Page 111 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes 2. In cost-based transfer pricing, which costing methods are used?
(a) Standard cost for computing cost (b) Full cost for computing cost
(c) Arbitrary costing methods (d) Direct cost for computing costs
3. Which of the following should be treated as incremental cash flows when deciding whether
to invest in a new manufacturing plant? The site is already owned by the company, but
existing buildings would need to be demolished.

(a) The market value of the site and existing buildings.
(b) Demolishing costs and site clearance.
(c) The cost of anew access road put in last year.
(d) Lost earnings on other products due to executive time spent on the new facility.

(e) A proportion of the cost of leasing the president’s jet aeroplane.
(f) Future depreciation of the new plant.
(g) The reduction in the company’s tax resulting from tax depreciation of the new plant.
(h) Money already spent in engineering design of the new plant.

4. The pricing that measures the exchange of products and services between responsibility
centres within the company is known as:
(a) Zone pricing (b) Transfer pricing

(c) Location pricing (d) Time pricing
5. Transfer pricing affect the level of taxes paid for a given level of income before taxes in the
case of a:

(a) Multinational firm (b) Domestic firm
(c) Joint venture (d) Domestic subsidiary

5.3 Method for Transfer Pricing

Market price is not a cure-all answer to the problem of setting transfer price because of non-
existence of an intermediate markets for a highly specialized product component. If an optimal
economic decision is wanted in a particular situation, the following general rule serves as the
helpful first step in the analysis. The minimum transfer price should be (a) the additional outlay
costs incurred to the point of transfer (sometimes approximated by variable costs) plus (b)
opportunity costs of the firm as a whole. This is the price that would make the supplying
division indifferent as to whether the output were sold inside or outside; the supplying division’s
contribution would be the same under either choice.
The term outlay cost represents the cash outflows that are directly associated with the production
and transfer of the goods or services, not necessarily have to be made at a particular instance.

Opportunity costs are defined as the maximum contribution to profits foregone by the firm as a
whole if the goods are transferred internally. An opportunity cost is a cost that measures the
opportunity that is lost or sacrificed when the choice of one course of action required that an
alternative course of action be given up.

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