RESPONSIBILITY ACCOUNTING & TRANSFER PRICING

Basic Concepts
75. Controllable costs are costs that
A. are likely to respond to the amount of attention devoted to them by a specified manager.
B. are governed mainly by past decisions that established the present levels of operating and organizational
capacity and that only change slowly in response to small changes in capacity.
C. will be unaffected by current managerial decisions.
D. fluctuate in total in response to small change in the rate of utilization of capacity.

76. Which of the following does not apply to the content of managerial reports?
A. Reporting standard is relevant to the decision to be made.
B. May extend beyond double-entry accounting system.
C. Pertain to subunits of the entity and may be very detailed.
D. Pertains to the entity as a whole and is highly aggregated.*

Return on Investment
77. If the investment turnover decreased by 10 percent and ROS decreased by 30 percent, the ROI would
A. increase by 30% C. decrease by 37%
B. decrease by 10% D. decrease by 33.3%

78. Return on investment (ROI) is a term often used to express income earned on capital invested in a business
unit. A companys ROI would be increased if sales
A. increased by the same peso amount as expenses and total assets increased.
B. remained the same and expenses were reduced by the same peso amount that total asset increased.
C. decreased by the same peso amount that expenses increased.
D. and expenses increased by the same percentage that total assets increased.

79. If the investment turnover increased by 30% and ROS decreased by 20%, the ROI would
A. increase by 4% C. increase by 30%
B. increase by 6% D. decrease by 50%

Residual Income
80. Jar Division of Handy, Inc. expects the following result for 2004:
Unit sales 70,000
Unit selling price P 10
Unit variable cost P 4
Total fixed costs P300,000
Total investment P500,000
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A foreign customer
has approached Jars manager with an offer to buy 10,000 units at P7 each. If Jar accepts the order, it would not
lose any of the 70,000 units at the regular price. Accepting the order would increase fixed costs by P10,000 and
investment by P40,000.

What is the minimum price that Jar could accept for the order and still maintain its expected residual income?
A. P5.00 C. P4.75
B. P5.60 D. P9.00



Return on Investment & Residual Income
81. Scotch Co. has the following results for the year:
Sales P740,000
Variable expenses 260,000
Fixed expenses 300,000
Total divisional assets average P1,000,000. The companys minimum required rate of return is 14 percent. The
residual income and return on investment for Scotch are:
A. B. C. D.
Residual Income P36,000 P40,000 P36,000 P40,000
Return on Investment 36% 18% 18% 36%

82. The following information relates to two projects of Rica Corporation.
Project A Project B
Operating income P2,500,000 P600,000
Residual income P 500,000 P200,000
ROI 10% 12%
Return on residual investment 2% 4%
A bonus of P50,000 will be paid to the manager whose project contributed most to the overall performance of the
firm. The P50,000 bonus should go to the manager of
A. project A because the residual income is higher
B. project B because the return on investment is higher
C. project A because it was a larger, more complex project
D. project B because the return on residual investment is higher*

Transfer Pricing
83. An appropriate transfer price between two divisions of the Star Corporation can be determined from the following
data:
Fabrication Division
Market price of subassembly P50
Variable cost of subassembly P20
Excess capacity (in units) 1,000
Assembling Division
Number of units needed 900
What is the natural bargaining range for the two divisions?
A. Between P20 and P50 C. Any amount less than P50
B. Between P50 and P70 D. 50 is the only acceptable price
WORKING CAPITAL MANAGEMENT
Working Capital Policy
142. As a company becomes more conservative with respect to working capital policy, it would tend to have a(n)
A. increase in the ratio of current liabilities to noncurrent liabilities.
B. decrease in the operating cycle.
C. decrease in the operating cycle.
D. increase in the ratio of current assets to noncurrent liabilities.*

143. Wen Company follows and aggressive financing policy in its working capital management while Manong
Corporation follows a conservative financing policy. Which one of the following statements is correct?
A. Wen has low ratio of short-term debt to total debt while Manong has a high ratio of short-term debt to total
debt.
B. Wen has a low current ratio while Manong has a high current ratio
C. Wen has less liquidity risk while Manong has more liquidity risk.
D. Wen finances short-term assets with long-term debt while Manong finances short-term assets with short-
term debt.

