L6

Question 1

Accountability

Answer 1

specifies the scope of decisions for which managers are being held accountable during their performance evaluation

Question 2

How can managers or teams performance be assessed?

Answer 2

using key performance indicators (KPI) that they can control

Question 3

Cost center

Answer 3

• suitable if team only controls costs (actual costs vs. budget) (input price variance) (input efficiency variance)

Question 4

Revenue center

Answer 4

• suitable if team only controls revenues (revenue vs. target, sales growth, market share)

Question 5

Profit center

Answer 5

• suitable if team controls cost & revenues

profit vs. target

Question 6

investment center

Answer 6

• suitable if team controls costs, revenues and asset base

return on investment, residual income

Question 7

controllability principle

Answer 7

only hold managers responsible for decisions which they can control or, at least, significantly influence

Question 8

CPC

Answer 8

Contribution by Profit Center

Question 9

full costing

Answer 9

also called absorption costing, is required by financial reporting standards (satisfies matching principle)
= is the conventional costing system that includes variable and fixed manufacturing costs as part of product cost

Question 10

variable costing

Answer 10

is connected with the contribution income statement because it separates variabel and fixed costs

Question 11

What can be a problem with full costing?

Answer 11

Net income determined using full costing is affected by changes in inventory levels. Here, overproduction is boosting profit for the period (because then ending inventory is booked which is subtracted from COGS and then there is a higher gross margin and also a higher net income)

Question 12

Market-based transfer pricing

Answer 12

if market is competitive, setting the transfer price equal to the market price generally leads to aligned incentives

Question 13

cost-based transfer price

Answer 13

• is the market price for intermediate products does not exist
  variable-cost based TP:
• appropriate in case of excess capacity
• unfair to the selling division (cannot recover all the costs)
  full-cost based TP:
• representative relevant costs for long-run decisions
• little incentives to control costs

Question 14

arm’s-length standard calls

Answer 14

for international transfers means that setting transfer prices to reflect the price that unrelated parties acting independent would have set