9.0 Responsibility Accounting 2018

#MASReview1stSEM2018 MAS09
RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING
 Type of responsibility centers (cost, revenue, profit and investment centers)

 Concepts of decentralization and segment reporting
 Controllable and non-controllable costs, direct and common costs
 Performance margin (manager vs. segment performance)
 Preparation of ‘segmented’ income statement
 Return on investment (RoI), residual income and economic value added (EVA)
 Rational and need for transfer price
 Transfer pricing schemes (minimum transfer price, market-based transfer price, cost-based transfer price
and negotiated price)
RESPONSIBILITY ACCOUNTING
A RESPONSIBILITY CENTER is any part, segment or subunit of an organization. A segment may be a product line, a
geographical area or any other meaningful unit. RESPONSIBILITY ACCOUNTING is an accounting system that measures
accounting results of each responsibility center separately. It is also used to measure consolidated results.
A responsibility center’s plans are expressed in its budget, and the actual results for that responsibility center are then compared
against its budget to determine how well it is achieving its plans.
The budget is developed by responsibility center. All of the responsibility centers combined make up the consolidated budget.
For instance, the Sales Budget is developed for each individual responsibility center, and all the responsibility centers’ budgets
together make up the consolidated Sales Budget. Consolidating all the different budgets for all the different responsibility
centers is part of the process of developing the Master Budget.
The main purposes for responsibility centers and responsibility accounting are to enable evaluation of subunits’
performance and contribute to measuring the performance of the subunits’ managers. This provides motivation for man agers
of the subunits. By knowing what they are responsible for and controlling those items, managers should be more motivated
than if they were evaluated on something outside of their control.
TYPE OF RESPONSIBILITY CENTERS (COST, REVENUE, PROFIT AND INVESTMENT CENTERS)
Cost Center – This type of center is responsible only for the incurrence of costs. A cost center does not have any revenue, and
therefore has no profit. An example of this type of center would be an equipment maintenance department or an internal accounting
department.
A cost center is the least complex type of center due to its being responsible only for costs, and the managers of a cost center are
best evaluated by using variance analysis for these costs. The efficiency of operations is the key to the evaluation.
Note: A service department within a larger company is usually a cost center because it provides services
to other departments, so it does not have any revenue.
Revenue Center – This type of center is the opposite of a cost center in that it is responsible only for revenues. A sales department is
a revenue center. Though every department will incur some costs, the costs incurred by a revenue center are generally immaterial and
may not even be controllable by the center. A revenue center’s costs may simply be allocated to them by the central company. Managers
in revenue centers are evaluated by the level of revenue that the center generates. Effectiveness is the key for the evaluation.
Profit Center – this is a department responsible for both revenues and expenses. An example would be a department within a store, which
would have both revenues and cost of goods sold. Because a profit center is responsible for both costs and revenues, a manager of a
profit center will be evaluated on both costs and revenues. In a profit center, both efficiency and effectiveness are assessed, but
priority is given to effectiveness. In fact, the profit can be treated as the goal to be achieved.
Investment Center – An investment center is responsible not only for profit (revenues and costs), but also for some amount of invested
capital such as equipment and for providing a return on that capital. Because it is responsible for a return-on-investment, this type of
department is the most like a regular and complete business by itself. However, it is still part of an even larger organization. An example
of this type of center is a branch office. Effectiveness in achieving/exceeding predetermined criteria is the key evaluation.
In an investment center, the most important criterion for evaluation is the return-on-investment provided by the investment center.
Note: Given the nature of the measurement of an investment center (return-on-investment), it is actually
preferable for a company to have as many investment centers as possible. This is because the goal
of any business (and therefore any part of a business) should be return on invested capital.
CONCEPTS OF DECENTRALIZATION AND SEGMENT REPORTING
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Decentralization is the delegation of decision-making authority to lower levels. In centralized decision making, decisions are made at
the very top level, and lower-level managers are responsible for implementing these decisions. For decentralized decision making,
decisions are made and implemented by lower-level managers.
Reasons for decentralization include the following: access to local information, more timely response, focusing of central
management, exposure of segments to market forces, enhanced competition, training, and motivation.
PERFORMANCE MARGIN (MANAGER VS. SEGMENT PERFORMANCE); PREPARATION OF ‘SEGMENTED’ INCOME

