ACC 213

Practice Set
Responsibility Accounting, Transfer Pricing

Responsibility Accounting
1.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. flexible accounting.
c. responsibility accounting.
d. master budgeting.

2.A cost is considered controllable at a given level of managerial responsibility if

a. the manager has the power to incur the cost within a given time period.
b. the cost has not exceeded the budget amount in the master budget.
c. it is a variable cost, but it is uncontrollable if it is a fixed cost.
d. it changes in magnitude in a flexible budget.

3.As one moves up to each higher level of managerial responsibility,

a. fewer costs are controllable.
b. the responsibility for cost incurrence diminishes.
c. a greater number of costs are controllable.
d. performance evaluation becomes less important.

4.A responsibility report should

a. be prepared in accordance with generally accepted accounting principles.
b. show only those costs that a manager can control.
c. only show variable costs.
d. only be prepared at the highest level of managerial responsibility.

5.Top management can control

a. only controllable costs.
b. only noncontrollable costs.
c. all costs.
d. some noncontrollable costs and all controllable costs.

6.Not-for-profit entities
a. do not use responsibility accounting.
b. utilize responsibility accounting in trying to maximize net income.
c. utilize responsibility accounting in trying to minimize the cost of providing
services.
d. have only noncontrollable costs.

7.Which of the following is not a true statement?

 a. All costs are controllable at some level within 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.

8.Costs incurred indirectly and allocated to a responsibility level are considered to be

a. nonmaterial.
b. mixed.
c. controllable.
d. noncontrollable.

9.Management by exception
a. is most effective at top levels of management.
b. can be implemented at each level of responsibility within an organization.
c. can only be applied when comparing actual results with the master budget.
d. is the opposite of goal congruence.

10. Which responsibility centers generate both revenues and costs?

a. Investment and profit centers
b. Profit and cost centers
c. Cost and investment centers
d. Only profit centers

11. The linens department of a large department store is

a. not a responsibility center.
b. a profit center.
c. a cost center.
d. an investment center.

12. The foreign subsidiary of a large corporation is

a. not a responsibility center.
b. a profit center.
c. a cost center.
d. an investment center.

13. The maintenance department of a manufacturing company is a(n)

a. segment.
b. profit center.
c. cost center.
d. investment center.

14.Which of the following is not a correct match?

 1. Incurs costs
2. Generates revenue
3. Controls investment funds
a. Investment Center 1, 2, 3
b. Cost Center 1
c. Profit Center 1, 2, 3
d. All are correct matches.

15. A cost center

a. only incurs costs and does not directly generate revenues.
b. incurs costs and generates revenues.
c. is a responsibility center of a company which incurs losses.
d. is a responsibility center which generates profits and evaluates the
investment cost of earning the profit.

16. A manager of a cost center is evaluated mainly on

a. the profit that the center generates.
b. his or her ability to control costs.
c. the amount of investment it takes to support the cost center.
d. the amount of revenue that can be generated.

17. Performance reports for cost centers compare actual

a. total costs with static budget data.
b. total costs with flexible budget data.
c. controllable costs with static budget data.
d. controllable costs with flexible budget data.

18.In the performance report for cost centers,

a. controllable and noncontrollable costs are reported.
b. fixed costs are not reported.
c. no distinction is made between fixed and variable costs.
d. only materials and controllable costs are reported.

19.Of the following choices, which contain both a traceable fixed cost and a common
fixed cost?
a. Profit center manager's salary and timekeeping costs for a responsibility
center's employees.
b. Company president's salary and company personnel department costs.
c. Company personnel department costs and timekeeping costs for a
responsibility center's employees.
d. Depreciation on a responsibility center's equipment and supervisory salaries
for the center.

20.Which of the following is not an indirect fixed cost?

 a. Company president's salary
b. Depreciation on the company building housing several profit centers
c. Company personnel department costs
d. Profit center supervisory salaries

21.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.

22.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.

23.Controllable margin is defined as

a. sales minus variable costs.
b. sales minus contribution margin.
c. contribution margin less controllable fixed costs.
d. contribution margin less noncontrollable fixed costs.

24.Controllable margin is most useful for

a. external financial reporting.
b. preparing the master budget.
c. performance evaluation of profit centers.
d. break-even analysis.

25. Which of the following will not result in an unfavorable controllable margin
difference?
a. Sales exceeding budget; costs under budget
b. Sales exceeding budget; costs over budget
c. Sales under budget; costs under budget
d. Sales under budget; costs over budget

26.Which of the following are financial measures of performance?

