (other than an investment center).
D)A committed center.

Question 27

The transfer price is the dollar amount used in recording sales to primary customers.

Question 28

In a responsibility accounting system,the recording of revenue and costs begins with the:

A)Most profitable segments of the business.
B)Least profitable segments of the business.
C)Broadest areas of management responsibility.
D)Smallest areas of management responsibility.

Question 29

The part of a business a particular manager is held responsible for is called a:

A)Cost center.
B)Profit center.
C)Investment center.
D)Responsibility center.

Question 30

Carrier Corporation's Syracuse plant is organized into Air Conditioning and Heating Products divisions.The management of the Syracuse plant should evaluate the Heating Products division as:

A)A cost center.
B)An investment center.
C)A profit center (other than an investment center).
D)A revenue center.

Question 31

John Thomas is the manager of materials movement for the Syracuse plant of Carrier Corporation.Thomas should be evaluated as manager of:

A)A cost center.
B)An investment center.
C)A profit center (other than an investment center).
D)Human resources under his supervision.

Question 32

The human resources department of a large company would be considered:

A)A cost center.
B)A profit center.
C)An investment center.
D)A revenue center.

Question 33

The term responsibility center reflects the idea that the "centers" of a business usually are defined in a manner such that each center is:

A)Responsible for earning a specified amount of profit.
B)Responsible for all business operations in a specific region.
C)Under the control of a specified center manager.
D)Approximately the same size.

Question 34

The bookstore of a university would be considered:

A)A cost center.
B)A profit center.
C)An investment center.
D)A revenue center.

Question 35

San Francisco's famous St.Francis Hotel is owned by Westin Hotel and Resort Group.Westin should evaluate the St.Francis as:

A)A cost center.
B)A historical landmark.
C)An investment center.
D)A profit center (other than an investment center).

Question 36

Which of the following is not a valid reason for developing responsibility center information?

A)Responsibility center information is useful in deciding how to allocate resources among segments of the business.
B)Separately measuring the revenue and expenses of each responsibility center is a necessary step in developing financial statements for the business entity viewed as a whole.
C)Responsibility center information is useful in evaluating the performance of segment managers.
D)Responsibility center information helps management to quickly identify sections of the business that are performing poorly.

Question 37

A responsibility accounting system measures the performance of each of the following centers except:

A)Profit center.
B)Investment center.
C)Control center.
D)Cost center.

Question 38

Cost centers are evaluated primarily on the basis of their ability to control costs and:

A)Their return on assets.
B)Residual income.
C)The quantity and quality of the services they provide.
D)Their contribution margin ratio.

Question 39

The primary difference between profit centers and cost centers is that:

A)Profit centers generate revenue.
B)Cost centers incur costs.
C)Profit centers are evaluated using return on investment criteria.
D)Profit centers provide services to other centers in the organization.

Question 40

An example of a profit center is:

A)The accounting department in a manufacturing company.
B)The maintenance department of a university.
C)The furniture department of a retail department store.
D)The human resources department in a hospital.

Question 41

Many companies view performance margin as a more useful tool than responsibility margin for evaluating segment managers.This is because:

A)Managers have no control over traceable fixed costs.
B)Performance margin is not affected by the size of the department.
C)Performance margin indicates the change in operating income that would result from closing the department.
D)Performance margin includes only those revenue and costs under the manager's direct control.

Question 42

Depreciation on the factory would be an example of a:

A)Controllable fixed cost.
B)Period cost.
C)Responsibility cost.
D)Committed fixed cost.

Question 43

The dollar amount used by one division which supplies a good or a service to another division within a company is called a:

A)Market price.
B)Transfer price.
C)Fair price.
D)Agreed-upon price.

Question 44

A responsibility income statement generally does not show the:

A)Contribution margin of each responsibility center.
B)Traceable fixed costs allocated to each responsibility center.
C)Segment margin of each responsibility center.
D)Net income of each responsibility center.

Question 45

Company MHF operates subsidiaries in two countries.One of the subsidiaries consumes the output of the other in the production of a good for sale to the public.The company could increase cash flows by:

A)Using a transfer price based on full cost.
B)Using a transfer price to transfer as much income as possible to the subsidiary located in the lower tax country.
C)Using a transfer price based on market value.
D)Using a transfer price to transfer as much income as possible to the subsidiary located in the higher tax country.

Question 46

The most common value used for transfer pricing is:

A)Total fixed costs.
B)Total fixed and variable costs.
C)Market value less fixed costs.
D)Market value.

