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Performance Measurement Systems, Responsibility Accounting, and Decentralization
Answered

Goal Congruence and Responsibility Accounting

1. When managers within the various units of an organisation are committed to aligning their goals with the goals set by top management, the result is:
A. goal congruence.
B. planning and control.
C. responsibility accounting.
D. delegation of decision making.
2. Delegating decision making to lower-level managers, thereby enabling an organisation to react quickly to opportunities and problems as they arise, is a characteristic of:
A. a decentralised organisation.
B. a centralised organisation.
C. a corporation.
D. responsibility accounting.
3. What is a negative consequence of decentralisation?
A. Narrow focus
B. Services may be duplicated
C. Suboptimal decisions may be made
D. All of the given answers
4. Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decentralised and each division is evaluated as a profit centre. The Bottle Division produces bottles that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50.
The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the Cologne Division. Using the general rule, the minimum transfer price from the Bottle Division to the Cologne Division would be:
A. $2.00
B. $2.10
C. $2.50
D. $2.90
5. Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decentralised and each division is evaluated as a profit centre. The Bottle Division produces bottles that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50.
Assume the Bottle Division has no excess capacity and can sell everything produced externally. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:
A. $2.10
B. $2.50
C. $2.90
D. $3.00
6. Nova Company has two divisions: OPA Division and LPA Division. The OPA Division manufactures a single product, presently operates at 95 per cent of full capacity (100 000 units) and can sell all 95 000 units produced to outside customers. This product is also a component used in a product made by the LPA Division. OPA's full cost of production is $22.50 per unit, including $4.50 of applied fixed overhead costs. The applied fixed overhead is calculated based on production of 95 000 units. OPA's management believes that production can be raised to 100 000 units without affecting cost behaviour. OPA's selling price per unit is $30 with a 10 per cent sales commission on outside sales. LPA is presently negotiating the purchase of units from OPA. LPA can purchase a comparable component outside for $29.
Using the general transfer-pricing formula, calculate a transfer price for 5000 units that would be in the best interests of the company as a whole.
A. $18.00
B. $22.50
C. $27.80
D. $29.00

REVIEW QUESTIONS

12.1    Outline the four purposes of performance measurement systems. Explain how these purposes relate to responsibility accounting. 
12.3    Why is goal congruence important to an organisation's success? How can a responsibility accounting system foster goal congruence? 
12.4    Discuss the benefits and costs of decentralisation. 

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