essay

Question 1

why are transfer prices based on cost are not appropriate measure of divisional performance?

Answer 1

1. the selling division has little incentive to control cost if all costs will be recovered in the transfer price.
2. the company as a whole often makes poor decisions when one divisions is covering another’s full cost.

Question 2

how does a negotiated transfer price would result in desirable management behavior?

Answer 2

1. encourage the management of the extraction division to control cost.
2. benefit the pet products division by providing the clay at a below-market price.
3. Provide a more realistic measure of divisional performance.

Question 3

what Is the limitation of a plant-wide overhead rate that is applied on the basis of direct labor cost.

Answer 3

a plant-wide manufacturing overhead rate is acceptable only if a similar relationship between overhead and direct labor exists in all departments or the company manufactures products that receive proportional services from each department.

Question 4

why is departmental overhead rates preferable to plan-wide overhead rate?

Answer 4

1. a framework for reviewing overhead costs on a departmental basis, identifying departmental cost overruns, or taking corrective action to improve departmental cost control. 2. sufficient information about product profitability, thus increasing the difficulties associated with management decision making.

Question 5

what are the benefits from activity-based costing?

Answer 5

1. It leads to a more competitive position by evaluating cost drivers ( cost associated with the complexity of the transactions rather that the production volume).
2. it provides management with a more thorough understanding of product costs and product profitability for strategies and pricing decisions.