Responsibility Accounting and Transfer Pricing
Data concerning manufacturing overhead for Friendly Company are presented below. The Mixing
Department is a cost center. An analysis of the overhead costs reveals that all variable costs are
controllable by the manager of the Mixing Department and that 50% of supervisory costs are
controllable at the department level. The flexible budget formula and the cost and activity for the
months of July and August are as follows:
Instructions
(a) Prepare the responsibility reports for the Mixing Department for each month.
(b) Comment on the manager's performance in controlling costs during the two month period.
The Ace Division, a profit center of Berek Company, reported the following data for the first quarter of
2015:
Sales $6,000,000
Variable costs 4,200,000
Controllable direct fixed costs 800,000
Noncontrollable direct fixed costs 530,000
Indirect fixed costs 200,000
Instructions
(a) Prepare a performance report for the manager of Ace Division.
(b) What is the best measure of the manager's performance? Why?
(c) How would the responsibility report differ if the division was an investment center?
Spar Company has calculated the following ratios for one of its investment centers:
Margin 25%
Turnover 0.5 times
What is Spar's return on investment for this investment center?
Mike Corporation uses residual income to evaluate the performance of its divisions. The company's
minimum required rate of return is 14%. In January, the Commercial Products Division had average
operating assets of P970,000 and net operating income of P143,700. What was the Commercial
Products Division's residual income in January?
The marketing manager of Gilroy, Inc., accepted a rush order for a nonstock item from a valued
customer. The manager filed the necessary paperwork with the production department, and a
production manager did the same with purchasing for needed raw materials. Unfortunately, a
purchasing clerk temporarily lost the paperwork; by the time it was found, it was too late to order from
Gilroy's regular supplier. A new supplier was located that quoted a very attractive price.
The materials soon arrived and were found to be of poor quality, thus giving rise to a favorable
materials price variance, an unfavorable materials quantity variance, and an unfavorable labor efficiency
variance. These latter two variances, as was the usual case, appeared on the production manager's
performance report for the period just ended.
A. Given that the company uses a responsibility accounting system, should the production
manager be penalized for poor performance? Briefly discuss, keeping in mind that a production
manager is generally in a very good position to control material usage and labor efficiency.
B. Should anything be done to correct the situation? If "yes," briefly explain.
A Company has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces
containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is
$2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to
the Cologne Division, and the Cologne Division can purchase similar containers in the external market
for $2.60.
The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting
the demands of the Cologne Division. Using the general rule, the transfer price from the Bottle Division
to the Cologne Division would be?
Assume the Bottle Division has no excess capacity and could sell everything it produced externally.
Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be?
The maximum amount the Cologne Division would be willing to pay for each bottle transferred would
be?
AutoTech's Northern Division is currently purchasing a part from an outside supplier. The company's
Southern Division, which has no excess capacity, makes and sells this part for external customers at a
variable cost of $19 and a selling price of $31. If Southern begins sales to Northern, it (1) will use the
general transfer-pricing rule and (2) will be able to reduce variable cost on internal transfers by $3. On
the basis of this information, Southern would establish a transfer price of?