STATEMENT
A variation of the contribution income statement can be used to isolate controllable costs of a business unit from its non-controllable
costs, such as depreciation or allocated central costs. Thus, it is a way of evaluating managers of profit and investment centers.
CONTROLLABLE AND NON-CONTROLLABLE COSTS, DIRECT AND COMMON COSTS
Net revenues represent the sales value of all sales for the period.
Variable manufacturing costs include all of the variable costs of production – labor, materials and variable overheads – that were
incurred in the production of the units sold.
The manufacturing contribution margin of the company is the amount of money that is available to cover nonmanufacturing variable
costs, all fixed costs and then flow to profit. After all variable manufacturing costs are covered, increases to the contribution margin flow
directly to profit.
Variable nonmanufacturing costs include all variable costs that are not part of the production process. This includes, but is not
limited to, marketing, selling, general and administrative costs that are variable in nature.
The contribution margin of the company is the amount of money that is available to cover fixed costs and then flow to profit, after all
variable costs are covered.
Controllable fixed costs are fixed costs that the segment manager is able to control and influence. Examples of controllable fixed
costs are supervisory salaries and any expenses that are incurred by that segment only such as some sort of sales promotion.
The controllable margin or short-term segment manager performance is important because it is a measurement of all the
revenues and expenses (variable and fixed) that are controllable by the individual managers on a short-term (less than one year) basis.
The controllable margin is a good measure of a manager’s short-term performance.
Noncontrollable, traceable fixed costs are fixed costs that cannot be controlled by the manager within a time span of one year or
less. They are usually facilities costs such as depreciation, taxes and insurance.
The contribution by strategic business unit (SBU) or segment margin is a measure of the performance of each business unit. It
may also be used as a measure of the long-term performance of the manager, if the manager can control the noncontrollable traceable
fixed costs over a long-term period. However, in many cases, decisions about noncontrollable traceable fixed costs are made by others.
For purposes of evaluating a segment or a manager, noncontrollable, untraceable costs must not be allocated to the individual
segments. These are the costs that are incurred at the company level and would continue even if the individual segment were
discontinued. These costs are important, and the overall company needs to be able to cover them. But they should not be a part of a segment
manager’s performance evaluation, because the segment manager has no control over them. For purposes of evaluation, they can be omitted
from the individual segment reports. This will cause the individual segment reports to not total to the company’s net income. In the example
above, the sum of the two divisions’ contributions is P2,250, but the company’s net income is P1,250; the difference is untraceable,
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common costs.
Common costs are those costs that are shared by two or more responsibility centers, for example, costs of service departments such as
IT, human resources or accounting. The costs need to be allocated between or among the various responsibility centers that receive
benefit from them.
Cost allocation can be done based on various systems:
1) Cause and Effect. Activities that cause resources to be consumed are identified, and cost allocations are based on each
responsibility center’s usage of the resources. For example, costs of a centralized call center could be assigned to products
according to time spent by call center employees supporting customers of each product.
2) Benefits Received. Costs are allocated to the responsibility center or centers that benefit from the expenditure. For example,
the costs of a marketing program for a particular product could be allocated to that product; or the costs of a public relations
program that benefited the organization as a whole but no specific product could be allocated according to the revenues of
each department or division.
3) Fairness or Equity. This is often a requirement for government contracts when a price to the government is based on
costs and cost allocations. Cost allocation should be “reasonable” and “fair” and is more a matter of judgment than anything
else.
4) Ability to Bear. Costs are allocated proportionally, according to individual responsibility centers’ ability to bear the costs.
For example, administrative salaries might be allocated on the basis of each responsibility center’s operating income, on the
assumption that more profitable divisions have a greater ability to absorb headquarters costs.
RETURN ON INVESTMENT (ROI), RESIDUAL INCOME AND ECONOMIC VALUE ADDED (EVA)
1. Return-on-Investment (ROI)
ROI is the key performance measure for an investment center. It provides the measure of the percentage of return that was
provided on the peso amount of the investment (i.e., assets). Several different measurements of investment are used.
When Total Assets will be used as the denominator, the calculation is:
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Net Income of the Investment Center
Average Total Assets (or Investment) of the Investment Center
“Average Total Assets” is calculated: (Beginning Total Assets + Ending Total Assets) ÷ 2
In using ROI, the company needs to decide what it will use as the measure of total assets (or investment). There are a number of
different possibilities, as follows:
 Working Capital (Current Assets – Current Liabilities) plus Fixed Assets – This method includes only assets that
are financed with long-term liabilities and equity; assets that are financed with current liabilities are not included in the
calculation. We also call this invested capital.
Note: Unless otherwise instructed, use this method to calculate the investment base (the denominator of
the ROI formula) in an Exam question.
 Total Assets – This is used when a manager is evaluated on his/her utilization of all assets, regard- less of the method of
financing of these assets. This measure may be used because of the assumption that all of the assets that are in the business
unit (including net working capital) are really “on loan” from the parent company. Working capital is calculated as current
assets minus current liabilities.
 Long-term Assets – This includes invested capital and property, plant and equipment (or fixed assets).
 Total Assets Employed – Idle assets such as vacant land or an idle machine are subtracted from the total assets.
 Average Invested Capital – It is calculated as the invested capital at the beginning of the year plus the invested capital
at the end of the year divided by 2.
A variation on this method provides us with a measure of the return on shareholders’ equity (ROE). There is a problem, however, with
using equity as the denominator for ROI analysis, because it reflects all of the company’s liabilities, both current and long-term. This
means that the measurement basis for the evaluation is probably outside of the control of the manager. This is because
most managers of a department are not involved in the decisions about how to finance the investments that the larger company is making
(i.e., short-term debt, long-term debt or equity).
The formula is: Net Income / Average Stockholders’ Equity.
2. Residual Income (RI)
Residual Income (RI) attempts to overcome the weakness in ROI by measuring the amount of return that is provided by a department. RI
for a division is calculated as the amount of return (net income before taxes) that is in excess of a targeted amount of return on the
investments employed by that division. Residual income is the income earned after the division has covered the required charge for the
funds it has invested in its operations.
Two items that you need to know in regard to the calculation of RI are:
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 The targeted amount of return is usually some percentage of the total employed assets of the division or the
invested capital in the division, and
 The percentage used in the calculation is the target rate that management has set.
If the target rate is not available in the question, you should use the company’s weighted average cost of capital (which
will be given in the question).
Note: Invested capital is usually calculated as fixed assets plus working capital. Capital assets or land
that is idle should not be included in the amount of the investment.
When using this method to evaluate investment opportunities, any project that has a positive RI will be accepted even if it will
reduce the overall company or division ROI.
The formula for RI is:
Net income before taxes on project or investment opportunity