Question 47

The responsibility margin is calculated by:

A)Subtracting fixed costs traceable to a center from its contribution margin.
B)Subtracting common fixed costs from the contribution margin.
C)Subtracting variable costs from sales.
D)Subtracting common fixed costs from variable costs.

Question 48

Responsibility accounting systems should begin with:

A)A budget by center.
B)A performance report by center.
C)A measure of corporate performance.
D)A company-wide income statement.

Question 49

If a company wanted to evaluate the manager's ability to control costs,the company would probably look at the:

A)Performance margin.
B)Responsibility margin.
C)Contribution margin.
D)Segment margin.

Question 50

Responsibility accounting systems measures the performance of:

A)The entire company.
B)Each center individually.
C)Both the entire company and each center individually.
D)Neither the entire company nor each center individually.

Question 51

In preparing a responsibility income statement that shows contribution margin and responsibility margin,generally two concepts are involved in allocating costs to the various centers.These concepts are:

A)Whether the costs are variable or fixed and whether they are material in dollar amount.
B)Whether the costs are traceable to the responsibility center and whether the responsibility center is organized as a profit center or an investment center.
C)Whether the costs are variable or fixed and whether they are directly traceable to the responsibility center.
D)Whether the costs are traceable to the responsibility center and whether they are material in dollar amount.

Question 52

In the short run,the greatest increase in profitability will result from increasing sales in those profit centers with the:

A)Highest performance margins.
B)Lowest traceable fixed costs.
C)Highest contribution margin ratios.
D)Highest responsibility margins.

Question 53

Sloan Sporting Goods has stores in four geographic regions.Each region has at least 20 stores.In the company's responsibility accounting system,sales are recorded separately for each sales department within each store.The total sales for a particular region are determined by:

A)Combining the total sales of all stores in that region.
B)Using a separate revenue account to record the sales transaction for each region.
C)Taking a percentage of the company's total sales that is equal to the percentage of the company's stores located in that region.
D)Adding together the sales tickets for all sales transactions in the region.

Question 54

Parker's newly hired director of accounting services feels that the property taxes on the Cairo factory should be allocated to the fabricating,assembly,and finishing departments based upon the square footage they occupy.Of the following,which is not a valid reason to reject this recommendation?

A)The property taxes would not change even if one or more of the departments were eliminated.
B)Such an allocation violates GAAP.
C)The property taxes are not under the control of department managers.
D)The allocation may imply changes in efficiency that are unrelated to center performance.

Question 55

The contribution margin is calculated by:

A)Subtracting fixed costs from sales.
B)Subtracting variable costs from sales.
C)Subtracting fixed and variable costs from sales.
D)Subtracting common costs from sales.

Question 56

In a responsibility income statement,the term common fixed costs describes fixed costs that:

A)Are under the manager's immediate control.
B)Jointly benefit several responsibility centers of the business.
C)Occur in virtually every responsibility center of the business (such as salaries).
D)Are easily traceable to specific profit centers.

Question 57

The concept of contribution margin applies:

A)Only to investment centers.
B)Only to profit centers.
C)Only to cost centers.
D)To all types of responsibility centers.

Question 58

Successful operation of a responsibility accounting system requires all of the following except:

A)Budgets prepared for each responsibility center.
B)The use of a bonus pool based on ROA (return on assets).
C)An accounting system which measures the performance of each responsibility center.
D)The preparation of timely performance reports.

Question 59

Traceable fixed costs that the manager of a department cannot change are called:

A)Controllable.
B)Committed.
C)Conditional.
D)Common.

Question 60

Responsibility margin is equal to:

A)Revenue,less contribution margin and traceable fixed costs.
B)Revenue,less variable costs.
C)Revenue,less variable costs and traceable fixed costs.
D)Revenue,less variable fixed costs,traceable fixed costs,and common costs.

Question 61

Responsibility income statement-cost classification
Milton's,a large department store,prepares income statements by sales department.These statements follow the contribution margin approach,showing contribution margin and responsibility margin for each profit center as well as monthly income from operations for the store.Indicate the classification of each of the costs listed below by inserting the appropriate code letters in the space provided. Costs
____ (a)The cost of merchandise sold in the Women's Sportswear Department.
____ (b)Advertising a sale in the Housewares Department (classify as a fixed cost).
____ (c)Depreciation on equipment used in the Automotive Service Department.
____ (d)Depreciation on the store's heating and air conditioning system.
____ (e)Monthly salary of the manager of the Toy Department.
____ (f)Sales taxes collected from customers and paid to local tax authorities.
____ (g)Monthly salaries of store security guards.

