Cost Accounting, 15e Global Edition (Horngren/Datar/Rajan)
Chapter 22 Management Control Systems, Transfer Pricing, and Multinational
Considerations
Objective 22.1
1) Which of the following is a characteristic of a management control system?
A) It aids and coordinates the process of making decisions.
B) It encourages short-term profitability and maximizing net income.
C) It helps individuals throughout the organization to act independently and maximize the profitability
of their departments.
D) It deals with coordinating planning across the organization and is not concerned with behavioral
aspects of management like employee motivation.
2) Which of the following is a part of the formal management control system?
A) mutual commitments among the members of the organization
B) the quality system which provides information about defective products
C) shared values and loyalties among the members of the organization
D) general understanding about acceptable behavior for managers
3) Which of the following is true of goal congruence?
A) It exists when the management’s strategy is in line with the shareholders’ requirements.
B) It exists when individuals and groups work toward achieving the organization’s goals.
C) It exists when both internal and external stakeholders of an organization have similar goals.
D) It exists when an organization‘s goals are in line with the social acceptability of organizational goals.
4) A well-designed management control system uses information from ________.
A) internal sources only as they are the most reliable sources of information
B) external sources only as they are more dynamic and future oriented
C) both internal and external sources as a wide range of information is required
D) external sources only as they are the most reliable sources of information
5) If an oil refinery used refinery down-time as a Balanced Scorecard control measure, it would represent
the ________ perspective.
A) financial
B) customer
C) internal business process
D) learning and growth
6) If a computer manufacturer used its common stock price as a Balanced Scorecard control measure, it
would represent the ________ perspective.
A) financial
B) customer
C) internal business process
D) learning and growth
7) Line managers supervising individual refineries are concerned with ________.
A) obtaining information about the firm’s opportunity costs
B) obtaining information about the firm’s sunk costs
C) obtaining information about the firm’s equipment downtime and product quality
D) obtaining information about customer satisfaction and market share
8) ________, in the perspective of an effective management control, is the extent to which managers strive
or endeavor in order to achieve a goal.
A) Efficiency
B) Effectiveness
C) Effort
D) Variance
9) The formal management control system includes the shared values, loyalties, and mutual
commitments among members of the organization.
10) Management control systems is designed only for top level managers and is not applicable to line
managers.
11) Of the four perspectives of the balanced scorecard the customer perspective refers to employee
satisfaction, absenteeism, information systems capabilities, and number of processes with real-time
feedback.
12) The human resources systems is a part of the formal management control systems of an organization.
13) The management accounting system is an informal management control system which provide
information about the firm‘s costs, revenues, and income.
14) The formal management control system includes shared values, loyalties, and mutual commitments
among members of the company, company culture, and norms about acceptable behavior for managers
and other employees.
15) Effort refers to physical exertion, such as a worker producing at a faster rate, but excludes non-
physical aspects like acumen and diligence of a worker.
16) An organization should design its management control system independently of its strategies, so that
the system is not affected by change of strategies in future.
17) Goal congruence exists when individuals work toward achieving one goal, and groups work toward
achieving a different goal.
18) Management control systems should be designed to support the organizational responsibilities of
individual managers.
19) Effort in terms of management control systems is defined in terms of physical exertion such as a
worker producing at a faster rate.
20) Effective management control systems should also motivate managers and other employees.
21) For each of the following Balanced Scorecard measures, identify which of the four perspectives
(Financial, Customer, Internal Business Process, or Learning and Growth) the measure best represents.
________ a. On-time delivery of gasoline from refineries to retail stations
________ b. Customer satisfaction
________ c. Common stock price
________ d. Return on investment
________ e. Market share
________ f. Number of days lost to accidents
________ g. Employee satisfaction
________ h. Friendliness of employees
________ i. Repeat purchases
________ j. Cash flow from operations
22) What is goal congruence?
23) “Management control systems consist of formal and informal control systems.” Briefly explain the
formal and informal management systems and enlist their components.
Objective 22.2
1) ________ means minimum constraints and maximum freedom for managers at the lowest levels of an
organization to make decisions and to take actions.
A) Total centralization
B) Use of market-based transfer pricing
C) Total decentralization
D) Use of negotiated transfer pricing
2) An advantage of decentralization is that it ________.
A) creates greater responsiveness to local needs
B) focuses manager’s attention on the organization as a whole
C) does not result in a duplication of activities
D) reduces the cost of gathering information
3) Which of the following is an advantage of decentralization?
A) It creates greater responsiveness to local needs.
B) It focuses managers’ attention on the organization as a whole.
C) It does not result in a duplication of activities.
D) It encourages suboptimal decision making.
4) Which of the following is a benefit of decentralization?
A) It creates greater responsiveness to local needs.