– Target return in pesos: a % of employed assets or invested capital
= Residual Income
Example: Paterno Company has Total Assets of P4,000,000 and Net Operating Income of P600,000. Its target,
or required, rate of return is 10%. How much residual income does Paterno have?
The Target return = P4,000,000 × .10 = P400,000
Net Operating Income of P600,000 less P400,000 target return = P200,000 of residual income.
In the calculation of Residual Income, the target rate of return multiplied by invested capital is considered an imputed cost of the
investment. This imputed cost is the opportunity cost of other potential returns that have been forgone in order to make the
investment.
Note: Residual Income may be a negative amount. This occurs when the profits that the division or project actually
achieved are less than the target income that was set for the division or project.
3. Economic Value Added (EVA)
Economic value added (EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting
its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA can also be referred to as economic profit, and it
attempts to capture the true economic profit of a company. EVA is the incremental difference in the rate of return over a company's
cost of capital. Essentially, it is used to measure the value a company generates from funds invested into it. If a company's EVA is
negative, it means the company is not generating value from the funds invested into the business. Conversely, a positive EVA shows
a company is producing value from the funds invested in it.
The formula for calculating EVA is: Net Operating Profit After Taxes (NOPAT) - Invested Capital * Weighted Average Cost of Capital
(WACC)
*Invested Capital = Total Assets less Non-interest bearing short-term debts
TRANSFER PRICING
A transfer price is the price that is charged by one unit of the company to another unit of the same company for the services or goods
produced by the first unit and “sold” to the second unit. They are used by profit and investment centers in order to calculate the
costs of services received from service departments and revenues when “selling” a product to another department when that product has
an outside market. Transfer pricing is most common in firms that are vertically integrated, i.e., they are engaged in several different
value-creating operations for a product. When transfers of goods or services are made from one profit center to another profit center within
the same company, a portion of the revenue of one of the divisions is a portion of the cost of the other division. Therefore, the price at
which the transfer takes place affects the earnings reported by each division. If the transfer price used is not the market price, this can
distort reported profits and cause them to be a poor guide for cost center performance evaluation.
RATIONAL AND NEED FOR TRANSFER PRICE
For a multinational company with subsidiaries in several different countries, there are several considerations in setting transfer prices. For
instance, transfer prices can be used to minimize taxes. If goods are shipped to a country with a relatively high tax rate from a country
with a lower tax rate, it will benefit the company as a whole to set the transfer price high.
Another goal in setting transfer prices is minimizing customs charges. The transfer price set can affect the customs charges for goods
imported from a foreign unit. If this is the case, a low transfer price would reduce the amount of customs charges levied on the shipment.
Repatriation of profits to the parent firm and risk of expropriation are two other considerations. Some countries place limits on
the amount of profits that a foreign subsidiary may remit back to the parent company (repatriate). One way to deal with this is to use a
high transfer price on goods being shipped to the foreign subsidiary from the parent, thus keeping the subsidiary’s profits low while
claiming some of them in the higher transfer price. This is something a firm would also want to do if its management perceives a
significant risk of expropriation, the risk that the foreign country will take ownership of the subsidiary away from the parent. The parent
company would set the transfer price for goods shipped to the subsidiary high in order to remove funds from the foreign country as quickly
as possible.
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TRANSFER PRICING SCHEMES (MINIMUM TRANSFER PRICE, MARKET-BASED TRANSFER PRICE, COST-BASED
TRANSFER PRICE AND NEGOTIATED PRICE)
Market Price
The transfer price is set as the current price of the selling division’s product in an arms-length transaction. When there is an external
market for the product, this is almost always the best transfer price to use for profitability and performance measurement, because it is
objective. It satisfies the “arm’s length” requirement by taxing authorities. Furthermore, it satisfies the management of the buying company
that they are paying a fair price for the goods and the management of the selling company that they are receiving a fair price for the goods.
However, sometimes there is no external market and thus a market price is not available. Another drawback is that each transfer of
product entails an element of profit and loss. It may be difficult to determine the actual cost of the final product. Furthermore, intracompany
profit must be eliminated from inventories when consolidated financial statements and the income tax return are prepared.
Cost of Production plus Opportunity Cost
This is a calculation that includes not only the cost of production (called outlay cost), but also the profit margin that the selling
department is giving up by selling the product internally rather than externally. Though this approximates a market price, it is not
exactly a market price because a true market price may only be set in an arm’s length transaction, which this is not.
Variable Cost
The Variable Cost method uses the selling division’s variable costs only. This works well of the selling division has excess capacity and when
the main objective of the transfer price is simply to satisfy the internal demand for goods. It is not appropriate if the seller is a profit or
investment unit, though, because it will decrease the seller’s profitability. Therefore, when the selling division does not have excess capacity,
the selling division will prefer to sell to an outside customer. However, a transfer price equal to variable cost does encourage the buying
division to buy the item internally.
Full Cost
Full cost includes all materials, labor and a full allocation of overhead. It is the full cost of production and is calculated using absorption
costing. The advantages of using full cost are that it is well understood, and the cost information is easily available in the accounting
records. Because the product is transferred at cost, there is no need to eliminate intracompany profits from inventories in consolidated
financial statements and income tax returns. Furthermore, the transferred cost can be easily used to compare actual and budgeted costs.
Cost Plus
Under this method we add some fixed peso amount or a percentage of costs to the cost of production to approximate a normal profit
markup. It can be used when a market price is not available.
This method may use either standard costs or actual costs. If standard costs are used, then there will be an opportunity to separate out
variances. If actual costs are used, then there is no motivation for the manager of the producing and selling department to control the
department’s costs, because whatever costs are incurred will be passed on to the next department. And if the profit markup is a percentage
of cost, it actually gives the selling department an incentive to inflate the cost through production inefficiencies and excessive allocation of
common costs.
Negotiated Price
In order for this method to work, each department or unit must have the ability to determine the amount of its materials that it buys or the
amount of its output that it sells. This method is going to be the most useful when the products in a market are rapidly changing and the
companies need to be able to react quickly to changes in the market place. It also can be helpful if the units are having a conflict and
negotiation can bring about a resolution. However, in order to be effective, neither negotiating party should have an unfair bargaining
position. A drawback of this method is that negotiation can be time-consuming and require frequent revision of prices because of changing
costs and market conditions. Time required for negotiating diverts the attention of division managers away from more productive activities
that would benefit the company, to activities that benefit the division. And the resulting division profits may be more a measurement of the
manager’s negotiating ability than the division’s productive efficiency.
Arbitrary Pricing
Transfer prices may simply be set by central management to achieve tax minimization or some other overall objective. The advantage to
this method is that the price achieves the objectives that central management considers most important. The disadvantages far outweigh
the advantages, however, because this method defeats the goal of making divisional managers profit conscious. It hampers their
autonomy as well as their profit incentive.
When deciding which method to use, management will generally consider a number of factors. The most common factors are the
following items:
2) The goals of the company and what method will best enable those goals to be met (goal congruence), and
3) Factors relating to the capacity of the producing department, its ability to sell the product on the open market and the ability
of the purchasing department to buy the product on an open market.
Dual-Rate Pricing
Dual-rate pricing is a method in which the selling and the purchasing departments each record the transaction at different prices. For
example, the seller records it at market value, but the purchasing department records it at the variable cost of production. As a result of
this, each department’s results are more positive on paper. If this is done, the total of the divisional profits will be greater than the profit
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for the company as a whole. The profit assigned to the producing division will need to be eliminated when the consolidated financial
statements and income tax returns are prepared.
****E X E R C I S E S****
MUTLIPLE CHOICES
Question 1 - CMA 1291 3-10 - Responsibility Centers and Reporting Segments
A segment of an organization is referred to as a service center if it has
A. Authority to provide specialized support to other units within the organization.