Question 62

Responsibility income statements
Identify and discuss briefly the two concepts generally used in assigning costs to responsibility centers of a business.

Question 63

Responsibility income statement-preparation
Gameland Village is segmented into two sales departments: software and video games.During April,these two departments reported the following operating results: In addition,fixed costs common to both departments amounted to $42,000.
Complete the following segmented income statement for Gameland Village.Follow the contribution margin approach,and show percentages as well as dollar amounts.Conclude your income statement with the company's income from operations.

Question 64

Evaluation of responsibility centers
Shown below are the current-year data for two investment centers of Chelsea Trading,Inc.The total assets utilized by each of these investment centers during the year amount to $1,500,000: (a)Compute the following measures for each investment center: (b)Assume that a $3,000 monthly expenditure for advertising could increase the monthly sales of either investment center by $20,000.Which center should the company advertise to receive the maximum benefit from its advertising expenditure? Center _________.Explain your reasoning:

Question 65

Division X supplies partially completed units of product to division Y.The divisions' negotiated price is $30 per unit.Assuming Division X completed and transferred 3,000 units to division Y,the total transfer price on this transaction is:

A)$30,000.
B)$60,000.
C)$90,000.
D)$3,000.

Question 66

Responsibility income statement
Classico's Pizza,a chain of pizza parlors,views each branch location as an investment center.The local branch reported the following results for the current year: Compute the following measures for this investment center:
(a)Contribution margin: $_______________
(b)Contribution margin ratio: _______________%
(c)Responsibility margin: $_______________
(d)Increase in annual responsibility margin that would be expected to result from a 10% increase in sales volume: $_______________

Question 67

Business units
(a)Define what is meant by each of the following: profit center,investment center,and cost center.Your answer should make clear the distinction between each of these types of centers.
(b)Briefly describe the criteria used to evaluate each of the three types of centers listed in part a.

Question 68

Accounting terminology
Listed below are seven technical accounting terms introduced or emphasized in this chapter: Each of the following statements may (or may not)describe one of these technical terms.In the space provided beside each statement,indicate the accounting term described,or answer "None" if the statement does not correctly describe any of the terms.
____ (a)Costs that jointly benefit several responsibility centers of the business and that do not vary significantly with changes in sales volume.
____ (b)The amount charged by a responsibility center for the goods it sells to another responsibility center.
____ (c)Used to evaluate the performance of a manager based solely on revenue and costs under the manager's control.
____ (d)A responsibility center of a business that may be evaluated by the return earned on assets.
____ (e)The subtotal in a responsibility income statement that is most useful in evaluating the short-term effects of various marketing strategies on profitability.

Question 69

Using a responsibility income statement
Shown below is the current monthly income statement of Metro Video,by profit centers: On the basis of this information,compute the increase in monthly income from operations that may be expected to result from each of the following actions:
(a)Spending $5,000 per month in advertising is expected to increase sales in the Equipment Sales Department by 35%.$________________
(b)Closing the Equipment Sales Department and allowing the Video Rentals Department to expand is expected to increase the revenue of the Video Rentals Department by $105,000 per month.This action also is expected to increase fixed costs traceable to the Video Rentals Department by $40,000 per month.$_______________

Question 70

Division X supplies partially completed units of product to division Y.The divisions' negotiated price is $30 plus 20% per unit.Assuming Division X completed and transferred 5,000 units to division Y,the total transfer price on this transaction is:

A)$180,000.
B)$120,000.
C)$150,000.
D)$5,000.

Question 71

Old Jeans,Inc.has two divisions or profit centers,one makes regular fit jeans and the other makes relaxed fit jeans.The information for the two centers follows: There are also common fixed costs of $27,500.
Required:
Prepare a responsibility income statement by profit center and in total.

Question 72

Preparation of responsibility income statements
Hal-Marts,Inc.has two sales departments: equipment and clothing.During February,these two departments reported the following operating results: In addition,fixed costs common to both departments amounted to $54,400.
Complete the following responsibility income statement for Hal-Marts,Inc.Follow the contribution margin approach,and show percentages as well as dollar amounts.Conclude your income statement with the company's income from operations.(Round your percentage computations to nearest whole percent)