B) It helps in rasing capital at a local level.
C) It relieves top managers of accountability.
D) It eliminates the need for enforcing goal congruence among the departments.
5) ________ occurs when a decision’s benefits for one subunit is more than offset by the costs to the
organization as a whole.
A) Suboptimal decision making
B) Independent decision making
C) Congruent decision making
D) Departmental decision making
6) Which of the following statements is true of decentralization?
A) A decentralized structure does not empower employees to handle customer complaints directly.
B) A decentralized structure forces top management to lose some control over the organization.
C) Decentralization slows responsiveness to local needs for decision making.
D) A decentralized structure only delegate recurring and structured decisions to lower levels.
7) Which of the following areas lends themselves to the concept of decentralization?
A) dividend decisions
B) long-term financing
C) product advertising
D) strategic planning
8) Which of the following is a drawback of decentralizing a multinational company?
A) It may lead to increased exchange rate risk.
B) It may result in lack of control and results in increasing risk.
C) It creates less responsiveness to the needs of a subunit’s customers, suppliers, and employees.
D) It may lead to an increase in bureaucracy.
9) Which of the following is a responsibility center to measure the revenues and costs of subunits in
centralized or decentralized companies?
A) investment center
B) environmental center
C) exchange policy center
D) taxation rebate center
10) Decentralization in multinational companies may lead to lack of control.
11) An investment center is always a decentralized subunit.
12) In a profit center, the manager is accountable for investments, revenues, and costs.
13) Decisions regarding sources of long-term financing are best made at subunit level as the subunit has
local knowledge and can leverage it in negotiations.
14) Surveys indicate that decisions made most frequently at the corporate level are related to sources of
supplies and products to manufacture.
15) The labels profit center and cost center are dependent on the degree of centralization or
decentralization in a company.
16) Incongruent decision making occurs when individuals and groups work toward achieving the
organization’s goals even if departmental performance is adversely affected.
17) For each of the following activities, characteristics, and applications, identify whether they can be
found in a centralized organization, a decentralized organization, or both types of organizations.
________ a. Freedom for managers at lower organizational levels to make decisions
________ b. Gathering information may be very expensive
________ c. Greater responsiveness to user needs
________ d. Have few interdependencies among divisions
________ e. Maximum constraints and minimum freedom for managers at lowest levels
________ f. Maximization of benefits over costs
________ g. Minimization of duplicate functions
________ h. Minimum of suboptimization
________ i. Multiple responsibility centers with various reporting units
________ j. Profit centers
18) The president of Silicon Company has just returned from a week of professional development courses
and is very excited that she will not have to change the organization from a centralized structure to a
decentralized structure just to have responsibility centers. However, she is somewhat confused about
how responsibility centers relate to centralized organizations where a few managers have most of the
authority.
Required:
Explain how a centralized organization might allow for responsibility centers.
19) What is decentralization and what are its benefits?
20) Why is decentralization costly?
Objective 22.3
1) A product may be passed from one subunit to another subunit in the same organization. The product is
known as a(n) ________.
A) interdepartmental product
B) intermediate product
C) subunit product
D) transfer product
2) Which of the following best describes a transfer price?
A) It is the price charged by an organization when it transfer goods to another organization in lieu of
services provided by it.
B) It is the price that is to be used while calculating revenue from sales to customers for tax purposes.
C) It is the price that is charged by a department of an organization when it sells its goods to its
competitors.
D) It is the price one subunit charges for a product or service supplied to another subunit of the same
organization.
3) A transfer-pricing method leads to goal congruence when ________.
A) there is a price difference in different markets due to market inefficiencies
B) managers do no act for their own best interest and work for the long-term best interest of the
manager’s subunit
C) managers act in their own best interest and the decision is in the long-term best interest of the
company
D) there is a low degree of centralization
4) Which of the following is true of transfer pricing?
A) It creates costs for the selling subunit.
B) It creates revenues for the buying subunit.
C) It helps top managers evaluate the performance of individual subunits.
D) It makes managers’ information-processing and decision-making tasks difficult.
5) Transfer-pricing systems enable managers to focus on maximizing the performance of their subunits.
6) The product or service transferred between subunits of an organization is called an intermediate
product.
7) The transfer price creates revenues for the selling subunit and costs for the buying subunit affecting
each subunit’s operating income.
8) What are transfer prices and what are its criteria?
Objective 22.4
1) Negotiated transfer prices are often employed when ________.
A) market prices are stable
B) market prices are volatile
C) market prices change by a regular percentage each year
D) goal congruence is not a major objective
2) The costs used in cost-based transfer prices ________.
A) are actual costs
B) are budgeted costs
C) can either be actual or budgeted costs
D) are lower than the market-based transfer prices
3) Which of the following is true of hybrid transfer prices?