1. Controllable margin
2. Product quality
3. Labor productivity
a. 1
 b. 2
c. 3
d. 1 and 3

27.A responsibility report for a profit center will

a. not show controllable fixed costs.
b. not show indirect fixed costs.
c. show noncontrollable fixed costs.
d. not show cumulative year-to-date results.

28. The dollar amount of the controllable margin

a. is usually higher than the contribution margin.
b. is usually lower than the contribution margin.
c. is always equal to the contribution margin.
d. cannot be a negative figure.

Responsibility Report. In April, the vice president of sales of Petro Products asks the
controller to prepare a responsibility report for the performance evaluation of the
manager of its Division Y, which is organized into Sections A and B.

The following cost items related to the operation of Division Y for the month of May,
19-- are presented by the controller:

Actual
Budgeted
Item Cost Cost
Division Y costs:
Staff wages....................................................................................... $20,000 $
18,500
Supplies............................................................................................ 6,000
4,800
Manager's salary.............................................................................. 8,000
6,400
Other expenses................................................................................ 15,000
13,400
Total Division Y cost.................................................................... $ 49,000 $
43,100

Administration cost allocable to Division Y........................................... $17,000 $

14,500
Unit outputCDivision Y.......................................................................... 10,000
10,000

Section A costs:
 Supervisor's salaryCSection A......................................................... 8,000
9,500
Employees' wagesCSection A:
Juracek........................................................................................ 2,000
1,900
Molloy......................................................................................... 3,500
3,600
Nienaber..................................................................................... 3,300
3,250
Oats............................................................................................. 4,100
4,050
Peterson...................................................................................... 5,800
5,650
Washington................................................................................. 5,000
5,000
Materials costCSection A................................................................. 4,500
5,200
Indirect laborCSection A.................................................................. 7,800
7,300
Other overhead costsCSection A..................................................... 18,000
19,600
Total Section A costs................................................................... $ 62,000 $
65,050

Section B costs:
Supervisor's salaryCSection B.......................................................... $ 7,000 $
7,500
Employees' wagesCSection B:
Laurie.......................................................................................... 4,400
4,350
Potash......................................................................................... 3,600
3,800
Tillman........................................................................................ 2,100
2,050
Other overhead costsCSection B..................................................... 15,000
14,500
Total Section B costs................................................................... $ 32,100 $
32,200

Required: Prepare a responsibility report for the month of May in a format suitable for
evaluating the performance of Division Y's manager.

Transfer Pricing
 Office Products Inc. manufactures and sells various high-tech office automation
products. Two divisions of Office Products Inc. are the Computer Chip Division and the
Computer Division. The Computer Chip Division manufactures one product, a "super
chip," that can be used by both the Computer Division and other external customers.
The following information is available on this month's operations in the Computer Chip
Division:

Selling price per chip P50

Variable costs per chip P20
Fixed production costs P60,000
Fixed SG&A costs P90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently, the Computer Division purchases no chips from the Computer Chips Division,
but instead pays P45 to an external supplier for the 4,000 chips it needs each month.

1. Assume that next month's costs and levels of operations in the Computer and Computer
Chip Divisions are similar to this month. What is the minimum of the transfer price
range for a possible transfer of the super chip from one division to the other? ______

2. Assume that next month's costs and levels of operations in the Computer and Computer
Chip Divisions are similar to this month. What is the maximum of the transfer price
range for a possible transfer of the chip from one division to the other? ______
3. Two possible transfer prices (for 4,000 units) are under consideration by the two divisions:
P35 and P40. Corporate profits would be ___________ if P35 is selected as the transfer
price rather than P40.
a. P20,000 larger
b. P40,000 larger
c. P20,000 smaller
d. the same

4. If a transfer between the two divisions is arranged next period at a price (on 4,000 units of
super chips) of P40, total profits in the Computer Chip division will
a. rise by P20,000 compared to the prior period.
b. drop by P40,000 compared to the prior period.
c. drop by P20,000 compared to the prior period.
d. rise by P80,000 compared to the prior period.

5. Assume, for this question only, that the Computer Chip Division is selling all that it can
produce to external buyers for P50 per unit. How would overall corporate profits be
affected if it sells 4,000 units to the Computer Division at P45? (Assume that the
Computer Division can purchase the super chip from an outside supplier for P45.)
a. no effect
b. P20,000 increase
c. P20,000 decrease
d. P90,000 increase
6. Assume, for this question only, that the Computer Chip Division is selling all that it can
produce to external buyers for P50 per unit. How would overall corporate profits be
affected if it sells 4,000 units to the Computer Division at P45? (Assume that the
Computer Division can purchase the super chip from an outside supplier for P45.)

a. no effect
b. P20,000 increase
c. P20,000 decrease
d. P90,000 increase