[MASREV] MATERIAL 06: RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING

1. Responsibility accounting is a system whose attributes include

a. responsibility, liability, and culpability
b. liability, accountability, and performance evaluation
c. performance evaluation, accountability, and responsibility
d. culpability, liability, and accountability
2. Some basic elements of responsibility accounting are
a. chart of accounts classification
b. control-based reports
c. budgeting system
d. all of the above
3. What term identifies an accounting system in which the operations of the business are broken down into reportable
segments and the control functions of a foreperson, sales managers, or supervisor is emphasized?
a. Responsibility accounting
b. Operations-research accounting
c. Control accounting
d. Budgetary accounting
4. The Atwood Company uses a performance reporting system that reflects the company’s decentralization of decision
making. The departmental performance report shows one line of data for each subordinate who reports to the group
vice-president. The data presented shows the actual costs incurred during the period, the budgeted costs, and all
variances from budget for that subordinate’s department. The Atwood Company is using a type of system called
a. Flexible budgeting
b. Responsibility accounting
c. Contribution budgeting
d. Cost-benefit accounting
5. The accumulation of accounting data on the basis of the individual manager who has the authority to make day-to-day
decisions about activities in an area is called
a. static reporting.
b. responsibility accounting.
c. flexible accounting
d. master budgeting.
6. Which of the following is critically important for a responsibility accounting system to be effective?
a. Each employee should receive a separate performance report.
b. Service department costs should be allocated to the operating departments that use the service.
c. Each manager should know the criteria used for evaluating his or her performance.
d. The details on the performance reports for individual managers should add up to the totals on the report to their
supervisor.
7. The report to a territorial sales manager which shows the contribution to profit by each salesperson in the territory is
a. Responsibility Report
b. Profit Report
c. Absorption Profit Report
d. Distribution report
8. A responsibility center
a. is an organization unit where management control exists over incurring costs or generating revenue
b. is responsible for all other departments
c. has a responsible manager in charge of it
d. all of the above

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9. A segment of an organization for which management wants to report the cost of the activities performed separately is
called a(n)
a. Activity-based costing center
b. Profit center
c. Activity center
d. Batch Activity center
10. 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
11. A cost center is used to
a. show responsibility for scheduling materials, labor, and overhead
b. collect costs incurred performing a set of homogeneous activities
c. show authority for choosing product markets and sources of supply
d. assign responsibility for setting the chart of accounts
12. Cost centers in a responsibility accounting system
a. will organize the company into the smallest units of activity – the individual worker
b. will have a specific manager in charge of every cost center
c. should have the same code number for similar units wherever they appear in an organization
d. should show the contribution margin in its control report
13. A profit center is
a. a responsibility center that always reports a profit.
b. a responsibility center that incurs costs and generates revenues.
c. evaluated by the rate of return earned on the investment allocated to the center.
d. referred to as a loss center when operations do not meet the company's objectives.
14. A responsibility center having control over generating revenue is
a. a cost center
b. a profit center
c. an investment center
d. an operation center
15. A distinguishing characteristic of an investment center is that
a. revenues are generated by selling and buying stocks and bonds.
b. interest revenue is the major source of revenues.
c. the profitability of the center is related to the funds invested in the center.
d. it is a responsibility center which only generates revenues.
16. In which type of responsibility center is the manager held accountable for its profits?
a. Cost center
b. Investment center
c. Profit center
d. Profit centers or Investment centers
17. Which of the following responsibility centers have managers who are held accountable for costs?
a. Cost centers and Investment centers
b. Revenue centers and Profit centers
c. Revenue centers and Investment centers
d. Cost centers and Profit centers
18. In responsibility accounting the most relevant classification of costs is
a. fixed and variable
b. discretionary and committed

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 c. incremental and nonincremental
d. controllable and noncontrollable
19. Controllable costs are costs that
a. fluctuate in total in response to small changes in the rate of capacity utilization.
b. will be unaffected by current managerial decisions.
c. management decides to incur in the current period to enable the company to achieve objectives other than
filling customers’ orders.
d. are likely to respond to the amount of attention devoted to them by a specified manager.
20. Overtime conditions and pay were recently set by the personnel department. The production department has just
received a request for a rush order from the sales department. The production department protests that additional
overtime costs would be incurred as a result of the order. The sales department argues the order is from an
important customer. The production department processes the order. In order to control costs, which department
should be charged with the overtime costs generated as a result of the rush order?
a. Personnel department
b. Production department
c. Sales department
d. Shared by production department and sales department
21. Which one of the following would NOT usually be considered a controllable cost for the product or division
manager?
a. factory wages
b. plant rent expense
c. maintenance
d. plant salaries
22. 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 interest
23. Of most relevance in deciding how or which costs should be assigned to a responsibility center is the degree of
a. Avoidability
b. Causality
c. Controllability
d. Variability
24. Internal reports prepared under the responsibility accounting approach should be limited to which of the following
costs?
a. Only variable costs of production
b. Only conversion costs
c. Only controllable costs
d. Only costs properly allocable to the cost center under generally accepted accounting principles
25. The best measure of the performance of the manager of a profit center is the
a. rate of return on investment.
b. success in meeting budgeted goals for controllable costs.
c. amount of controllable margin generated by the profit center.
d. amount of contribution margin generated by the profit center.
26. If used for performance evaluation, periodic internal reports based on a responsibility accounting system should not
a. be related to the organization chart
b. include allocated fixed overhead
c. include variances between actual and budgeted controllable costs
d. distinguish between controllable and noncontrollable costs

