Chapter 15

Question 1

A transfer price is the value assigned to the transfer of goods or services between divisions within
the same organization.

Answer 1

T

Question 2

Transfer prices are not used to record the exchange between two cost centers within the same
organization.

Answer 2

T

Question 3

Transfer prices cannot be used for decision making, product costing, or performance evaluation.

Answer 3

T

Question 4

From an organization’s viewpoint, transfer prices have no effect on total profits assuming the
transfer occurs between the two responsibility centers.

Answer 4

T

Question 5

If a transfer has no effect on divisional profit, risk-neutral managers will be indifferent between
making the transfer or not.

Answer 5

T

Question 6

If an intermediate market exists but divisions are prohibited from buying or selling from the
outside, the intermediate market can be ignored in determining the optimal transfer price.

Answer 6

T

Question 7

A perfect intermediate market exists if buyers can buy and sellers can sell outside of the
organization.

Answer 7

F

Question 8

When a perfect intermediate market exists, the optimal transfer price is the intermediate market
price.

Answer 8

T

Question 9

In general, the optimal transfer price for a division is the sum of its outlay costs and the
opportunity cost of not transferring its goods to another division.

Answer 9

F

Question 10

The use of an optimal transfer price eliminates potential conflicts between an organization’s
interests and the divisional manager’s interest.

Answer 10

T

Question 11

*A market price-based transfer price policy allows the selling division to determine the price for
transfers between divisions within the same organization.

Question 12

A selling division at capacity is indifferent between selling to outsiders and transferring inside at
the market price.

Answer 12

T

Question 13

When actual costs are used as the basis for a transfer, inefficiencies of the selling division are
transferred to the buying division.

Answer 13

T

Question 14

A transfer made at cost does not motivate the selling division to transfer its goods or services
internally.

Answer 14

F

Question 15

In general, negotiated transfer prices fall in a range between the selling division’s differential
costs and the buying division’s market price.

Answer 15

T

Question 16

In the United States, more companies use cost-based transfer prices than market-based transfer
prices.

Answer 16

T

Question 17

In interstate transactions, transfers can reduce an organization’s tax liability when the selling
division is in a lower tax jurisdiction than the buying division.

Answer 17

F

Question 18

In interstate transactions, transfers can reduce an organization’s tax liability when the selling
division is in a lower tax jurisdiction than the buying division.

Answer 18

T

Question 19

Tax avoidance is unethical when inflated transfer prices are used in international transactions to
shift profits from a division in one country to a division in another country.

Answer 19

T

Question 20

An organization that has significant foreign operations must disclose how its transfer prices are
established between domestic and foreign divisions.

Answer 20

F

Question 21

The GAAP financial reporting rules for segments require that all companies use transfer prices
based on market prices.

Answer 21

T

Question 22

Which of the following statements is(are) false?

(A) From an organization’s viewpoint, transfer prices have no effect on total profits assuming the
transfer occurs between the two responsibility centers.
(B) A transfer price is the value assigned to the transfer of goods or services between divisions
within the same organization.

A. Only A is false.
B. Only B is false.
C. Both A and B are false.
D. Neither A nor B is false.

Answer 22

D
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Question 23

Which of the following responsibility centers is affected by the use of market-based transfer
prices?

A. Cost center.
B. Profit center.
C. Revenue center.
D. Production center.

Answer 23

B

Question 24

Transfer prices would not be used by:

A. production centers.
B. investment centers.
C. profit centers.
D. cost centers.

Answer 24

B

Question 25

A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit,
and its variable marketing costs are $12 per unit. What is the opportunity cost of transferring
internally, assuming the division is operating at capacity?

A. $13.
B. $25.
C. $35.
D. $47.

Answer 25

A

Question 26

A division can sell externally for $60 per unit. Its variable manufacturing costs are $35 per unit,
and its variable marketing costs are $12 per unit. What is the optimal transfer price for
transferring internally, assuming the division is operating at capacity?

A. $12.
B. $35.
C. $47.
D. $60.

Answer 26

B

Question 27

In general, if a potential transfer has no effect on divisional profits:

A. no transfer will take place between the divisions.
B. managers will be indifferent between making the transfer or not.
C. the organization should not intervene to force a transfer.
D. the optimal transfer price is the opportunity cost for the buying division.

Answer 27

D

Question 28

An intermediate market is perfect when:

A. there are no quality differences between inside and outside suppliers.
B. there are quality differences between inside and outside customers.
C. buyers and sellers can sell any quantity without affecting the market price.
D. buyers and sellers are motivated to make decisions that are consistent with those of the
organization.

Answer 28

C

Question 29

When there is no intermediate market:

A. there is no optimal transfer price.
B. the selling division cannot transfer its goods internally.
C. the buying division cannot purchase its goods externally.
D. there is no reason for top management to intervene in transfer pricing disputes.

Answer 29

D

Question 30

The general principle on setting transfer prices that are in the organization’s best interests is:

A. outlay cost plus opportunity cost of the resource at the point of transfer.
B. variable costs plus opportunity cost of the resource at the point of transfer.
C. lost contribution margin less the allocated fixed costs for the selling division.
D. gross margin for the buying division plus the gross margin for the selling division.

Answer 30

B

Question 31

If the selling division has excess capacity, the transfer price should be set at its:

A. differential outlay costs.
B. differential outlay costs plus the foregone contribution to the organization of making the
transfer internally.
C. selling price less the variable costs.
D. selling price less the variable costs plus the foregone contribution to the organization of
making the transfer internally.