B. Responsibility for combining the raw materials, direct labor, and other factors of production into a final output.
C. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and
sources of supply.
D. Responsibility for developing markets and selling the output of the organization.
The least complex segment or area of responsibility for which costs are allocated is a(n)
A. Investment center.
B. Contribution center.
C. Cost center.
D. Profit center.
In theory, the optimal method for establishing a transfer price is
A. Budgeted cost with or without a markup.

B. Market price.
C. Flexible budget cost.
D. Incremental cost.
Under a standard cost system, the materials price variances are usually the responsibility of the
A. Production manager.
B. Cost accounting manager.
C. Purchasing manager.
D. Sales manager.
The purpose of identifying manufacturing variances and assigning their responsibility to a person/department should be to
A. Use the knowledge about the variances to promote learning and continuous improvement in the manufacturing operations.
B. Determine the proper cost of the products produced so that selling prices can be adjusted accordingly.
C. Pinpoint fault for operating problems in the organization.
D. Trace the variances to finished goods so that the inventory can be properly valued at year-end.
Question 6 - CIA 595 III-96 - Responsibility Centers and Reporting Segments
Which of the following techniques would be best for evaluating the management performance of a department that is operated
as a cost center?
A. Return on assets ratio.

B. Payback method.
C. Return on investment ratio.
D. Variance analysis.
Sherman Company uses a performance reporting system that reflects the company's decentralization of decision making. The
departmental performance report shows one line of data for each subordinate who reports to the group vice president. The data
presented show the actual costs incurred during the period, the budgeted costs, and all variances from budget for that
subordinate's department. Sherman is using a type of system called
A. Responsibility accounting.
B. Flexible budgeting.
C. Contribution accounting.
D. Cost-benefit accounting.
Question 8 - CIA 588 IV-19 - Responsibility Centers and Reporting Segments
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The alpha division of a company, which is operating at capacity, produces and sells 1,000 units of a certain electronic component
in a perfectly competitive market. Revenue and cost data are as follows:
Sales P50,000
Variable costs 34,000
Fixed costs 12,000
The minimum transfer price that should be charged to the beta division of the same company for each component is
A. P12
B. P46
C. P50
D. P34
The segment margin of an investment center after deducting the imputed interest on the assets used by the investment center
is known as
A. Return on assets.
B. Operating income.
C. Residual income.
D. Return on investment.
Division Z of a company produces a component that it currently sells to outside customers for P20 per unit. At its current level
of production, which is 60% of capacity, Division Z's fixed cost of producing this component is P5 per unit and its variable cost
is P12 per unit. Division Y of the same company would like to purchase this component from Division Z for P10. Division Z has
enough excess capacity to fill Division Y's requirements. The managers of both divisions are compensated based upon reported
profits. Which of the following transfer prices will maximize total company profits and be most equitable to the managers of
Division Y and Division Z?
A. P12 per unit.

