Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
Chapter 23 Transfer Pricing and Multinational Management Control Systems
23.1 Integrate the accounting internal control system assurance framework with
existing legislation.
1) A management control system is a means of gathering and using information to aid and coordinate the
process of making planning and control decisions throughout the organization, and to guide employee
behaviour.
2) Subunit managers are better informed about their suppliers than top management is.
3) A decentralized organizational structure may result in duplication of activities.
4) The goal of a management control system is to improve the collective decisions in an organization in an
economically feasible way.
5) Management control systems reflect only financial data.
6) The essence of decentralization is the freedom for managers at lower levels of the organization to make
decisions.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
7) A management control system would include both formal as well as informal control mechanisms.
8) A well-designed management control system obtains all of its information from within the company.
9) Motivation is the desire to attain a selected goal combined with the resulting drive or pursuit toward
that goal.
10) Effort in terms of management control systems is defined in terms of physical exertion such as a
worker producing at a faster rate.
11) Management control systems motivate managers and other employees to exert effort through a
variety of rewards tied to the achievement of goals.
12) A benefit of decentralization should be increased motivation of subunit managers.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
13) One benefit of centralization is an increase in development of an experienced pool of management
talent to fill higher-level management positions.
14) Suboptimal decision making is also called congruent decision making.
15) An important advantage of decentralized operations is that it improves corporate control.
16) The degree of freedom to make decisions is known as decentralization.
17) Management control systems collect which type of data?
A) financial
B) non-financial
C) data from outside of the company
D) financial and non-financial
E) financial and non-financial, including data from both within the company and outside of the company
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
18) A management control system should have all of the following characteristics, EXCEPT
A) it should motivate employees.
B) it should be closely aligned to organizational goals and objectives.
C) it should provide information for individual managers for decision making.
D) it should motivate managers.
E) it should always focus on customer satisfaction.
19) The costs of decentralization include all of the following, EXCEPT
A) management development and learning.
B) duplication of activities.
C) increased costs of information-gathering.
D) too many cost centres.
E) decreased loyalty to the organization as a whole.
20) Which of the following is FALSE concerning profit centres and cost centres?
A) A profit centre can exist within a centralized organization.
B) A profit centre can exist within a decentralized organization.
C) A cost centre can exist within a centralized organization.
D) A cost centre can exist within a decentralized organization.
E) If a profit centre exists within a centralized organization, there cannot be any cost centres in the
organization.
21) Which of the following is NOT a responsibility centre within an organization, whether centralized or
decentralized?
A) cost centre
B) profit centre
C) revenue centre
D) savings centre
E) investment centre
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
22) All of the following are benefits of decentralization EXCEPT
A) it creates greater responsiveness to local needs.
B) it decreases management and worker morale.
C) it leads to quicker decision making.
D) it sharpens the focus of managers.
E) it leads to better supplier relationships.
23) Exertion towards a goal is
A) motivation.
B) effort.
C) goal congruence.
D) incentive.
E) loyalty.
24) The degree of freedom to make decisions is
A) decentralization.
B) autonomy.
C) centralization.
D) motivation.
E) goal congruence.
25) 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.
E) increases loyalty toward the organization as a whole.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
26) Which of the following statements is FALSE?
A) A centralized 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) The extent to which decisions are pushed downward, and the types of decisions that are pushed
down, provide a measure of the level of centralization/decentralization in an organization.
E) Decentralization can increase motivation by allowing managers to exercise greater individual
initiative.
27) For each of the following activities, characteristics, and applications, tell whether they are primarily
labelled as being 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 sub optimization.
i. Multiple responsibility centres with various reporting units.
j. Profit centres
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
23-7
28) 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 centres. However, she is somewhat confused about
how responsibility centres relate to centralized organizations where a few managers have most of the
authority.
Required:
Explain how a centralized organization might allow for responsibility centres.
29) Discuss the possible problems a corporation might have if its operations are totally decentralized.
30) What is the purpose of the internal control system within an organization?
31) Discuss some of the recent legislation and frameworks relating to assurance and internal controls.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
23.2 Apply transfer-pricing processes.
1) Products transferred between subunits within an organization are considered intermediate products.
2) Department A charges Department B $1,350 for copying services provided. The $1,350 is considered a
transfer price.
3) Examples of market-based transfer prices include variable manufacturing costs, full manufacturing
costs, and full product costs.
4) Negotiated transfer prices are always transacted at the top management levels.
5) Market price is the only price that a firm should use when transferring goods from one subunit to
another subunit.
6) The choice of a transfer-pricing method has minimal effect on the allocation of company-wide
operating income among divisions.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
7) No matter how low the transfer price, the manager of the selling division should sell the division’s
product to other company divisions in the interests of overall company profitability.
8) The costs used in cost-based transfer prices can only be actual costs.
9) Companies may approach tax authorities to obtain an APA (Advanced Transfer Price Arrangement).