37. Star Market has 3 stores: P, Q and R. During 19x8, Store P had a contribution margin of P24, 000 and a
contribution margin ratio of 30%. Store Q had variable costs of P48, 000 and a contribution margin ratio of 40%.
Store R had variable costs of P84, 000 which represented 70% of sales in the store. For 19x8, Star Markets total
sales were
a. P320, 000
b. P360, 000
c. P440, 000
d. P280, 000
38. Khi Company has two divisions J and K. During 19x2, the contribution margin in J was P30, 000. The contribution
margin ratio in K during 19x2 was 40%, its sales were P125, 000 and its segment margin was P32, 000. The
common fixed expenses in the company were P40, 000 and the companys net income for the year was P18, 000.
The segment margin for Division J for 19x2 was
a. P26, 000
b. P32, 000
c. P8, 000
d. P58, 000
Productivity Measures
Questions 5 & 6 are based on the following information.
Information about Rose Company is as follows:
2001 2002
Output (units) 80,000 84,000
Selling price per unit P25 P25
Input quantities:
Materials (pounds) 4,000 4,000
Labor (hours) 3,200 3,250
Input prices:
Materials (per pound) P5.00 P5.50
Labor (per hour) P7.00 P7.50

5. What are the materials productivity, and labor productivity ratio for 2001?
A. B. C. D.
Materials 20.00 100.00 25.00 20.00
Labor 25.00 95.45 24.00 24.00

6. By how much did profits change as a result of changes in productivity related to materials, and labor,
respectively?
A. B. C. D.
Materials P(1,100) P1,100 P(625) P625
Labor P (825) P 825 P 625 P625
Responsibility Accounting & Transfer Pricing
75. A management decision may be beneficial for a given profit center, but not for the entire company. From
the overall company viewpoint, this decision would lead to
A. goal congruence C. suboptimization
B. centralization D. maximization

76. Company L had its operating asset turnover increased by 50% and the operating income margin increased
by 50%. Company U had its operating asset turnover increased by 30% and the operating income margin
decreased by 30%. What changes are expected for ROI of Company L and Company U, respectively?
A. B. C. D.
Company L 50% increase 125% increase 225% increase 125% increase
Company U 9% decrease 9% decrease no change no change

77. The manager of the Queen Division of Pusoy Company expects the following results in 2004 (pesos in millions):
Sales P49.60
Variable costs (60%) 29.76
Contribution margin P19.84
Fixed costs 12.00
Profit P 7.84
Investment:
Plant equipment P19.51
Working capital 14.88 P34.39
ROI P7.84/P34.39 22.80%
The division has a target ROI of 30 percent, and the manager has asked you to determine how much sales
volume the division would need to reach that. He states that the sales mix is relatively constant so variable costs
should be close to 60 percent of sales, fixed cost and plant and equipment should remain constant, and working
capital (cash, receivables, and inventories) should vary closely with sales in the percentage reflected above.
The peso sales that the division needs in order to reach the 30 percent ROI target is
A. P19,829,032 C. P57,590,322
B. P44,373,871 D. P59,510,000

78. Ace Division of Card, Inc. expects the following result for 2004:
Unit sales 70,000
Unit selling price P 10
Unit variable cost P 4
Total fixed costs P 300,000
Total investment P 500,000
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A foreign customer
has approached Houstons manager with an offer to buy 10,000 units at P7 each. Houston Division has capacity
of 75,000 units and the foreign customer will not accept fewer than 10,000 units. Accepting the order would
increase fixed costs by P10,000 and investment by P40,000.

At the price of P7 offered by foreign customer, what is the maximum number of units in regular sales that
Houston could sacrifice and still maintain its expected residual income?
A. 2,333 C. 2,667
B. 3,333 D. 3,667



79. Family Company has two division, Ma and Pa. Information for each division is as follows:
Ma Pa
Net earnings for division P20,000 P65,000
Asset base for division P50,000 P300,000
Target rate of return 15% 18%
Operating income margin 10% 20%
Weighted average cost of capital 12% 12%
What is the Economic Value Added for Ma and Pa, respectively?
A. P20,000, P36,000 C. P12,500, P11,000
B. P14,000, P29,000 D. P20,000, P29,000


81. Pacific Company has three plants: one located in Malaysia, one in India and another plant located in the
Philippines. Both plants manufactures a component used in a finished product manufactured in the Philippine
plant. Currently, both plants are operating at 70 percent capacity. In Malaysia the income tax rate is 42% while
in India the tax rate 35%; in the Philippines, the corporate income tax rate is 40%.
The market price of the component, in peso equivalent, is P100 and the foreign plants costs to manufacture the
component are as follows:
Direct materials P10
Direct labor 20
Variable overhead 5
Fixed overhead 25
Which transfer price would be in the best interest of the overall corporation?
A. B. C. D.
Malaysia P35 P 35 P100 P100
India P35 P100 P100 P 35

82. The Engine Division provides motors for the Auto Division of a company. The standard unit costs for Engine
Division are as follows:
Direct materials 10,000
Direct labor 20,000
Variable Overhead 5,000
Fixed Overhead 2,500
Market price P45,500
What is the best transfer price to avoid transfer price problems?
A. P45,500 C. P35,000
B. P30,000 D. P37,500

83. 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. variable costs
B. replacement cost D. market price