B. P20 per unit.
C. P22 per unit.
D. P18 per unit.
The Eastern division sells goods internally to the Western division of the same company. The quoted external price in industry
publications from a supplier near Eastern is P200 per ton plus transportation. It costs P20 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 P100. Actual per
ton direct labor is P50. Other actual costs of storage and handling are P40. The company president selects a P220 transfer
price. This is an example of
A. Cost plus 20% transfer pricing.

B. Cost-based transfer pricing.
C. Negotiated transfer pricing.
D. Market-based transfer pricing.
Decentralized firms can delegate authority and yet retain control and monitor managers' performance by structuring the
organization into responsibility centers. Which one of the following organizational segments is most like an independent
business?
A. Profit center.
B. Investment center.
C. Cost center.
D. Revenue center.
A and B are autonomous divisions of a corporation. They have no beginning or ending inventories, and the number of units
produced is equal to the number of units sold. Following is financial information relating to the two divisions.
Division
A B
Sales P150,000 P400,000
Other revenue 10,000 15,000
Direct materials 30,000 65,000
Direct labor 20,000 40,000
Variable factory overhead 5,000 15,000
Fixed factory overhead 25,000 55,000
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Variable selling and administrative expense 15,000 30,000

Fixed selling and administrative expense 35,000 60,000
Central corporate expenses (allocated) 12,000 20,000
What is the contribution margin of Division B?
A. P235,000
B. P265,000
C. P150,000
D. P205,000
Which of the following is not true about international transfer prices for a multinational firm?
A. Allows the firm to evaluate each division.

B. Allows firms to correctly price products in each country in which it operates.
C. Allows firms to attempt to minimize worldwide taxes.
D. Provides each division with a profit-making orientation.
A segment of an organization is referred to as a profit center if it has
A. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and
sources of supply.
B. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and
sources of supply and significant control over the amount of invested capital.
C. Authority to provide specialized support to other units within the organization.
D. Authority to make decisions over the most significant costs of operations including the power to choose the sources of
supply.
The inventory control supervisor at Wilson Manufacturing Corporation reported that a large quantity of a part purchased for a
special order that was never completed remains in stock. The order was not completed because the customer defaulted on the
order. The part is not used in any of Wilson's regular products. After consulting with Wilson's engineers, the vice president of
production approved the substitution of the purchased part for a regular part in a new product. Wilson's engineers indicated that
the purchased part could be substituted providing it was modified. The units manufactured using the substituted part required
additional direct labor hours resulting in an unfavorable direct labor efficiency variance in the Production Department. The
unfavorable direct labor efficiency variance resulting from the substitution of the purchased part in inventory would best be
assigned to the
A. Sales manager.
B. Inventory supervisor.
C. Production manager.
D. Vice president of production.
David Rogers, purchasing manager at Fairway Manufacturing Corporation, was able to acquire a large quantity of raw material
from a new supplier at a discounted price. Marion Conner, inventory supervisor, is concerned because the warehouse has become
crowded and some things had to be rearranged. Brian Jones, vice president of production, is concerned about the quality of the
discounted material. However, the Engineering Department tested the new raw material and indicated that it is of acceptable
quality. At the end of the month, Fairway experienced a favorable materials usage variance, a favorable labor usage variance,
and a favorable materials price variance. The usage variances were solely the result of a higher yield from the new raw material.
The favorable materials price variance would be considered the responsibility of the
A. Vice president of production.

B. Engineering manager.
C. Purchasing manager.
D. Inventory supervisor.
Under a standard cost system, the materials efficiency variances are the responsibility of
A. Sales and industrial engineering.

B. Purchasing and industrial engineering.
C. Purchasing and sales.
D. Production and industrial engineering.
One department of an organization, Final Assembly, is purchasing subcomponents from another department, Materials
Fabrication. The price that will be charged to Final Assembly by Materials Fabrication is to be determined. Outside market prices
for the subcomponents are available. Which of the following is the most correct statement regarding a market-based transfer
price?
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A. Marginal production cost transfer prices provide incentives to use otherwise idle capacity.
B. Overall long term competitiveness is enhanced with a market-based transfer price.
C. Corporate politics is more of a factor in a market-based transfer price than with other methods.
D. Market transfer prices provide an incentive to use otherwise idle capacity.
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 that is made exclusively for the Entertainment Division, while other less complex components are sold to
outside markets. The products of the Video Cards Division are sold in a competitive market; however, one video card model is
also used by the Entertainment Division. The actual costs per unit used by the Entertainment Division are presented below.
Plastic Video
Components Cards
Direct material $1.25 $2.40
Direct labor 2.35 3.00
Variable overhead 1.00 1.50
Fixed overhead .40 2.25
Total cost $5.00 $9.15
The Plastics Division sells its commercial products at full cost plus a 25% markup 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.
Assume that the Plastics Division has excess capacity and it has negotiated a transfer price of $5.60 per plastic component with
the Entertainment Division. This price will
A. Motivate both divisions as estimated profits are shared.

B. Demotivate the Plastics Division causing mediocre performance.
C. Cause the Plastics Division to reduce the number of commercial plastic components it manufactures.
D. Encourage the Entertainment Division to seek an outside source for plastic components.
When using a contribution margin format for internal reporting purposes, the major distinction between segment manager
performance and segment performance is
A. Direct variable costs of producing the product.