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27. The most desirable measure of departmental performance for evaluating the departmental manager is departmental
a. Revenue less controllable departmental expenses
b. Net income
c. Contribution to indirect expenses
d. Revenue less departmental variable expenses
28. Of little or no relevance in evaluating the performance of an activity would be
a. Flexible budgets for mixed costs
b. Fixed budgets for mixed costs
c. The difference between planned and actual results
d. The planning and control of future activities
29. Return on investment (ROI) is calculated as
a. divisional operating income/divisional investment
b. divisional investment – divisional income
c. divisional investment/divisional operating income
d. divisional income – (divisional investment x required rate of return)
30. The return on investment calculation only considers the following components:
S = Sales I = Investment NI = Net Income
Which of the following formulas best describes the return on investment calculation?
a. (I/S) x (S/NI) = I/NI
b. (S/I) x (NI/S) = NI/I
c. (I/S) x (NI/S) = (Ix NI) x (S x S)
d. (S/I) x (S/NI) = (S x S)/(I x NI)
31. To properly motivate divisional management, the divisional ROIs should be
a. Equal
b. Greater in the less profitable divisions to motivate those divisions to achieve higher ROIs
c. Lower in more profitable divisions in which motivation is necessary
d. Different based upon strategic goals of the firm
32. Evaluating performance using ROI encourages managers to focus on
a. income and investment
b. cost efficiency and operating asset efficiency
c. both a and b
d. neither a nor b
33. A measure frequently used to evaluate the performance of the manager of an investment center is
a. the amount of profit generated.
b. the rate of return on funds invested in the center.
c. the percentage increase in profit over the previous year.
d. departmental gross profit.
34. In the formula for ROI, idle plant assets are
a. included in the calculation of controllable margin.
b. included in the calculation of operating assets.
c. excluded in the calculation of operating assets.
d. excluded from total assets.
35. Return on investment for divisions and other company segments is a function of
a. assets employed and expected future cash flows.
b. contribution margin and invested capital.
c. investment turnover and profit margin on sales.
d. physical sales volume, prices, variable costs, and fixed costs.
36. Using residual income for evaluating performance
a. penalizes managers whose segments have low ROIs

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 b. penalizes managers of relatively large segment
c. encourages managers to maximize pesos of profit after a required ROI has been achieved
d. encourage managers to maximize ROI for the company
37. Residual income
a. is always the best measure of divisional performance
b. is not as good a measure of performance as ROI
c. overcomes some of the problems associated with ROI
d. cannot be used by divisions that deal with others in the same company
38. When a firm uses residual income to make decisions, the firm should favor those projects whose residual income
a. is closest to the firm’s minimum capital rate
b. is lowest
c. is highest
d. exceeds a specific target amount
39. A division's investment in conjunction with the residual income may be
a. operating assets
b. operating and non-operating assets
c. assets minus current liabilities
d. any of the above
40. In order to promote goal congruence a manager of an investment center is best evaluated using
a. standard variable costing income statements
b. return on investment
c. budgets and standard costs
d. residual income
41. An advantage of residual income is that it encourages managers to
a. accept projects which provide returns in excess of the company's required rate of return
b. to increase asset turnover
c. attempt to increase the margin
d. all of the above
42. In contrast to residual income (RI), economic value added (EVA) uses:
a. the firm's minimum rate of return instead of its cost of capital.
b. the firm's cost of capital instead of its minimum rate of return
c. a required rate of return.
d. values determined by using conventional accounting policies
43. Which of the following would promote goal congruence?
a. return on investment
b. single measures of performance
c. income based compensation
d. economic value added
44. Assuming that sales and net income remain the same, a company’s return on investment will
a. Increase if invested capital increases
b. Decrease if invested capital decreases
c. Decrease if the invested capital-employed turnover rate decreases
d. Decrease if the invested capital-employed turnover rate increases
45. The other things remaining constant, if a division doubles its investment turnover, its ROI will
a. Decrease
b. remain constant
c. increase
d. double