Answer 31

A

Question 32

The optimal transfer price when there are intermediate markets is:

A. full cost.
B. outlay costs.
C. variable cost.
D. market prices.

Answer 32

D

Question 33

Accutron, a large manufacturing company, has several autonomous divisions that sell their
products in perfectly competitive external markets as well as internally to the other divisions of the
company. Top management expects each of its divisional managers to take actions that will
maximize the organization’s goal as well as their own goals. Top management also promotes a
sustained level of management effort of all of its divisional managers. Under these
circumstances, for products exchanged between divisions, the transfer price that will generally
lead to optimal decisions for Accutron would be a transfer price equal to the: (CIA adapted)

A. full cost of the product.
B. full cost of the product plus a markup.
C. variable cost of the product plus a markup.
D. market price of the product.

Answer 33

A

Question 34

The Eastern Division sells goods internally to the Western Division at Tennessee Company. The
quoted external price in industry publications from a supplier near Eastern is $200 per ton plus
transportation. It costs $20 per ton to transport the goods to Western. Eastern’s actual market
cost per ton to buy the direct materials to make the transferred product is $100. Actual per-ton
direct labor is $50. Other actual costs of storage and handling are $40. Tennessee Company’s
president selects a $220 transfer price. This is an example of: (CIA adapted)

A. market-based transfer pricing.
B. cost-based transfer pricing.
C. negotiated transfer pricing.
D. cost plus 20% transfer pricing.

Answer 34

A

Question 35

Which of the following is the most significant disadvantage of a cost-based transfer price? (CIA
adapted)

A. Requires internally developed information.
B. Imposes market effects on company operations.
C. Requires externally developed information.
D. May not promote long-term efficiencies.

Answer 35

D

Question 36

105.Which of the following statements would be false regarding application of the variance analysis
model to nonmanufacturing costs?

A. The basic framework used for manufacturing is also used for nonmanufacturing costs.
B. Merchandising and service organizations focus on marketing and administrative costs to
measure efficiency and control costs.
C. The need for analysis of price and efficiency variances in nonmanufacturing settings is
increasing.
D. Service organizations are unable to substitute different types of labor.

Answer 36

D

Question 37

106.The Foxmoore Company experienced a $100,000 shortfall in sales revenues for the year. Top
management is quite disturbed about this and has decided to use variance analysis in assigning
the responsibility for the decline. Which of the following variances would most likely be within the
control of the marketing department?

A. Sales mix.
B. Market share.
C. Sales quantity.
D. Industry volume.

Answer 37

B

Question 38

107.Which of the following factors should not be considered when deciding whether to investigate a
variance?

A. Absolute or relative magnitude of the variance.
B. Trend or pattern of the variance over time.
C. Chance that an “out-of-control” situation can be corrected.
D. Whether the variance is favorable or unfavorable.

Answer 38

D

Question 39

108.There are several reasons why actual results differ from standards. Which of the following does
not represent a reason why a variance might occur?

A. Inaccurate information from the accounting system.
B. Increasing the accuracy of a variance report by decreasing its timeliness.
C. Standards which do not reflect the current economic conditions.
D. Operating conditions that are consistently inefficient.

Answer 39

B

Question 40

72. Which of the following is a total factor productivity measure?

A. Tons output/tons of material used.
B. Units produced/machine hour.
C. Sales value/total cost.
D. Gallons output/direct labor hour.

Answer 40

C

Question 41

Which of the following is not a partial productivity measure?

A. tons output/tons of material used.
B. sales value/total cost.
C. gallons output/direct labor hour.
D. units produced/machine hour.

Answer 41

B

Question 42

Partial productivity:

A. is a ratio of the value of output to the value of all key inputs.
B. is the same thing as the production volume variance.
C. focuses on an individual input.
D. includes materials and labor but not overhead.

Answer 42

C

Question 43

If a manager wants to assess performance relative to the industry, it is best to use:

A. partial productivity measures.
B. production volume variances.
C. sales price variances.
D. total factor productivity.

Answer 43

D

Question 44

Total factor productivity:

A. is a ratio of the value of output to the value of all key inputs.
B. is the same thing as the production volume variance.
C. focuses on an individual input.
D. includes materials and labor but not overhead.

Answer 44

A

Question 45

Partial productivity measures are most closely related to what type of variances?

A. Price variances.
B. Sales mix variances.
C. Efficiency variances.
D. Production volume variances.

Answer 45

C

Question 46

Which of the following performance measures would be used to evaluate the personnel
department performance?

A. Number of product recalls.
B. Percentage of late deliveries.
C. Number of requests for transfers.
D. Length of time to fill vacant positions.

Answer 46

D

Question 47

Which of the following is not a mistake often made when measuring nonfinancial
performance?

A. Using subjective rather than objective measures.
B. Not linking measure to strategy.
C. Not validating links between activities and strategies.
D. Not setting appropriate performance targets.

Answer 47

A

Question 48

A subjective performance measure is one where:

A. different people will agree as to the appropriateness of a measure.
B. different people will agree as to the method to calculate the measure.
C. different managers will calculate a measure the same.
D. different managers will view the facts and come to different conclusion.

Answer 48

D

Question 49

An objective performance measure is one where:

A. different people will agree as to the appropriateness of a measure.
B. different people will agree as to the method to calculate the measure.
C. different managers will calculate a measure differently.
D. different managers will view the facts and come to different conclusion.

Answer 49

B

Question 50

Which of the following statements is(are) true regarding performance measures?
(A) In general, objective performance measures are better than subjective performance
measures.
(B) In general, the use of multiple performance measures is better than the use of single
performance measures.

A. Only A is true.
B. Only B is true.
C. Both A and B are true.
D. Neither A nor B is true.

Answer 50

C