B. Direct fixed cost controllable by others.
C. Unallocated fixed cost.
D. Direct fixed cost controllable by the segment manager.
Plastic Video
Components Cards
Assume that the Entertainment Division is able to purchase a large quantity of video cards from an outside source at
$8.70 per unit. The Video Cards Division, having excess capacity, agrees to lower its transfer price to $8.70 per unit. This
A. Allow evaluation of both divisions on the same basis.

B. Optimize the overall profit goals of Parkside Inc.
C. Optimize the profit goals of the Entertainment Division while subverting the profit goals of Parkside Inc.
D. Subvert the profit goals of the Video Cards Division while optimizing the profit goals of the Entertainment Division.
9
Plastic Video
Components Cards
A per-unit transfer price from the Video Cards Division to the Entertainment Division at full cost, $9.15, would
A. Allow evaluation of both divisions on a competitive basis.

B. Encourage the Entertainment Division to purchase video cards from an outside source.
C. Provide no profit incentive for the Video Cards Division to control or reduce costs.
D. Satisfy the Video Cards Division's profit desire by allowing recovery of opportunity costs.
Question 24 - CIA 1190 IV-20 - Responsibility Centers and Reporting Segments A
limitation of transfer prices based on actual cost is that they
A. Charge inefficiencies to the department that is transferring the goods.

B. Can lead to suboptimal decisions for the company as a whole.
C. Lack clarity and administrative convenience.
D. Must be adjusted by some markup.
Overtime conditions and pay were recently set by the personnel department. The production department has just received a
request for a rush order from the sales department. The production department protests that additional overtime costs will
be incurred as a result of the order. The sales department argues that the order is from an important customer. The
production department processes the order. To control costs, which department should never be charged with the overtime
costs generated as a result of the rush order?
A. Shared by production department and sales department.

B. Production department.
C. Sales department.
D. Personnel department.
The WK Company uses a performance reporting system that reflects the company's decentralization of decision making. The
departmental performance report shows one line of data for each subordinate who reports to the group vice president. The data
presented show the actual costs incurred during the period, the budgeted costs, and all variances from budget for that
subordinate's department. The WK Company is using a system called
A. Program budgeting.
B. Responsibility accounting.
C. Flexible budgeting.
D. Cost-benefit accounting.
A company has two divisions, A and B, each operated as a profit center. A charges B P35 per unit for each unit transferred to B.
Other data follow:
A's variable cost per unit P30

A's fixed costs P10,000
A's annual sales to B 5,000 units
A's sales to outsiders 50,000 units
A is planning to raise its transfer price to P50 per unit. Division B can purchase units at P40 each from outsiders, but doing so
would idle A's facilities now committed to producing units for B. Division A cannot increase its sales to outsiders. From the
perspective of the company as a whole, from whom should Division B acquire the units, assuming B's market is unaffected?
A. Division A, despite the increased transfer price.

B. Division A, but only until fixed costs are covered, then from outside vendors.
C. Outside vendors.
D. Division A, but only at the variable cost per unit.
10
DigitalTech uses an accounting system that charges costs to the manager who has the authority to make decisions incurring the
costs. For example, if a sales manager authorizes a rush order that results in additional manufacturing costs, these additional
costs are charged to the sales manager. This type of accounting system is known as
A. Functional accounting.
B. Responsibility accounting.
C. Contribution accounting.
D. Transfer-pricing accounting.
A firm prepared a segmented income statement that included the following data for its suburban marketing segment:
Fixed costs controllable by the suburban marketing segment manager P150,000

Fixed suburban marketing costs controllable by corporate management P250,000
Fixed manufacturing costs allocated to the suburban marketing segment P110,000
Variable manufacturing costs P200,000
Variable selling costs P100,000
Variable administrative costs P130,000
Net sales P950,000
The best measure of the economic performance of the suburban marketing segment is:
A. P10,000
B. P520,000
C. P120,000
D. P370,000
Rockford Manufacturing Corporation uses a responsibility accounting system in its operations. Which one of the following items
is least likely to appear in a performance report for a manager of one of Rockford's assembly lines?
A. Direct labor.
B. Materials.
C. Depreciation on the manufacturing facility.
D. Repairs and maintenance.
An organization employs a system of internal reporting that furnishes departmental managers with revenue and cost information
on only those items that are subject to their control. Items not subject to the manager's control are not included in the
performance reports. This method of accounting is known as
A. Segment reporting.
B. Contribution margin reporting.
C. Responsibility accounting.
D. Absorption cost accounting.
The price that one division of a company charges another division for goods or services provided is called the
A. Outlay price.
B. Market price.
C. Distress price.
D. Transfer price.
In responsibility accounting, a center's performance is measured by controllable costs. Controllable costs are best described as
including
A. Direct material and direct labor, only.

B. Those costs about which the manager is knowledgeable and informed.
C. Only those costs that the manager can influence in the current time period.
D. Only discretionary costs.
An appropriate transfer price between two divisions of The Stark Company can be determined from the following data:
Fabricating Division
Market price of subassembly P50
Variable cost of subassembly P20
11
Excess capacity (in units) 1,000
Assembling Division
Number of units needed 900
What is the natural bargaining range for the two divisions?
A. Any amount less than P50.

B. Between P20 and P50.
C. P50 is the only acceptable price.
D. Between P50 and P70.
The segment margin of the Wire Division of Lerner Corporation should not include
A. Variable selling expenses of the Wire Division.

