Cost Accounting (14th Edition)

798 CHAPTER 22 MANAGEMENT CONTROL SYSTEMS, TRANSFER PRICING, AND MULTINATIONAL CONSIDERATIONS
22-4 Name three benefits and two costs of decentralization.
22-5 “Organizations typically adopt a consistent decentralization or centralization philosophy across
all their business functions.” Do you agree? Explain.
22-6 “Transfer pricing is confined to profit centers.” Do you agree? Explain.
22-7 What are the three methods for determining transfer prices?
22-8 What properties should transfer-pricing systems have?
22-9 “All transfer-pricing methods give the same division operating income.” Do you agree? Explain.
22-10 Under what conditions is a market-based transfer price optimal?
22-11 What is one potential limitation of full-cost-based transfer prices?
22-12 Give two reasons why the dual-pricing system of transfer pricing is not widely used.
22-13 “Cost and price information play no role in negotiated transfer prices.” Do you agree? Explain.
22-14 “Under the general guideline for transfer pricing, the minimum transfer price will vary depending
on whether the supplying division has unused capacity or not.” Do you agree? Explain.
22-15 How should managers consider income tax issues when choosing a transfer-pricing method?
Exercises
Required
Required
Required
22-16 Evaluating management control systems, balanced scorecard. Adventure Parks Inc. (API) operates
ten theme parks throughout the United States. The company’s slogan is “Name Your Adventure,” and
its mission is to offer an exciting theme park experience to visitors of all ages. API’s corporate strategy supports
this mission by stressing the importance of sparkling clean surroundings, efficient crowd management
and, above all, cheerful employees. Of course, improved shareholder value drives this strategy.
1. Assuming that API uses a balanced scorecard approach (see Chapter 13) to formulating its management
control system. List three measures that API might use to evaluate each of the four balanced
scorecard perspectives: financial perspective, customer perspective, internal-business-process perspective,
and learning-and-growth perspective.
2. How would the management controls related to financial and customer perspectives at API differ
between the following three managers: a souvenir shop manager, a park general manager, and the
corporation’s CEO?
22-17 Cost centers, profit centers, decentralization, transfer prices. Fenster Corporation manufactures
windows with wood and metal frames. Fenster has three departments: glass, wood, and metal. The glass
department makes the window glass and sends it to either the wood or metal department where the glass is
framed. The window is then sold. Upper management sets the production schedules for the three departments
and evaluates them on output quantity, cost variances, and product quality.
1. Are the three departments cost centers, revenue centers, or profit centers?
2. Are the three departments centralized or decentralized?
3. Can a centralized department be a profit center? Why or why not?
4. Suppose the upper management of Fenster Corporation decides to let the three departments set their
own production schedules, buy and sell products in the external market, and have the wood and metal
departments negotiate with the glass department for the glass panes using a transfer price.
a. Will this change your answers to requirements 1 and 2?
b. How would you recommend upper management evaluate the three departments if this change is made?
22-18 Benefits and costs of decentralization. Jackson Markets, a chain of traditional supermarkets, is
interested in gaining access to the organic and health food retail market by acquiring a regional company in
that sector. Jackson intends to operate the newly-acquired stores independently from its supermarkets.
One of the prospects is Health Source, a chain of twenty stores in the mid-Atlantic. Buying for all
twenty stores is done by the company’s central office. Store managers must follow strict guidelines for all
aspects of store management in an attempt to maintain consistency among stores. Store managers are
evaluated on the basis of achieving profit goals developed by the central office.
The other prospect is Harvest Moon, a chain of thirty stores in the Northeast. Harvest Moon managers
are given significant flexibility in product offerings, allowing them to negotiate purchases with local organic
farmers. Store managers are rewarded for exceeding self-developed return on investment goals with company
stock options. Some managers have become significant shareholders in the company, and have even
decided on their own to open additional store locations to improve market penetration. However, the
increased autonomy has led to competition and price cutting among Harvest Moon stores within the same
geographic market, resulting in lower margins.
1. Would you describe Health Source as having a centralized or a decentralized structure? Explain.
2. Would you describe Harvest Moon as having a centralized or a decentralized structure? Discuss some
of the benefits and costs of that type of structure.