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46. Other factors remaining unchanged, the rate of return on investment may be improved by
a. increasing investment in assets.
b. increasing expenses.
c. reducing sales
d. decreasing investment in assets.
47. Which of the following will not improve return on investment if other factors remain constant?
a. Increasing sales volume while holding fixed expenses constant.
b. Decreasing assets.
c. Increasing selling prices.
d. None of the above.
48. Assuming that sales and net income remain the same, a company’s return on investment (ROI) would
a. increase if the invested capital-employed turnover rate decreases.
b. Increase if the invested capital-employed turnover rate increases.
c. Increase if invested capital increases.
d. Decrease if invested capital decreases.
49. Economic value added would decrease if:
a. operating income increases
b. the division invests in a project wherein the after-tax operating income is more than the cost of capital
c. operating expenses increase
d. cost of capital decreases
50. Which of the following is not a true statement?
a. Many costs are controllable at some level with a company.
b. Responsibility accounting applies to both profit and not-for-profit entities.
c. Fewer costs are controllable as one moves up to each higher level of managerial responsibility.
d. The term segment is sometimes used to identify areas of responsibility in decentralized operations.
51. Transfer prices are charges for
a. transportation of goods outside units of an organization.
b. goods sold by subunits to outside customers.
c. goods exchanged among subunits.
d. goods stored within a subunit.
52. A transfer price is a price charged
a. to outside customers
b. when one division sells its goods or services to another division
c. by the selling division to the buying division when outside market does not exist
d. a and b
53. Transfer prices are
a. necessary to calculate costs in a cost, profit, or investment center
b. preferred by buying divisions are the lowest possible
c. do not make any difference for the company's bottom-line no matter what number is used
d. all of the above
54. Which of the following is a key factor to consider in deciding whether to make internal transfers, and, if so, in setting
the transfer price?
a. Is there an outside supplier?
b. Is the seller's variable cost less than the market price/
c. Is the selling unit operating at full capacity?
d. All of the above are key factors.
55. From the standpoint of the company, the important question in transfer pricing is
a. what is fair to the divisions
b. how to determine the profit of the divisions

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 c. whether or not the transfer should take place
d. when the transfer should be made
56. The objective of a transfer pricing system should be to
a. maximize the transfer price
b. minimize the transfer price
c. maintain goal congruence between the divisions and the entire firm
d. none of the above
57. The objective(s) of transfer pricing are
a. to motivate managers
b. to provide an incentive for managers to make decisions consistent with the firm's goals (i.e., goal congruence)
c. to provide a basis for fairly rewarding the managers
d. all of the above
58. A transfer pricing system should satisfy which of the following objectives?
a. accurate performance evaluation
b. goal congruence
c. preservation of divisional autonomy
d. all of the above
59. The market price method satisfy a key objective of transfer pricing, namely:
a. Consistency
b. Reliability
c. Objectivity
d. Usability
60. The general rule in establishing transfer prices consistent with economic decision making is the
a. differential cost plus opportunity cost if goods are transferred internally.
b. actual cost plus opportunity cost if goods are transferred internally.
c. standard cost plus opportunity cost if goods are transferred internally.
d. all of the above.
61. A selling division produces components for a buying division that is considering accepting a special order for the
products it produces. The selling division has excess capacity. The minimum price the selling division would be
willing to accept is the
a. selling division’s variable costs
b. buying division’s outside purchase price
c. price that would allow the buying division to cover its incremental cost of the special order
d. price that would allow the selling division to maintain its current ROI
62. The minimum transfer price from the seller's standpoint is
a. market price when excess capacity exists
b. market price when excess capacity does not exist
c. incremental costs when excess capacity exists
d. b and c
63. An example of a transfer price policy is
a. market price.
b. actual cost plus markup.
c. standard cost plus markup.
d. all of the above.
64. If full cost is used in transfer pricing, it is preferable to use
a. standard full cost because the buyer does not wish to be stuck with unknowns
b. standard full cost because the seller does not wish to pass along the variations in cost
c. actual full cost because the buyer is well-advised to deal with the real rather than anticipated costs
d. actual full costs because the seller is well-advised to deal with the real rather than anticipated costs