B. The Wire Division's fair share of the salary of Lerner Corporation's president.
C. Fixed selling expenses of the Wire Division.
D. Net sales of the Wire Division.
A and B are autonomous divisions of a corporation. They have no beginning or ending inventories, and the number of units
produced is equal to the number of units sold. Following is financial information relating to the two divisions.
Division
A B
Sales P150,000 P400,000
Other revenue 10,000 15,000
Direct materials 30,000 65,000
Direct labor 20,000 40,000
Variable factory overhead 5,000 15,000
Fixed factory overhead 25,000 55,000
Variable selling and administrative expense 15,000 30,000
Fixed selling and administrative expense 35,000 60,000
Central corporate expenses (allocated) 12,000 20,000
What is the total contribution to corporate profits generated by Division A before allocation of central corporate expenses?
A. P20,000
B. P18,000
C. P30,000
D. P80,000
Division A of a company is currently operating at 50% capacity. It produces a single product and sells all its production to
outside customers for P13 per unit. Variable costs are P7 per unit, and fixed costs are P6 per unit at the current production level.
Division B, which currently purchases this product from an outside supplier for P12 per unit, would like to purchase the product
from Division A. Division A will operate at 80% capacity to meet outside customers' and Division B's demand. What is the
minimum price that Division A should charge Division B for this product?
A. P13.00 per unit.

B. P12.00 per unit.
C. P9.60 per unit.
D. P7.00 per unit.
Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n)
A. Division.
B. Profit center.
C. Operating unit.
D. Revenue center.
A successful responsibility accounting reporting system is dependent upon
A. A reasonable separation of costs into their fixed and variable components since fixed costs are not controllable and must
be eliminated from the responsibility report.
B. Identification of the management level at which all costs are controllable.
C. The correct allocation of controllable variable costs.
D. The proper delegation of responsibility and authority.
12
The Stonebrook Company uses a performance reporting system that reflects the company's decentralization of decision
making. The departmental performance reports show actual costs incurred during the period against budgeted costs. Any
variances from the budget are assigned to the individual department manager who controls the costs. Stonebrook is using a
type of system called
A. Responsibility accounting.
B. Activity-based budgeting.
C. Flexible budgeting.
D. Transfer-pricing accounting.
If a manufacturing company uses responsibility accounting, which one of the following items is least likely to appear in a
performance report for a manager of an assembly line?
A. Supervisory salaries.
B. Materials.
C. Repairs and maintenance.
D. Equipment depreciation.
Which of the following is the most significant disadvantage of a cost-based transfer price?
A. Requires internally developed information.

B. Imposes market effects on company operations.
C. May not promote long-term efficiencies.
D. Requires externally developed information.
Fairmount Inc. uses an accounting system that charges costs to the manager who has been delegated the authority to make the
decisions incurring the costs. For example, if the sales manager accepts a rush order that will result in higher than normal
manufacturing costs, these additional costs are charged to the sales manager because the authority to accept or decline the
rush order was given to the sales manager. This type of accounting system is known as
A. Functional accounting.
B. Transfer price accounting.
C. Responsibility accounting.
D. Reciprocal allocation.
When comparing performance report information for top management with that for lower-level management,
A. Top management reports show control over fewer costs.

B. Lower-level management reports are likely to contain more quantitative data and less financial data.
C. Top management reports are more detailed.
D. Lower-level management reports are typically for longer time periods.
The most fundamental responsibility center affected by the use of market-based transfer prices is a(n)
A. Investment center.
B. Cost center.
C. Profit center.
D. Production center.
A carpet manufacturer maintains a retail division consisting of stores stocking its brand and other brands, and a manufacturing
division that makes carpets and pads. An outside market exists for carpet padding material in which all padding produced can
be sold. The proper transfer price for padding transferred from the manufacturing division to the retail division is
A. The market price at which the retail division could purchase padding.
B. Variable manufacturing division production cost plus allocated fixed factory overhead.
C. Variable manufacturing division production cost plus variable selling and administrative cost.
D. Variable manufacturing division production cost.
A segment of an organization is referred to as an investment center if it has
A. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and
sources of supply.
13
B. Authority to make decisions over the most significant costs of operations including the power to choose the sources of
supply.
C. Authority to provide specialized support to other units within the organization.
D. Authority to make decisions affecting the major determinants of profit including the power to choose its markets and
sources of supply and significant control over the amount of invested capital.
In a responsibility accounting system, managers are accountable for
A. Costs over which they have significant influence.

B. Product costs but not for period costs.
C. Incremental costs.
D. Variable costs but not for fixed costs.
Which of the following is not true of responsibility accounting?
A. The focus of cost center managers will normally be narrower than that of profit center managers.
B. Every factor that affects a firm's financial performance ultimately is controllable by someone, even if that someone
is the person at the top of the firm.
C. When a responsibility accounting system exists, operations of the business are organized into separate areas controlled
by individual managers.
D. Managers should only be held accountable for factors over which they have significant influence.
The receipt of raw materials used in the manufacture of products and the shipping of finished goods to customers is under the
control of the warehouse supervisor. The warehouse supervisor's time is spent approximately 60% on receiving activities and
40% on shipping activities. Separate staffs are employed for the receiving and shipping operations. The labor-related costs for
the warehousing function are as follows:
Warehouse supervisor's salary P40,000