A) The cost used in hybrid transfer prices is always the actual cost.
B) The cost used in hybrid transfer prices is always the budgeted cost.
C) They take into account both cost and market information.
D) They are less popular in manufacturing industry.
4) To reduce the excessive focus of subunit managers on their own subunits, many companies
compensate subunit managers on the basis of ________.
A) both the operating income earned by their respective subunits and the company as a whole
B) both the investing income earned by their respective subunits and the company as a whole
C) only the investing income earned by their respective subunits
D) both the net income and earned by their respective subunits and the company as a whole
Answer the following questions using the information below:
Axelia Corporation has two divisions, Refining and Extraction. The company’s primary product is Luboil
Oil. Each division’s costs are provided below:
Extraction: Variable costs per barrel of oil $ 7
Fixed costs per barrel of oil $ 5
Refining: Variable costs per barrel of oil $28
Fixed costs per barrel of oil $32
The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases
25,000 barrels of oil from the Extraction Division and 15,000 barrels from other suppliers at $60 per barrel.
5) What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming
the method used to place a value on each barrel of oil is 180% of variable costs?
A) $12.60
B) $21.60
C) $72.00
D) $130.00
6) What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming
the method used to place a value on each barrel of oil is 110% of full costs?
A) $12.00
B) $13.20
C) $44.00
D) $79.00
7) Assume 200 barrels are transferred from the Extraction Division to the Refining Division for a transfer
price of $18 per barrel. The Refining Division sells the 200 barrels at a price of $120 each to customers.
What is the operating income of both divisions together?
A) $7,200
B) $9,600
C) $10,800
D) $20,400
Answer the following questions using the information below:
Timekeeper Corporation has two divisions, Distribution and Manufacturing. The company’s primary
product is high-end watches. Each division’s costs are provided below:
Manufacturing: Variable costs per unit $1.00
Fixed costs per unit $5.00
Distribution: Variable costs per unit $0.60
Fixed costs per unit $0.40
The Distribution Division has been operating at a capacity of 4,000,000 units a week and usually
purchases 2,000,000 units from the Manufacturing Division and 2,000,000 units from other suppliers at
$9.00 per unit.
8) What is the transfer price per watch from the Manufacturing Division to the Distribution Division,
assuming the method used to place a value on each pound of fertilizer is 160% of variable costs?
A) $1.00
B) $1.60
C) $2.20
D) $8.00
9) What is the transfer price per watch from the Manufacturing Division to the Distribution Division,
assuming the method used to place a value on each transfer is 120% of full costs?
A) $6.00
B) $7.20
C) $9.00
D) $11.00
10) Assume 100,000 pounds are transferred from the Manufacturing Division to the Distribution Division
for a transfer price of $8.00 per pound. The Distribution Division sells the 100,000 pounds at a price of
$11.00 each to customers. What is the operating income of both divisions together?
A) $200,000
B) $300,000
C) $400,000
D) $500,000
Answer the following questions using the information below:
Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching
Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing
Division, which completes the shoe and sells it to retailers. The Stitching Division “sells”shoes to the
Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $42. (Ignore
changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the
range of 40,000-100,000 units. The fixed costs for the Polishing Division are assumed to be $14 per pair at
100,000 units.
Stitching‘s costs per pair of soles are:
Direct materials $10
Direct labor $ 8
Variable overhead $ 6
Division fixed costs $ 4
Polishing‘s costs per completed pair of shoes are:
Direct materials $14
Direct labor $ 6
Variable overhead $ 4
Division fixed costs $16
11) What is the market-based transfer price per pair of shoes from the Stitching Division to the Polishing
Division?
A) $20
B) $32
C) $42
D) $52
12) What is the transfer price per pair of shoes from the Stitching Division to the Polishing Division if the
method used to place a value on each pair of shoes is 180% of variable costs?
A) $18.00
B) $32.40
C) $43.20
D) $57.60
13) What is the transfer price per pair of shoes from the Stitching Division to the Polishing Division if the
transfer price per pair of soles is 125% of full costs?
A) $12.50
B) $22.50
C) $30.00
D) $35.00
14) Calculate and compare the difference in overall corporate net income of Branded Shoe Company
between Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for $120 per pair
to customers.
Scenario A: Negotiated transfer price of $30 per pair of soles
Scenario B: Market-based transfer price
A) $1,000,000 more net income under Scenario A
B) $1,000,000 of net income using Scenario B
C) $200,000 of net income using Scenario A.
D) The net income would be the same under both scenarios.
15) Assume the transfer price for a pair of shoes is 180% of total costs of the Stitching Division and 40,000
of soles are produced and transferred to the Polishing Division. The Stitching Division’s operating income
is ________.
A) $896,000
B) $720,000
C) $800,000
D) $880,000