MSQ-04 - Responsibility Acctg, Transfer Pricing & GP Analysis

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  MANAGEMENT ADVISORY SERVICES HILARIO TAN MSQ-04  –  RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & GROSS PROFIT VARIATION ANALYSIS Page 1 of 10 THEORY Basic concepts 1. Richmond Enterprises is reviewing its policies and procedures in an effort to enhance goal congruence throughout the organization. The processes that are most likely to encourage this behavior are  A. Reciprocal cost allocation, zero-base budgeting, and standard costing. B. Cost-based transfer pricing, imposed budgeting, and activity-based costing. C. Cost-based transfer pricing, management-by-objective performance evaluation, and participatory budgeting. D. Participatory budgeting, reciprocal cost allocation, and management-by-objective performance evaluation. 2. An effective management by objectives (MBO) program can increase organizational effectiveness. Which of the following contributes to an effective MBO program?  A. Emphasis on should do rather than must do objectives. B. Objectives that are quantified, clearly measurable, and state target dates for completion. C. Managers who hold their subordinates strictly accountable for achieving their objectives precisely as they have been written. D. All of the answers are correct. 3. Which of these assertions refer to responsibility accounting? 1. Costs and revenues are identified with individuals for better control and performance appraisal. 2. Performance reports under this concept includes variances of actual amounts versus plan. 3. Third parties who are external users are the main recipients of information. 4. Only expenses which are directly under the control of managers should ideally be charged to them.  A. Assertions 1 and 2 only. C. Assertions 1, 2 and 4 only. B. Assertions 1 and 4 only. D. All four assertions. 4. All of the following are elements of responsibility accounting except  A. Control reports. B. Chart of accounts classification. C. Responsibility center definition. D. Planning systems and systemic approaches. 5. Cost centers are  A. Amounts of expenditure attributable to various activities. B. Units of product or service for which costs are ascertained. C. Functions or locations for which costs are ascertained for control purposes. D. A section of an organization for which budgets are prepared and control exercised. 6. Which of the following types of responsibility centers has accountability for revenues?  A. Cost centers and investment centers. C. Expense and investment centers. B. Cost centers and profit centers. D. Profit centers and investment centers. 7. A formal report in responsibility accounting is covered by the guideline of  A. GAAP C. PICPA B. Management D. SEC Responsibility reporting system 8. A responsibility reporting system  A. Does not permit comparative evaluation of responsibility centers. B. Does not permit management by exception at each level of responsibility. C. Begins with the highest level of responsibility and moves downward to the lowest level. D. Involves the preparation of a report for each level of responsibility shown in the company’s organization chart. 9. Which of these are among the qualities of a good report under the concept of responsibility accounting? 1. It should be consistent in form and content for each issue. 2. It should be prompt, timely and regularly issued.  MANAGEMENT ADVISORY SERVICES HILARIO TAN MSQ-04  –  RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & GROSS PROFIT VARIATION ANALYSIS Page 2 of 10 3. It should easily be understood by users as to the contents, their significance and how to use them. 4. It should be able to pinpoint who is to blame as a pre-requisite to explain variances. 5. It should highlight efficiencies and inefficiencies. 6. It should be comparative and analytical. 7. It should be comprehensive as to include all details that can possibly be contained in the report.  A. All except 4 and 7. C. Statements 1, 2, 3, 4 and 7 only. B. All except 4, 5 and 6. D. All seven statements. 10. In responsibility accounting, there are two (2) types of reports distinguished as to goals and objectives  A. Horizontal reporting and vertical reporting. B. Trends analysis reporting and comparative reporting. C. Operations reporting and financial condition reporting. D. Responsibility performance reporting and information reporting. 11. Which of the following items of cost would be least likely to appear in a performance report based on responsibility accounting technique for the supervisor of an assembly line in a large manufacturing situation?  A. Direct labor. C. Repairs and maintenance. B. Materials. D. Supervisor’s salary.  12. Among the management accounting concepts is controllability which means (3)  A. Accounting information must be of such quality that confidence can be placed in it. B. Management accounting must ensure that flexibility is maintained in assembling and interpreting information. C. It is necessary at all times to identify the responsibilities and key result areas of the individuals within the organization. D. Management accounting identified elements or activities which management can or cannot influence, and seeks to arrest risks and sensitivity factors. 13. The following costs may be controllable at certain levels within a manufacturing concern, except:  A. Insurance costs of plant and equipment. B. Power rates imposed by government agency. C. Basic salary of permanent manufacturing personnel. D. Monthly maintenance cost of equipment covered by an annual contract. 14. Managers are most likely to accept allocations of common costs based on  A. Ability to bear. C. Cause and effect. B. Benefits received. D. Fairness. Performance evaluation 15. This practice is irrelevant in evaluating performance of an activity  A. Planning for future activities B. Fixed budgets for mixed costs C. Flexible budget for mixed costs D. Difference between planned cost and actual 16. The following information pertains to Bala Co. for the year ended December 31, 1991: Sales $600,000 Income 100,000 Capital investment 400,000 Which of the following equations should be used to compute Bala’s return on investment?   A. (4/6) x (1/6) = ROI C. (6/4) x (1/6) = ROI B. (4/6) x (6/1) = ROI D. (6/4) x (6/1) = ROI 17. Maplewood Industries wants its division managers to concentrate on improving profitability. The performance evaluation measures that are most likely to encourage this behavior are  A. Dividends per share, return on equity, and times interest earned. B. Turnover of operating assets, gross profit margin, and return on equity. C. Return on operating assets, the current ratio, and the debts-to-equity ratio. D. Turnover of operating assets, dividends per share, and times interest earned.  