Receiving clerks' wages 75,000
Shipping clerks' wages 55,000
Employee benefit costs (30% of wage and salary costs) 51,000
P221,000
The company employs a responsibility accounting system for performance reporting purposes. The costs are classified on the
report as period or product costs. The total labor-related costs that would be listed on the responsibility accounting performance
report as product costs under the control of the warehouse supervisor for the warehousing function would be
A. P128,700
B. P130,000
C. P169,000
D. P97,500
A company plans to implement a bonus plan based on segment performance. In addition, the company plans to convert to a
responsibility accounting system for segment reporting. The following costs, which have been included in the segment
performance reports that have been prepared under the current system, are being reviewed to determine if they should be
included in the responsibility accounting segment reports:
I. Corporate administrative costs allocated on the basis of net segment sales.
II. Personnel costs assigned on the basis of the number of employees in each segment.
III. Fixed computer facility costs divided equally among each segment.
IV. Variable computer operational costs charged to each segment based on actual hours used times a predetermined
standard rate; any variable cost efficiency or inefficiency remains in the computer department.
Of these four cost items, the only item that could logically be included in the segment performance reports prepared on a
responsibility accounting basis would be the
A. Corporate administrative costs.

B. Fixed computer facility costs.
C. Variable computer operational costs.
D. Personnel costs.
14

9.0 Responsibility Accounting 2018

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#MASReview1stSEM2018 MAS09

RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING

 Type of responsibility centers (cost, revenue, profit and investment centers)

TYPE OF RESPONSIBILITY CENTERS (COST, REVENUE, PROFIT AND INVESTMENT CENTERS)

CONCEPTS OF DECENTRALIZATION AND SEGMENT REPORTING

PERFORMANCE MARGIN (MANAGER VS. SEGMENT PERFORMANCE); PREPARATION OF ‘SEGMENTED’ INCOME

CONTROLLABLE AND NON-CONTROLLABLE COSTS, DIRECT AND COMMON COSTS

Cost allocation can be done based on various systems:

The formula is: Net Income / Average Stockholders’ Equity.

2. Residual Income (RI)

The formula for RI is:

Net income before taxes on project or investment opportunity

The Target return = P4,000,000 × .10 = P400,000

3. Economic Value Added (EVA)

*Invested Capital = Total Assets less Non-interest bearing short-term debts

RATIONAL AND NEED FOR TRANSFER PRICE

Cost of Production plus Opportunity Cost

Question 1 - CMA 1291 3-10 - Responsibility Centers and Reporting Segments

A segment of an organization is referred to as a service center if it has

A. Authority to provide specialized support to other units within the organization.

Question 2 - CMA 693 3-14 - Responsibility Centers and Reporting Segments

Question 3 - CMA 1296 3-17 - Responsibility Centers and Reporting Segments

In theory, the optimal method for establishing a transfer price is

A. Budgeted cost with or without a markup.

Question 4 - CMA 694 3-20 - Responsibility Centers and Reporting Segments

Question 5 - CMA 1296 3-23 - Responsibility Centers and Reporting Segments

Question 6 - CIA 595 III-96 - Responsibility Centers and Reporting Segments

A. Return on assets ratio.

Question 7 - CMA 1294 3-21 - Responsibility Centers and Reporting Segments

Question 8 - CIA 588 IV-19 - Responsibility Centers and Reporting Segments

Question 9 - CMA 1296 3-2 - Responsibility Centers and Reporting Segments

Question 10 - CIA 592 IV-19 - Responsibility Centers and Reporting Segments

A. P12 per unit.

Question 11 - CIA 1193 IV-19 - Responsibility Centers and Reporting Segments

A. Cost plus 20% transfer pricing.

Question 12 - CMA 694 3-24 - Responsibility Centers and Reporting Segments

Question 13 - CIA 1193 IV-21 - Responsibility Centers and Reporting Segments

Variable selling and administrative expense 15,000 30,000

What is the contribution margin of Division B?

Question 14 - CIA 594 III-40 - Responsibility Centers and Reporting Segments

A. Allows the firm to evaluate each division.

Question 15 - CMA 1291 3-8 - Responsibility Centers and Reporting Segments

A segment of an organization is referred to as a profit center if it has

Question 16 - CMA 1296 3-24 - Responsibility Centers and Reporting Segments

Question 17 - CMA 1296 3-21 - Responsibility Centers and Reporting Segments

A. Vice president of production.

Question 18 - CMA 694 3-21 - Responsibility Centers and Reporting Segments

A. Sales and industrial engineering.

Question 19 - CIA 1193 IV-18 - Responsibility Centers and Reporting Segments

Question 20 - CMA 696 3-28 - Responsibility Centers and Reporting Segments

A. Motivate both divisions as estimated profits are shared.

Question 21 - CMA 1292 3-22 - Responsibility Centers and Reporting Segments

A. Direct variable costs of producing the product.

Question 22 - CMA 696 3-27 - Responsibility Centers and Reporting Segments

A. Allow evaluation of both divisions on the same basis.

Question 23 - CMA 696 3-26 - Responsibility Centers and Reporting Segments

A. Allow evaluation of both divisions on a competitive basis.

Question 24 - CIA 1190 IV-20 - Responsibility Centers and Reporting Segments A

limitation of transfer prices based on actual cost is that they

A. Charge inefficiencies to the department that is transferring the goods.

Question 25 - CIA 587 IV-15 - Responsibility Centers and Reporting Segments

A. Shared by production department and sales department.

Question 26 - CMA 692 3-23 - Responsibility Centers and Reporting Segments