Question 1

An organization has a decentralized structure in which division A supplies division B with an intermediate product for which there is no external market. Division B carries out further processing and then sells the final product on the external market. Due to organizational policy the current transfer pricing basis is variable cost.
The manager of division A has stated, 'The current transfer price is unfair because it does not enable us to recoup our costs'.
The manager of division B has stated, 'The current transfer pricing system enables us to quote competitive prices for the finished product'.
The Chief Executive of the organization is considering imposing a transfer pricing policy that uses dual pricing.
Dual pricing would:

Options :

A : be welcomed by the manager of division A but the manager of division B would resist it.

B : be welcomed by both divisional managers.

C : increase divisional autonomy.

D : involve a lump sum payment to division A in addition to the payment of the variable cost per unit.

Answer: B

Question 2

Which of the following statements is correct in respect of the key feature of dual pricing?

Options :

A : The selling price recorded by the selling division is higher than the cost recorded by the receiving division.

B : Internal customers are offered trade discounts depending on the number of units they purchase.

C : Internal transfers are priced at marginal cost and a lump sum payment is made subsequently to contribute to fixed costs.

D : Internal customers are charged a lower price than external customers to reflect savings in distribution costs.

Answer: A

Question 3

A manufacturing company is in the process of introducing just in time (JIT) and total quality management (TQM) into every aspect of its value chain.
Which TWO of the following are appropriate changes to make to the support activities in the organization's value chain?

Options :

A : Inbound logistics would need to ensure that materials of appropriate quality are delivered on a just in time basis.

B : Operations would need to be carried out on a right first time basis as any failure could delay production.

C : After sales service would need to ensure that appraisal costs are kept to a minimum.

D : Procurement would need to arrange to purchase goods so that they are delivered as required.

E : Firm infrastructure would need to arrange appropriate training courses for staff.

F : Technology development would need to ensure that processes are continually improving.

Answer: A,D

Question 4

Division A is an investment centre with assets of $7.3 million. The following is an extract from the annual budget for division A:

The cost of capital is 14%.
Calculate the residual income for division A.

Options :

A : $808,000

B : $1,727,800

C : $358,000

D : $2,008,000

Answer: A

Question 5

Which of the following statements is TRUE about the activity based costing system when compared to absorption costing method?

Options :

A : ABC is easier to administer than an absorption costing system

B : ABC will be less detailed than an absorption costing system

C : ABC will provide more accurate overhead allocation than absorption costing

D : ABC will cost less to administer than an absorption costing system

Answer: C

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