Solution Manual for Cost Management Accounting Control 6th Edition by Hansen, Mowen and Guan
RESPONSIBILITY ACCOUNTING, PERFORMANCE EVALUATION, AND TRANSFER PRICING
QUESTIONS FOR WRITING AND DISCUSSION
1. Decentralization is the delegation of decision-making authority to lower levels. In centralized decision making, decisions are made at the very top level, and lower-level managers are responsible for implementing these decisions. For decentralized decision making, decisions are made and implemented by lower-level managers.
2. Reasons for decentralization include the following: access to local information, more timely response, focusing of central management, exposure of segments to market forces, enhanced competition, training, and motivation.
3. Knowledge of local conditions may be critical for decisions; local managers are aware of these conditions, whereas higher-level managers may not be. This can lead to more informative decision making.
4. Margin = Net income/Sales, and Turnover = Sales/Average operating assets. By breaking ROI into margin and turnover, more insight into why ROI may change from one period to the next is possible.
5. Three advantages of ROI include: (1) ROI encourages managers to pay attention to the relationships among sales, expenses, and investment. (2) ROI encourages cost efficiency. (3) ROI discourages excessive investment in operating assets. Increased profitability can be achieved (all other things being equal) by increasing revenues, decreasing expenses, or lowering investment.
6. Two disadvantages of ROI are: (1) ROI may discourage managers from investing in proj-ects that would increase the profitability of the firm but decrease the division’s ROI. (2) It also may encourage managers to focus on short-run profitability and to take actions that may harm long-run profitability.
7. Residual income is the difference between net income and the minimum dollar return required on an investment. Residual income encourages investment in all projects that earn at least the minimum rate of return.
8. EVA is economic value added. It is the difference between after-tax income and the cost of the capital employed. EVA is an absolute dollar amount, not a percentage rate of return like ROI. EVA differs from residual income in EVA’s use of after-tax income and the true cost of capital (rather than a hurdle rate).
9. A stock option is the right to purchase a certain amount of stock at a fixed price. It can encourage goal congruence by giving managers an ownership stake in the firm, encouraging them to view operations from a long-run perspective.
10. A transfer price is the price charged for goods that are transferred from one division to another division of the same company.
11. The transfer pricing problem is finding a transfer price that simultaneously satisfies three objectives: accurate performance evaluation, goal congruence, and preservation of divisional autonomy.
12. Agree. Because at least one division will be made better off and firm profits will increase.
13. If a perfectly competitive outside market exists, the transfer price should be market price. Minimum price = maximum price = market price. Any other price would make at least one division worse off, and firm profits may decrease if the price is not market price.
14. Full cost, full cost plus, variable cost plus. The major disadvantage is that cost-based transfer prices may not reflect the optimal outcome for the divisions and the firm. Specifically, it is possible for the transfer price, using one of the costing approaches, to be less than the minimum price or greater than the maximum price. The prices, however, are simple to use and, in some cases, may reflect the outcome of a negotiated agreement.
15. Internal Revenue Code Section 482 outlines the transfer pricing methods acceptable for