Question

1. An investment opportunity with a residual income that equals or exceeds the company's required rate of return should be accepted.

True or False

2. A cost-based transfer price should be based on standard unit costs, not actual costs.

True or False

3. The most desirable way to set a transfer price is to base it on either variable cost or total cost.

True or False

4. In a responsibility reporting system, the reports of a particular manager contain summary information about the revenue and cost items directly under his or her control and detailed data on the activities of the responsibility centers that fall under his or her chain of authority.

True or False

5. Investment centers are often evaluated on the basis of return on investment.

True or False

Answer 1

1. Residual Income is useful to identify returns above and over the minumim expected returns. Thus this statement is true.

2. Transfer Price should be fixed at Standard cost and not actual cost because an actual costs are high then chances that the selling division transfers the costs to the buying division is possible. Thus this statement is correct.

3. The desirable transfer price method is comparable uncontrolled price method and not cost method. Hence False.

4. This is the definition of the term Responsiblity reporting system. Hence this statement is True.

5. Return on investment is the basis for evaluation of the performance of an investment Centre. Hence this statement is True.