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CHAPTER 13
RESPONSIBILITY ACCOUNTING, SUPPORT DEPARTMENT
ALLOCATIONS, AND TRANSFER PRICING
QUESTIONS
1. Four potential advantages of decentralization are:
Better executed executive training and development
Higher level of job satisfaction for employees
Three potential disadvantages of decentralization are:
Suboptimization by plant or outlet managers
Possibility of organizational disruption if top management has difficulty in re-
Functions that may be handled centrally:
Capital project approval
(1) Major costs for long-term commitments
Cash management
(1) Cash and investment funds are managed more efficiently if they are
pooled.
(2) When funds are needed, tradition and good business dictate that they are
Inventory control
Inventory, being a near-cash asset, is subject to theft and misappropriation. Its
Evaluation of divisional profitability
2. The two basic functions of responsibility reports are to
provide operational managers with information needed for planning, control-
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It is sometimes appropriate for a company to prepare a single responsibility report
tal performance of the division can be gained. If total cost information can be sub-
3. Suboptimization is a condition in which individual managers work to achieve re-
sults from segment managers’ motivation to appear successful and gain rewards
ests.
4. Support department costs may be allocated to revenue-producing departments for a
variety of reasons. The most common reasons are to encourage managers to use sup-
point because they assign costs that are uncontrollable by a department to that de-
partment.
in a more cost-beneficial way and to recommend cost control improvements to the
support department. However, such cost allocations may cause dysfunctional be-
to be unfair.
5. The four criteria (benefits received, causation, equity, and ability-to-bear) are all
ten not used because it may result in unrealistic or profit-detrimental actions.
and causation criteria.
6. The direct method is the simplest method of allocation and does not take into con-
sideration the assistance provided among support departments. Thus, the direct
other support departments.
The step method does take into consideration assistance provided between support
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The algebraic method, unlike the other methods, recognizes reciprocal (give-and-
take) exchanges of assistance among the support departments by providing a set of
The only similarity among the methods is their ultimate objective: the assignment
of support department costs to revenue-producing areas.
7. The added costs are an artifact of the cross-allocation process of solving simulta-
8. Transfer prices are internally set and agreed on prices with which a selling divi-
sion transfers goods or services to a buying division. The objectives are goal con-
In negotiating transfer prices among segment managers, the managers are ex-
pected to work together (1) to make choices that will maximize the efficiency and
management has properly trained, motivated, and evaluated segment managers,
the transfer price can be a device to promote such goal congruence.
would reveal that the whole company would do better if the acquisitions were made
internally. This example illustrates the concept of suboptimization.
9. The biggest problem involves how the term “cost” is defined. A cost can be de-
fined as any of the following: incremental or variable; absorption (product costs
only); or absorption plus some portion of the segment’s nonproduction costs (sell-
Another problem is that if actual costs include inefficiencies, the transfer prices
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Problems of using market-based transfer prices include:
the possibility that no objective price can be found because the product has no
exact counterpart in the market;
10.
Type of Center
Recommended Type of Transfer Price & Usage
Cost-Selling Segment
Cost-based: consistent with the objective of this
type of center, this use is a way of allocating the
center’s cost to other centers.
Cost-Buying
Segment
Preferably cost-based: consistent with the objective
of this type of center, however, depending on the
selling segment’s demands, the transfer price could
be at any point between the lower limit (incremen-
tal costs plus opportunity cost of facilities) and the
upper limit (lowest market price the buying seg-
ment would have to pay externally); goods or ser-
vices received by the center are carried at the
transfer price for internal reporting purposes.
Revenue-Selling
Segment
Market price: revenue from transfers of goods or
services is recorded at the transfer price for internal
reporting purposes.
Revenue-Buying
Segment
Transfer prices for goods or services should be be-
tween the lower and upper limits with the lower
limit giving this segment the greatest gross margin
on its internal sales; whichever transfer price is cho-
sen will be the cost of goods or services purchased
for this segment for internal reporting.
Profit or Investment-
Selling Segment
Transfer prices should be set between the lower and
upper limits; since these types of centers are sup-
posed to earn a profit, their managers will try to ne-
gotiate a price closer to the upper limit; whichever
price is set becomes the revenue measure for inter-
nal sales for internal reporting purposes.
Profit or Investment-
Buying Segment
Transfer prices should fall between lower and upper
limits with managers of these segments arguing for
prices closer to the lower limits to afford their seg-
ments the highest gross margin; whichever price is
set becomes the cost of goods or services acquired
by the center for internal reporting purposes.
