DEVRY ACCT 349 Week 7 Assignment Chapter 22 and 23 New Work
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ACCT 349 Week 7 Assignment Chapter 22 and 23 New Work
Chapter 22: Management Control Systems, Transfer Pricing, and Multinational Considerations
Review Questions and Exercises
1.A means of gathering and using information to aid and coordinate the planning and control decisions throughout the organization and to guide the behavior of its managers and other employees is called a _________
2._________ exists when individuals and groups work toward achieving the organization’s goals—that is, managers working in their own perceived best interest take actions that align with the overall goals of top management.
3.The desire to attain a selected goal combined with the resulting pursuit of that goal is called _______
4.___________ is the freedom for managers at lower levels of an organization to make decisions.
5.____________refers to the degree of freedom to make decisions.
6.____________________ arises when the benefit of a decision to a subunit is more than offset by the costs or loss of benefit to the organization as a whole.
7.Products transferred between subunits of a company are called________________
8.What four criteria help in choosing a transfer price?___________________
9.In many situations, a general guideline formula has proven to be a helpful first step in setting a minimum transfer price. This minimum transfer price is equal to the sum of which two per-unit costs? ___________________________
1.(CMA adapted) Which of the following is decentralization least likely to accomplish?
a.Provide a pool of management talent
b.Shorten decision time
c.Heighten goal congruence
d.Increase motivation of subunit managers
2.(CPA) Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities?
b.Standard variable cost
c.Actual cost plus a markup
3.Designing the transfer-pricing system is most difficult in organizations that are:
a.Highly decentralized with many interdependencies among subunits
b.Highly centralized with many interdependencies among subunits
c.Highly decentralized with few interdependencies among subunits
d.Highly centralized with few interdependencies among subunits
4.(CMA) Parkside Inc. has several divisions that operate as decentralized profit centers. Parkside’s Entertainment Division manufactures video arcade equipment using the products of two of Parkside’s other divisions. The Plastics Division manufactures plastic components; one type is made exclusively for the Entertainment Division, while other less complex components are sold to external markets. The products of the Video Cards Division are sold in a competitive market, but one video card model is also used by the Entertainment Division. The actual manufacturing cost per unit of the Entertainment Division is as follows:
Plastics Components Video Cards
Direct materials used $1.25 $2.40
Direct manufacturing labor 2.35 3.00
Variable overhead 1.00 1.50
Fixed overhead 0.40 2.25
Total cost per unit $5.00 $9.15
The Plastics Division sells its commercial products at full cost plus a 25% markup based on cost and believes the proprietary plastic component made for the Entertainment Division would sell for $6.25 per unit on the open market. The market price of the video card used by the Entertainment Division is $10.98 per unit.
Assuming the Video Cards Division has no unused capacity, a transfer price to the Entertainment Division of $9.15 per unit will:
a.Allow evaluation of both divisions on a competitive basis
b.Satisfy the Video Cards Division`s profit desire by allowing recovery of opportunity costs
c.Not motivate the Entertainment Division and will cause mediocre performance.
d.Provide no incentive for the Video Cards Division to control or reduce costs
e.Encourage the Entertainment Division to purchase video cards from an external source.
5.Use the information in question 4 but assume the Entertainment Division is able to purchase a large quantity of video cards from an external supplier at $8.70 per unit. The Video Cards Division, having unused capacity, agrees to lower the transfer price to $8.70 per unit. This action will:
a.Optimize the profit goals of the Entertainment Division while subverting the profit goals of Parkside Inc.
b.Provide no profit incentive for the Video Cards Division.
c.Subvert the profit goals of the Video Cards Division while optimizing the profit goals of the Entertainment Division.
d.cause mediocre performance in the Video Cards Division because opportunity costs increase
e.Optimize the overall profit goals of Parkside Inc.
6.Use the information in question 4 and assume the Plastics Division has unused capacity and negotiates a transfer price of $5.60 per plastic component with the Entertainment Division. This price will:
a.Cause the Plastics Division to reduce the number of commercial plastic components it manufactures.
b.Motivate both divisions
c.Encourage the Entertainment Division to seek an external supplier for plastic components
d.Not motivate the Plastics Division, causing mediocre performance.
e.satisfy the Plastics Division’s profit desire by allowing recovery of opportunity costs
7.(CPA adapted) Mar Company has two decentralized divisions, X and Y. Division X has been purchasing certain component parts from Division Y at $75 per unit. Because Division Y plans to raise the price to $100 per unit, Division X desires to purchase these parts from external suppliers for $75 per unit. The following information is available:
Y`s variable cost per unit $70
Y`s annual fixed costs $15,000
Y`s annual production of these parts for X 1,000 units
If Division X buys from an external supplier, the facilities Division Y uses to manufacture these parts will be idle. Assuming g Division Y’s fixed costs cannot be avoided, what is the result if Mar requires Division X to buy from Division Y at a transfer price of $100 per unit?
Chapter 23: Performance Measurement, Compensation, and Multinational Considerations.
Review Questions and Exercises
1.Designing accounting-based performance measure for an organization subunit requires three steps. Step 1 is to choose performance measures that _____________ financial goals.
2.In the formula to calculate residual income, the required rate of return multiplied by investment is called the ________ cost of the investment.
3.__________cost is the cost of purchasing an asset today identical to the one currently held, or the cost of purchasing an asset that provides services like the one currently held if an identical asset cannot be purchased.
4.An important consideration in designing compensation arrangements is the trade-off between creating incentives to get the manager to work hard and imposing ______ on the manager.
5. _________ describes situations in which an employee prefers to exert less effort (or report distorted information) compared to the effort (or accurate information) desired by the owner, because the employee’s effort (or validity of the reported information) cannot be accurately monitored and enforced.
6.Name the four levers of control _________________
1.Roma Bottling Co. has an investment of $3,000,000, an income-to-revenues ratio of 4%, and an ROI of 12%. Its revenues are:
Income = 12% × $3,000,000 = $360,000
Revenues = $360,000 ÷ 0.04 = $9,000,000
2.Using the information in question 1, the revenues-to-investment ratio is:
$9,000,000 ÷ $3,000,000 = 3 times
3.(CMA adapted) A company`s ROI increases if:
To answer this question, use assumed amounts. Suppose the present ROI is 20% as follows:
Income x Revenues = ROI
$100,000 – $90,000 x $100,000 = 20%
a.Revenues increase by the same dollar amount that costs and total assets increase
b.Revenues remain the same, and costs are reduced by the same dollar amount that total assets increase
c.Revenues and costs increase by the same dollar amount that costs increase
d.Revenues and costs increase by the same percentage that total assets increase
e.None of the above
4.For the fiscal year just ended, Fletcher Inc. has an RI of $180,000 and operating income of $500,000. If the required rate of return is 16%, the amount of investment is:
Imputed interest cost = $500,000 − $180,000 = $320,000
Investment = $320,000 ÷ 0.16 = $2,000,000
e.None of the above
5.Using the information in question 4, ROI is:
$500,000 ÷ $2,000,000 = 25%
e.None of the above
6.(CPA) Marsh Inc. has an incentive compensation plan under which its president is paid a bonus equal to 10% of Marsh’s income after deducting the bonus but before deducting income taxes. For the year ended December 2010, Marsh’s income was $110,000 before deducting the bonus and income taxes. Marsh had income taxes of $40,000 in 2010. How much bonus should Marsh pay its president for 2010?
Let B = Bonus
B = ($110,000 – B) x 0.10
B = $11,000 – 0.10B
1.10B = $11,000
B = $11,000/1.10 = $10,000
The income taxes of $40,000 should not be used in computing the bonus.