RESPONSIBILITY ACCOUNTING & TRANSFER PRICING

Question 1

1. Variance analysis would be appropriate to measure performance in
   a. Cost centers
   b. Profit centers
   c. Investment centers
   d. Cost, profit and investment centers

Answer 1

d. Cost, profit and investment centers

Question 2

2. A primary consideration in tracing a cost in responsibility accounting is
   a. Whether it is fixed or variable
   b. Whether it is production or administrative
   c. Who or what caused the cost to be incurred
   d. Where in the organizational structure the cost occurred

Answer 2

c. Who or what caused the cost to be incurred

Question 3

3. Which of these items will LEAST likely appear in the internal performance report prepared by a profit center manager?
   a. Intersegment and external sales
   b. Discretionary fixed cost
   c. Direct variable cost
   d. Committed fixed cost

Question 4

4. Residual income is a better measure for performance evaluation than return on investment because
   a. The problems associated with measuring the asset base are eliminated
   b. Desirable investment decisions will not be neglected by high-return divisions
   c. Only the gross book value of assets needs to be calculated
   d. The arguments about the implicit cost of interest are eliminated

Answer 4

b. Desirable investment decisions will not be neglected by high-return divisions

Question 5

Items 5 to 8 are based on the following information

The following is available for an investment center of Gin Corporation for 2024:
Sales P 100,000
Operating expenses 85,000
Average operating assets 40,000
Stockholder’s equity 25,000
Required rate of return 18%

5. Determine the operating profit margin.
   a. 15%
   b. 25%
   c. 37.5%
   d. 60%

Answer 5

a. 15%
Solution: Profit margin = operating income ÷ sales = (100,000 – 85,000) ÷ 100,000

Question 6

6. What is the assets turnover?
   a. 1.5x
   b. 2.5x
   c. 3.5x
   d. 4x

Answer 6

b. 2.5x
Solution: Assets turnover = sales ÷ operating assets = 100,000 ÷ 40,000

Question 7

7. What is the return on investment?
   a. 15%
   b. 25%
   c. 37.5%
   d. 60%

Answer 7

Solution: RoI = operating income ÷ operating assets = (100,000 – 85,000) ÷ 40,000
RoI (alternative solution) = profit margin x assets turnover = 15% x 2.5

Question 8

8. What is the residual income?
   a. P 7,200
   b. P 7,800
   c. P 9,600
   d. P 15,000

Answer 8

b. P 7,800
Solution: Residual income = operating income – required income = 15,000 – 18% (40,000)

Question 9

9. The following information is available for Brandy Enterprises for 2024:
   Net operating profit after taxes
   -P 36,000,000
   Depreciation expense
   -15,000,000
   Change in net working capital
   -10,000,000
   Capital expenditures
   -12,000,000
   Invested capital (total assets – current liabilities)
   -100,000,000
   Weighted average cost of capital
   -10%

What is the amount of the economic value added (EVA)?
a. P 36,000,000
b. P 26,000,000
c. P 20,000,000
d. P 15,000,000

Answer 9

b. P 26,000,000
Solution: EVA = profit after tax – required profit = 36 M – 10% (100 M)

Question 10

Items 10 & 11 are based on the following information
The Motor Division of Beer Corporation uses 5,000 carburetors per month in its production of automotive engines.
It presently buys all of the carburetors it needs from two outside suppliers at an average cost of P100. The Carburetor
Division of Beer manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division
is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer
at P 106 per unit. Its cost structure (on 15,000 units) is:
Variable production costs P 70
Variable selling costs 10
All fixed costs 10
The Carburetor Division would not incur any variable selling costs on units that are transferred internally.

10. What is the maximum of the transfer price range for a transfer between the two divisions?
    a. P 106
    b. P 100
    c. P 90
    d. P 70

Answer 10

Solution: Maximum transfer price is based on the purchase price offered by the outside supplier.

Question 11

11. What is the minimum of the transfer price range for a transfer between the two divisions?
    a. P 70
    b. P 90
    c. P 96
    d. P 106

Answer 11

Solution 1: Minimum transfer price (full capacity): 106 – 10
Solution 2: Minimum transfer price = Unit VC + Lost UCM = 70 + (106 – 70 – 10)

Question 12

12. The minimum transfer price generally is equal to the
    a. Opportunity costs plus incremental costs
    b. Opportunity costs less additional outlay costs
    c. Opportunity costs divided by the additional outlay costs
    d. Opportunity costs times 125% plus the additional outlay costs

Answer 12

a. Opportunity costs plus incremental costs