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11. Dual pricing exists when the selling division is permitted to record one transfer
both divisions.
12. Support departments can use transfer prices when (1) user departments of the support
department have significant control over the quantity and quality of assistance pro-
center) and (2) assistance itself (whether it can be acquired externally, is recurring and
uniform, and is expensive).
Advantages of transfer prices over allocation include:
the fact that the rationale for the transfer prices must be provided to the buying
department; and
13. In a multinational setting, transfer prices can affect the profits and inventory val-
would be various taxing authorities with which to come to agreements on advance
14. Any company’s green agenda must be a global undertaking; activities in one seg-
ment may create costs and benefits for part or all of an organization. Such interac-
company buys another company’s surplus credits––creating an organizational cost
for emissions.
The active markets in emissions credits provide a “selling/buying” value for them.
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Intraorganizational sharing of carbon or emissions credits requires an appropriate
can be optimized for tax purposes.
PricewaterhouseCoopers, Transfer Pricing and the Green Agenda (2008), pp. 1–2;
http://www.pwc.com/en_GX/gx/tax–management-strategy/pdf/pwc_tax_transfer_pricing_and
_the_green_agenda.pdf (last accessed 12/30/11).
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EXERCISES
15. a. C
b. D
c. C
d. D
e. C
16. a. A
b. N
c. A
17. Each student will have a different answer; however, some important considera-
tions follow.
Centralized model: all IT functions (strategy and planning, application develop-
organization.
Advantages of Centralization:
Hardware and software can be obtained with the largest economies of scale
(often resulting in a 10 to 15 percent cost savings).
Organizational communications are simpler.
Activities are more aligned with overall company strategies.
A unified presence is provided to customers and suppliers.
Disadvantages of Centralization:
they are being overcharged.
A very effective decision and resource allocation process is needed since each
business unit can have different or conflicting IT needs.
IT “outages” could cause an entire company to be crippled.
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The key to a centralized organization’s success is its ability to be responsive. If
the big, centralized operation can be responsive to the needs of the business, then
that approach can make sense. When companies decide to move away from de-
Decentralized model: created when companies adopt specific client/server archi-
tectures or occurred during a merger because separateness was often the quickest
Advantages of Decentralization:
Disadvantages of Decentralization:
There will be higher total hardware and software costs for the organization.
Other important information:
Type and size of company
19. a. P
b. R
c. I
d. R or P
e. I
f. C
20. Each student will have a different answer. However, following are some of the
units that may be included.
ogy, custodial, human resources, and accounting
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Profit centers: Athletics, bookstore, residence halls, cafeterias, international pro-
grams, university newspaper/radio station, and community workshops
21. a. The EM group is centralized.
c. Having the operating divisions solicit and pay for the EM group projects could
mean that fewer projects are generated than would be likely if the EM group
market price allows the EM group to show profitability, such a price is more
onerous to the operating divisions than a cost-based price would be—leading
22. Each student will have a different answer; however some important considerations
follow.
ating performance for salary adjustments, bonuses, and promotions.
Peachtree, QuickBooks and Creative Solutions.
c. Some directly traceable costs include salary, malpractice insurance, fringe
d. Indirect expenses include building rent, depreciation, equipment lease pay-
ments, interest expense, legal and accounting fees, office supplies, medical
doctors.
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23.
BSP ASV
BSP BSV
$38 473,000
$39 473,000
$39 460,000
$17,974,000
$18,447,000
$17,940,000
$473,000 U
$507,000 F
Sales Price Variance
Sales Volume Variance
$34,000 F
Total Revenue Variance
differences created a $34,000 favorable revenue variance.
24.
ASP ASV
BSP ASV
BSP BSV
$0.68 682,000
$0.70 682,000
$0.70 675,000
$463,760
$477,400
$472,500
$13,640 U
$4,900 F
Sales Price Variance
Sales Volume Variance
$8,740 U
Total Revenue Variance
$8,740 revenue shortfall.
25. a. 30 1.3 = 39 seminars in 2013; 39 $4,200 = $163,800
b.
ASP ASV
BSP ASV
BSP BSV
$3,675* 42
$4,000 42
$4,000 39
$154,350
$168,000
$156,000
$13,650 U
$12,000 F
Sales Price Variance
Sales Volume Variance
$1,650 U
Total Revenue Variance
*$154,350 ÷ 42 = $3,675 per seminar
only $3,675 rather than the budgeted $4,000.
26. a. From HR to Fabricating [(0.35 ÷ 0.80) × $630,000] $275,625
b. From HR to Finishing [(0.45 ÷ 0.80) × $630,000] $354,375