10) Market based transfer prices are generally accepted by tax authorities because they represent arm’s
length prices.
11) A product may be passed from one subunit to another subunit in the same organization. The product
is known as
A) an interdepartmental product.
B) an intermediate product.
C) a subunit product.
D) a transfer product.
E) a secondary product.
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
12) The price one subunit of an organization charges for a product or service supplied to another subunit
of the same organization is called
A) an interdepartmental product price.
B) an intermediate product price.
C) a subunit price.
D) a transfer price.
E) a fixed price.
13) All of the following criteria may be used to choose a transfer–pricing method EXCEPT
A) promotion of quality products.
B) promotion of a sustained high level of management effort.
C) promotion of a high level of subunit autonomy.
D) promotion of goal congruence.
E) promotion of optimal decision making.
14) All of the following are appropriate methods for determining transfer prices EXCEPT
A) cost-based transfer prices.
B) market-based transfer prices.
C) negotiated transfer prices.
D) taxation policies.
E) cost based transfer prices at 110% of full cost.
15) A transfer pricing method should lead to which of the following results?
A) managers always acting in their own best interest
B) managers acting in their own best interest and their decisions being in the long-term best interest of the
manager’s subunit
C) managers acting in their own best interest and their decisions being in the long–term best interest of
the company
D) managers acting in their own best interest and their decisions being in the short-term best interest of
the company
E) managers competing with each other
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
16) Subunits X and Y determined the price for interdepartmental services during the last monthly
meeting, using the selling prices charged to outside parties. This is an example of
A) subunit transfer prices.
B) negotiated transfer prices.
C) market-based transfer prices.
D) cost-based transfer prices.
E) multinational transfer pricing.
Use the information below to answer the following question(s).
Blackoil Corp. has two divisions, Refining and Production. The company’s primary product is Clean Oil.
Each division’s costs are provided below:
Refining:
Variable costs per litre of oil
$30
Fixed costs per litre of oil
$24
Production:
Variable costs per litre of oil
$6
Fixed costs per litre of oil
$4
The Production Division is able to sell the oil to other areas for $24 per litre. The Refining Division has
been operating at a capacity of 80,000 litres a day, using oil from the Production Division and oil
purchased from other suppliers. The Refining Division usually purchases 50,000 litres of oil, on average,
from the Production Division and 30,000 litres, on average, from other suppliers at $40/litre.
17) What is the transfer price per litre assuming the method used is 175% of variable costs?
A) $10.50
B) $12.00
C) $17.50
D) $24.50
E) $12.50
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
18) What is the transfer price per litre from the Production Division to the Refining Division assuming the
method is 120% of full costs?
A) $16.80
B) $12.00
C) $9.50
D) $7.20
E) $12.50
19) What is the transfer price per litre from production to refining if the market price method of pricing is
used?
A) $24
B) $32
C) $36
D) $40
E) $38
20) What is the Production Division’s operating income per 200 litres of oil reported under the 175% of
variable costs method?
A) $1,500
B) $880
C) $100
D) $(100)
E) $1,200
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
21) What is the Refining Division’s operating income if 150 litres of oil are sold at $110 /litre and 200 litres
are transferred in? Assume the transfer price is based on 175% of variable costs.
A) $16,500
B) $15,600
C) $8,400
D) $7,500
E) $8,500
22) Division A sells soybean paste internally to Division B, which, in turn, produces soybean burgers that
sell for $5 per kilogram. Division A incurs costs of $0.75 per kilogram, while Division B incurs additional
costs of $2.50 per kilogram.
What is Division A‘s operating income per kilogram assuming the transfer price of the soybean paste is
set at $1.25 per kilogram?
A) $0.500
B) $0.875
C) $1.250
D) $1.625
E) $1.525
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
23) Division A sells soybean paste internally to Division B, which, in turn, produces soybean burgers that
sell for $5 per kilogram. Division A incurs costs of $0.75 per kilogram, while Division B incurs additional
costs of $2.50 per kilogram.
What is Division B’s operating income per kilogram assuming the transfer price of the soybean paste is
set at $1.25 per kilogram?
A) $0.500
B) $0.875
C) $1.250
D) $1.625
E) $1.525
24) Division A sells soybean paste internally to Division B, which, in turn, produces soybean burgers that
sell for $5 per kilogram. Division A incurs costs of $0.75 per kilogram, while Division B incurs additional
costs of $2.50 per kilogram.
Which of the following formulas correctly reflects the company’s operating income per kilogram?
A) $5.00 – ($0.75 +$2.50) = $1.75
B) $5.00 – ($1.25 +$2.50) = $1.25
C) $5.00 – ($0.75 +$3.75) = $0.50
D) $5.00 – ($0.25 +$1.25 +$3.50) = 0
E) $5.00 – ($0.25 +$1.25 +$1.50) = $2.00
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
Answer the following question(s) using the information below:
Greenlawn Ltd. has two divisions, Distribution and Production. The company’s primary product is
fertilizer. Each division’s costs are provided below:
Production:
Variable costs per kilogram
$0.05
Fixed costs per kilogram
$0.25
Distribution:
Variable costs per kilogram
$0.03
Fixed costs kilogram
$0.02
The Distribution Division has been operating at a capacity of 4,000,000 kilograms a week and usually
purchases 2,000,000 kilograms from the Production Division and 2,000,000 kilograms from other
suppliers at $0.45 per kilogram.