MANAGEMENT ADVISORY SERVICES HILARIO TAN MSQ-04  –  RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & GROSS PROFIT VARIATION ANALYSIS Page 3 of 10 18. Compared to a jewelry store, a supermarket has  A. Higher margin and higher turnover. C. Lower margin and higher turnover. B. Higher margin and lower turnover. D. Lower margin and lower turnover. 19. Presently, the Alligator Division of Animal Crackers Co. has a profit margin of 30 percent. If total sales rise by $100,000, both the numerator and the denominator of the profit margin will increase. The net result will be  A. no change in the profit margin ratio. B. a decrease in the profit margin ratio to below 30 percent. C. an increase in the profit margin ratio to above 30 percent. D. a change in the profit margin ratio that cannot be determined from this information. 20. A subunit of an organization is evaluated on the basis of its ROI. If this subunit's sales and expenses both increase by $30,000, how will the following measures be affected?  A. B. C. D. ROI Increase Indeterminate No change No change  Asset turnover Increase Increase Increase Decrease Profit margin Increase Decrease Decrease No change 21. Which combination of changes in asset turnover and income as a percentage of sales will maximize the return on investment?  A. B. C. D.  Asset turnover Increase Increase Decrease Decrease Income as a percentage of sales Increase Decrease Increase Decrease 22. Which of the following changes would NOT change return on investment (ROI)?  A. increase total assets B. increase sales and expenses by the same percentage C. decrease sales and expenses by the same percentage D. increase sales dollars by the same amount as total assets E. decrease sales and expenses by the same dollar amount 23. ABC Corp. is composed of three operating divisions. Overall, the ABC Corp. has a return on investment of 20 percent. Division A has a return on investment of 25 percent. If ABC Corp. evaluates its managers on the basis of return on investment, how would the Division A manager and the ABC Corp. president react to a new investment that has an estimated return on investment of 23 percent?  A. B. C. D. Division A manager Accept Accept Reject Reject  ABC Corp. president Accept Reject Accept Reject 24. Residual income is a better measure for performance evaluation of an investment center manager than return on investment because  A. Returns do not increase as assets are depreciated. B. Only the gross book value of assets needs to be calculated. C. The problems associated with measuring the asset base are eliminated. D. Desirable investment decisions will not be neglected by high return divisions. 25. Delmar Corporation is considering the use of residual income as a measure of the performance of its divisions. What major disadvantage of this method should the company consider before deciding to institute it?  A. opportunities may be undertaken which will decrease the overall return on investment. B. this method does not make allowance for difference in the size of compared divisions. C. residual income does not measure how effectively the division manager controls costs. D. the minimum required rate of return may eliminate desirable opportunities from consideration. 26. Power Corporation has two divisions, X and Y, Division X is evaluating a project that will earn a return which is more than the imputed interest charged for the invested capital, but less than the division’s historical return on invested capital. Division Y is considering a project that will earn a rate of return which is greater than the division’s historical return on invested capital, but less than the imputed interest charge for invested capital. If the corporate objective is to maximize residual income, the division should decide as follows:  A. Y accept and X accept. C. Y reject and X accept. B. Y accept and X reject. D. Y reject and X reject.  MANAGEMENT ADVISORY SERVICES HILARIO TAN MSQ-04  –  RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & GROSS PROFIT VARIATION ANALYSIS Page 4 of 10 27. A prospective project under consideration by P Division of C Co. has an estimated residual income of a negative $20,000. If the project requires an investment of $400,000, the  A. company's target rate is 15 percent. B. project's return on investment is zero. C. project generates a negative return on investment. D. project's return on investment is 5 percent less than the company's target rate. 28. Suppose a manager is to be measured by residual income. Which of the following will not result in an increase in the residual income figure for this manager, assuming other factors remain constant?  A. An increase in sales. B. A decrease in expenses. C. A decrease in operating assets. D. An increase in the minimum required rate of return. Transfer pricing 29. In a decentralized company in which divisions may buy goods from one another, the transfer-pricing system should be designed primarily to  A. Increase in the consolidated value of inventory. B. Allow division managers to buy from outsiders. C. Minimize the degree of autonomy of division managers. D. Aid in the appraisal and motivation of managerial performance. 30. The minimum potential transfer price is determined by  A. the lowest outside price for the good. B. incremental costs in the selling division. C. the extent of idle capacity in the buying division. D. negotiations between the buying and selling division. 31. The maximum of the transfer price negotiation range is  A. set by the selling division. B. determined by the buying division. C. influenced only by internal cost factors. D. negotiated by the buying and selling division. 32. The optimal transfer price from the viewpoint of the corporation is  A. variable cost B. absorption cost plus markup C. variable cost plus opportunity cost D. absorption cost plus opportunity cost E. absorption cost plus selling expenses 33. To avoid waste and maximize efficiency when transferring products among divisions in a competitive economy, a large diversified corporation should base transfer prices on  A. full cost. C. production cost. B. market price. D. variable cost. Gross profit analysis 34. In gross profit analysis, if the cost price variance is zero, such variance indicates that (3)  A. Manufacturing management was able to control production costs at budgeted costs. B. Manufacturing management was unable to keep production costs at budgeted costs. C. Manufacturing management was able to control production cost below budgeted costs. D. Manufacturing management was not able to control production at budgeted costs but purchasing was able to keep at budgeted price. 35. If a company has favorable sales volume variance, its  A. Income will be positive. B. Sales price variance is also favorable. C. Total contribution margin will be more than planned. D. Total contribution margin might be less than planned.
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