Solution for Transfer Price
CHAPTER 13
Investment Centers and Transfer Pricing
ANSWERS TO REVIEW QUESTIONS
13-1 Goal congruence means a meshing of objectives, in which the managers throughout an organization strive to achieve goals that are consistent with the goals set by top management. Goal congruence is important for organizational success because managers often are unaware of the effects of their decisions on the organization's other subunits. Also, it is natural for people to be more concerned with the performance of their own subunit than with the effectiveness of the entire organization. In order for the organization to be effective, it is important that everyone in it be striving for the same ultimate objectives.
13-2 The managerial accountant's primary objective in designing a responsibility-accounting system is to provide incentives for the organization's subunit managers to strive toward achieving the organization's goals.
13-3 Under the management-by-objectives (MBO) philosophy, managers participate in setting goals that they then strive to achieve. These goals may be expressed in financial or other quantitative terms, and the responsibility-accounting system is used to evaluate performance in achieving them. The MBO approach is consistent with an emphasis on obtaining goal congruence throughout an organization.
13-4 An investment center is a responsibility-accounting center, the manager of which is held accountable not only for the investment center's profit but also for the capital invested to earn that profit. Examples of investment centers include a division of a manufacturing company, a large geographical territory of a hotel chain, and a geographical territory consisting of several stores in a retail company.
13-5 [pic]
13-6 A division's ROI can be improved by improving the sales margin, by improving the capital turnover, or by some combination of the two. The manager of the automobile division of an insurance company could improve the
Investment Centers and Transfer Pricing
ANSWERS TO REVIEW QUESTIONS
13-1 Goal congruence means a meshing of objectives, in which the managers throughout an organization strive to achieve goals that are consistent with the goals set by top management. Goal congruence is important for organizational success because managers often are unaware of the effects of their decisions on the organization's other subunits. Also, it is natural for people to be more concerned with the performance of their own subunit than with the effectiveness of the entire organization. In order for the organization to be effective, it is important that everyone in it be striving for the same ultimate objectives.
13-2 The managerial accountant's primary objective in designing a responsibility-accounting system is to provide incentives for the organization's subunit managers to strive toward achieving the organization's goals.
13-3 Under the management-by-objectives (MBO) philosophy, managers participate in setting goals that they then strive to achieve. These goals may be expressed in financial or other quantitative terms, and the responsibility-accounting system is used to evaluate performance in achieving them. The MBO approach is consistent with an emphasis on obtaining goal congruence throughout an organization.
13-4 An investment center is a responsibility-accounting center, the manager of which is held accountable not only for the investment center's profit but also for the capital invested to earn that profit. Examples of investment centers include a division of a manufacturing company, a large geographical territory of a hotel chain, and a geographical territory consisting of several stores in a retail company.
13-5 [pic]
13-6 A division's ROI can be improved by improving the sales margin, by improving the capital turnover, or by some combination of the two. The manager of the automobile division of an insurance company could improve the