25) What is the transfer price per kilogram from the Production Division to the Distribution Division,
assuming the method used to place a value on each kilogram of fertilizer is 160% of variable costs?
A) $0.05
B) $0.11
C) $0.08
D) $0.40
E) $0.48
26) What is the transfer price per kilogram from the Production Division to the Distribution Division,
assuming the method used to place a value on each kilogram of fertilizer is 120% of full costs?
A) $0.30
B) $0.36
C) $0.45
D) $0.55
E) $0.42
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
27) Assume 100,000 kilograms are transferred from the Production Division to the Distribution Division
for a transfer price of $0.40 per kilogram. The Distribution Division sells the 100,000 kilograms at a price
of $0.55 each to customers. What is the operating income of both divisions together?
A) $10,000
B) $15,000
C) $20,000
D) $25,000
E) $0
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
Answer the following question(s) using the information below.
Beta Shoe Ltd. manufactures only one type of shoe and has two divisions, the Sole Division, and the
Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes
the shoe and sells it to retailers. The Sole Division “sells” soles to the Assembly Division. The market price
for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs
for the Sole Division are assumed to be the same over the range of 40,000-100,000 units. The fixed costs
for the Assembly Division are assumed to be $7 per pair at 100,000 units.
Sole’s costs per pair of soles are:
Direct materials
$4
Direct labour
$3
Variable overhead
$2
Division fixed costs
$1
Assembly’s costs per completed pair of shoes are:
Direct materials
$6
Direct labour
$2
Variable overhead
$1
Division fixed costs
$7
28) What is the market-based transfer price per pair of soles from the Sole Division to the Assembly
Division?
A) $9
B) $10
C) $20
D) $16
E) $27
29) What is the transfer price per pair of soles from the Sole Division to the Assembly Division if the
method used to place a value on each pair of soles is 180% of variable costs?
A) $14.40
B) $12.60
C) $16.20
D) $28.80
E) $32.40
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
30) What is the transfer price per pair of shoes from the Sole Division to the Assembly Division per pair of
soles if the transfer price per pair of soles is 125% of full costs?
A) $10.00
B) $12.50
C) $11.25
D) $20.00
E) $8.75
31) Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40,000 of
soles are produced and transferred to the Assembly Division. The Sole Division’s operating income is:
A) $320,000
B) $360,000
C) $248,000
D) $440,000
E) $400,000
32) If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers, what is the
operating income of both divisions together?
A) $4,400,000
B) $3,400,000
C) $3,000,000
D) $2,600,000
E) $2,400,000
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
Answer the following question(s) using the information below.
Cool Air Ltd. manufactures only one type of air conditioner and has two divisions, the Compressor
Division, and the Assembly Division. The Compressor Division manufactures compressors for the
Assembly Division, which completes the air conditioner and sells it to retailers. The Compressor Division
“sells” compressors to the Assembly Division. The market price for the Assembly Division to purchase a
compressor is $77. (Ignore changes in inventory.) The fixed costs for the Compressor Division are
assumed to be the same over the range of 5,000-10,000 units. The fixed costs for the Assembly Division
are assumed to be $15.00 per unit at 10,000 units.
Compressor’s costs per compressor are:
Direct materials
$34.00
Direct labour
$14.50
Variable overhead
$6.00
Division fixed costs
$15.00
Assembly’s costs per completed air conditioner are:
Direct materials
$300.00
Direct labour
$125.00
Variable overhead
$40.00
Division fixed costs
$15.00
33) What is the market-based transfer price per compressor from the Compressor Division to the
Assembly Division?
A) $34.00
B) $54.50
C) $69.50
D) $77.00
E) $115.50
Cost Accounting: A Managerial Emphasis, 6e
Chapter 23 – Transfer Pricing and Multinational Management Control Systems
34) What is the transfer price per compressor from the Compressor Division to the Assembly Division if
the method used to place a value on each compressor is 150% of variable costs?
A) $81.75
B) $77.00
C) $9.00
D) $72.75
E) $51.00
35) What is the transfer price per compressor from the Compressor Division to the Assembly Division if
the transfer price per compressor is 110% of full costs?
A) $84.70
B) $80.00
C) $76.45
D) $59.95
E) $77.00
36) Assume the transfer price for a compressor is 150% of total costs of the Compressor Division and
1,000 of the compressors are produced and transferred to the Assembly Division. The Compressor
Division’s operating income is:
A) $31,750
B) $32,750
C) $34,750
D) $36,500
E) $49,750