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65. To minimize taxes, some multinational companies set low transfer prices when goods are shipped from
a. low tax countries to other low tax countries
b. low tax countries to high tax countries
c. high tax countries to low tax countries
d. c or b
66. Sands Corporation operates two stores: J and K. The following information relates to store J, determine J's segment
contribution margin.
Sales revenue P1,300,000
Variable operating expenses 600,000
Fixed expenses:
Traceable to J and controllable by J 275,000
Traceable to J and controllable by others 80,000
67. The following data relate to Department no. 2 of Young Corporation:
Segment contribution margin P480,000
Profit margin controllable by the segment manager 230,000
Segment profit margin 110,000
On the basis of this information, fixed costs traceable to Department no. 2 but controllable by others are?
68. If controllable margin is P300,000 and the average investment center operating assets are P1,000,000, the return on
investment is?
69. Oxford Company earned controllable margin of P125,000 on sales of P1,600,000. The division had average operating
assets of P1,300,000. The company requires a return on investment of at least 8%. How much is residual income?
70. Niceville Company had sales of P400,000, variable costs of P200,000, and direct fixed costs totaling P100,000. The
company’s operating assets total P800,000, and its required return is 10%. How much is the residual income?
71. If an investment center has a P45,000 controllable margin and P600,000 of sales, what average operating assets are
needed to have a return on investment of 10%?
72. Dodge City Parts has a current return on investment of 10% and the company has established an 8% minimum rate
of return for the division. The division manager has two investment projects available, for which the following
estimates have been made:
Project A - Annual controllable margin = P24,000, operating assets = P400,000
Project B - Annual controllable margin = P60,000, operating assets = P550,000
Which project should be funded?
73. If an investment center has generated a controllable margin of P75,000 and sales of P300,000, what is the return on
investment for the investment center if average operating assets were P500,000 during the period?
74. Cart Company recorded operating data for its shoe division for the year.
Sales P500,000
Contribution margin 90,000
Total fixed costs 60,000
Average total operating assets 200,000
How much is ROI for the year if management is able to identify a way to improve the contribution margin by
P20,000, assuming fixed costs are held constant?
75. The Eastern Division of Flint Corp. had an ROI of 25% when sales were P1 million and controllable margin was
P200,000. What were the average operating assets?
76. Lou Alabassi is the North Division manager and his performance is evaluated by executive management based on
Division ROI. The current controllable margin for North Division is P46,000. Its current operating assets total
P210,000. The division is considering purchasing equipment for P40,000 that will increase sales by an estimated
P10,000, with annual depreciation of P10,000. If the equipment is purchased, what will happen to the return on
investment for the division?

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77. CinRich Corporation recorded operating data for its Waterhole division for the year. CinRich requires its return to be
9%.
Sales P500,000
Controllable margin 90,000
Total average assets 300,000
Fixed costs 30,000
How much is ROI for the year?
78. The current controllable margin for Claremont Division is P62,000. Its current operating assets are P200,000. The
division is considering purchasing equipment for P60,000 that will increase annual controllable margin by an estimated
P10,000. If the equipment is purchased, what will happen to the return on investment for Claremont Division?
79. Marsh Company that had current operating assets of one million and net income of P200,000 had an opportunity to
invest in a project that requires an additional investment of P250,000 and increased net income by P40,000. The
company's required rate of return is 12%. After the investment, the company's residual income will amount to?
80. Bearing Division of Phantom Corp. sells 80,000 units of Part X to the outside market. Part X sells for P10.00 and has
a variable cost of P5.50 and a fixed cost per unit of P2.50. Bearing has a capacity to produce 100,000 units per period.
Motor Division currently purchases 10,000 units of Part X from Bearing for P10.00. Motor has been approached by
an outside supplier willing to supply the parts for P9.00. What is the effect on XYZ’s overall profit if Bearing refuses
the outside price and Motor decides to buy outside?
81. Bearing Division of XYZ Corp. sells 80,000 units of Part X to the outside market. Part X sells for P10.00 and has a
variable cost of P5.50 and a fixed cost per unit of P2.50. Bearing has a capacity to produce 100,000 units per period.
Motor Division currently purchases 10,000 units of Part X from Bearing for P10.00. Motor has been approached by
an outside supplier willing to supply the parts for P9.00. What is the effect on XYZ’s overall profit if Bearing refuses
the outside price and Motor decides to buy inside?
82. 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 current level of production, the fixed cost of
producing this component is P4 per unit and the variable cost is P7 per unit. Division Z would like to purchase this
component from Division X. What would be the price that Division X should charge Division Z?
83. Family Enterprises has two divisions: Davy and Johnny. Davy Division has a capacity to produce 2,000 units and is
expecting to sell 1,500 units. Johnny Division wants to purchase 100 units of a product Davy produces. Davy sells the
product at a selling price of P100 per unit, the variable cost per unit is P25 and the fixed costs total P30,000. The
minimum transfer price that Davy will accept is?
84. An appropriate transfer price between two divisions of the Reno Corporation can be determined from the following:
Fabrication Division
Market price of subassembly P50
Variable cost of subassembly P20
Excess capacity (in units) 1,000
Assembling Division
Number of units needed 900
What is the natural bargaining range for the two divisions?
85. The Dela Merced Company’s Household Products Division reported in 2007 sales of P15,000,000, an asset turnover
ratio of 3.0, and a rate of return on average assets of 18 percent. The percentage of net income to sales is?

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