Question

The objective(s) of transfer pricing are

Select one:

a. to provide an incentive for managers to make decisions consistent with the firm's goals (i.e., goal congruence)

b. to motivate managers

c. all of the options are correct

d. to provide a basis for fairly rewarding the managers

e. to provide an incentive for managers to make decisions consistent with the firm's goals (i.e., goal congruence) and to provide a basis for fairly rewarding the managers

A company may consider using variable costs in transfer pricing when

Select one:

a. none of the alternatives are correct

b. there is no excess capacity because fixed costs would stay the same

c. there is excess capacity because variable costs would stay the same

d. there is excess capacity because fixed costs would stay the same

e. there is no excess capacity because variable costs would not stay the same

When cost is used in transfer pricing, it is preferable to use

Select one:

a. standard costs because it is predetermined and because it is less subject to manipulation

b. standard costs because it is predetermined

c. actual costs because they are what actually cost the seller

d. standard costs because it is less subject to manipulation

e. actual costs because it includes all variances

Answer 1

Answer 1:

c. All of the options are correct.

Explanation:

The objective of the transfer price is to provide incentives and motivate managers to make decisions and reduce costs in accordance with the firm's goals.

Answer 2:

d. There is excess capacity because fixed costs would stay the same.

Explanation:

When there is excess capacity, the fixed costs will still be the same and hence the transfer price is usually the variable cost only.

Answer 3:

a. standard costs because it is predetermined and because it is less subject to manipulation.

Explanation:

Standard costs are used in transfer pricing because they are pre-determined and they can not be manipulated by the managers for their own interests.

In case of any doubt, please comment.