ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 46  October 2023 CPA Licensure Examination

MS-H
MANAGEMENT SERVICES Aljon Lee  Elirie Arañas  Kenneth Manuel

RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD

RESPONSIBILITY ACCOUNTING
 RESPONSIBILITY ACCOUNTING is a performance measurement tool where managers are held responsible for
their performance, actions of subordinates and all activities within their area of authority and control.
 Responsibility accounting is consistent with MANAGEMENT BY OBJECTIVES (MBO) -- the management process
in which managers and subordinates agree on goals as well as the methods to achieve them and subordinates
are subsequently evaluated with reference to the agreed plan.
 Responsibility accounting system functions best under a decentralized form of organization.
 DECENTRALIZATION allows the separation of an entity into manageable units wherein each unit is managed
by an individual who is given decision authority and is held accountable for his/her decisions.
 Decentralized organizations must avoid SUB-OPTIMIZATION, which happens when managers decide in favor
of their own decentralized unit even at the expense of the entire organization as a whole.
 Most decentralized organizations are divided into responsibility centers (also called STRATEGIC BUSINESS
UNITs) to facilitate improved decision making through the use of more information at the local level.
 A RESPONSIBILITY CENTER is a component of an entity (e.g., product line, department, and division) whose
manager has authority over, and is responsible and accountable for, a particular set of activities.
 The four common types of responsibility centers are:
A) COST CENTER – managers are responsible mainly for the costs incurred by the unit
B) REVENUE CENTER – managers are responsible mainly for the revenues generated by the unit
C) PROFIT CENTER – managers are responsible for both revenues and costs of the unit
D) INVESTMENT CENTER - managers are responsible for revenues, costs and investment of capital.
 The PERFORMANCE REPORT, which is often considered as the end-product of the responsibility accounting,
shows and compares actual results with the intended (budgets or standards) results of a responsibility center,
thereby highlighting material deviations that need corrective actions. The contents would normally depend on
type of responsibility center presenting the performance report:
RESPONSIBILITY CENTER KEY PERFORMANCE MEASURES
Cost Center Variance Analysis: Actual Costs vs. Budgeted/Standard Costs
Revenue Center Variance Analysis: Actual Sales vs. Budgeted/Target Sales
Variance Analysis: Actual Profit vs. Budgeted/Target Profit
Profit Center
Segmented Income Statement
Variance analysis: Actual Profit vs. Budgeted/Target Profit
Investment Center Segmented Income Statement
ROI, Residual Income, EVA
 The SEGMENTED INCOME STATEMENT is a detailed version of the contribution format of income statement.
This income statement presentation highlights controllability of costs by behavioral classification. In addition
to the usual variable costs and fixed costs, a more detailed classification of costs may be made:
Sales ✓ Direct costs are separable costs that are attributable or traceable to
Less: VARIABLE Manufacturing Costs the segment or business unit.
Manufacturing Contribution Margin ✓ CONTROLLABILITY is based on degree of influence a manager can
exercise over an amount with reference to assigned responsibilities.
Less: VARIABLE Non-Manufacturing Costs
✓ Most controllable costs are discretionary costs by nature.
Contribution Margin
✓ Non-controllable costs are either committed costs or costs that are
Less: Controllable Direct FIXED Costs controllable by others or by a higher authority.
Controllable or Performance Margin ✓ CONTROLLABLE or PERFORMANCE MARGIN is usually used to evaluate
Less: Non-Controllable Direct FIXED Costs the performance of the manager.
Segment Margin ✓ SEGMENT MARGIN is usually used to evaluate the performance of the
Less: Allocated Common Costs segment or business unit (e.g., continue vs. shutdown).
Profit ✓ Common costs allocated to a segment are usually not controllable by
the manager of the same segment.
 RETURN ON INVESTMENT (ROI):
✓ ROI broken down into margin and turnover is
ROI = Margin x Turnover based on the Du Pont Technique.
✓ ROI is also known as return on assets.
✓ MARGIN - net profit margin, return on sales.
Operating Income Operating Income Sales ✓ TURNOVER - assets turnover, investment
Operating Assets = Sales x Operating Assets turnover, capital turnover.

✓ ‘Operating income’ for most investment centers is based on earnings before interests & taxes (EBIT).
✓ ‘Operating assets’ are preferably based on the average balance for the reporting period and composed of
productive assets used to earn the operating income (i.e., idle assets are excluded).
✓ The term ‘invested capital’ is sometimes used as the denominator for the ROI formula. While the term
means operating assets for most investment centers, invested capital may also mean total assets, owners’
equity or total assets less current liabilities, depending on the situation and application.
 RESIDUAL INCOME (RI):
RI = Operating Income – Required Income ✓ Minimum ROI may also be known as desired rate of
return or minimum required rate of return.
where: Required Income = Operating Assets x Minimum ROI
✓ The ‘Minimum ROI’ under RI is usually based on the imputed interest rate, which is imposed and set by a higher
authority like a head office (for branches) or a holding company (for subsidiaries).

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD MS-H
 ECONOMIC-VALUE ADDED (EVA):
✓ WACC may also be called hurdle rate,
EVA = Operating Income after Tax – Required Income cutoff rate, target rate, standard rate
or minimum acceptable rate of return.
where: Required Income = (Total Assets – Current Liabilities) x WACC
✓ EVA is a specific form of RI that measures a segment’s economic profit based on residual wealth after
accounting for the costs of capital; EVA is often used for incentive compensation & investor relations.
✓ Unlike RI, EVA uses the Weighted Average Costs of Capital (WACC) as the minimum required rate of
return to determine the amount of required income.
✓ WACC is computed based on the long-term sources of financing -- debt and equity -- hence, the
computation: (total assets – current liabilities) being equal to (long-term liabilities and equity).
NOTE: WACC shall be covered in MS-K (Cost of Capital, Leverage & Capital Structure)
✓ Under EVA, ‘operating income after tax’ is based on the formula: EBIT (100% - tax rate)
 ROI vs. RI:
➢ Under ROI method, division managers tend to accept only the investments whose returns exceed the
division’s ROI; under RI method, division managers would accept an investment as long as it earns an
amount in excess of the minimum required return.
➢ RI has the advantage of having a better measure of performance than ROI because it encourages
investment in projects that would otherwise be rejected under ROI.
➢ A major disadvantage of RI is that it cannot be used to compare divisions of different sizes or asset base
-- RI tends to favor larger divisions because of larger peso amount involved.
➢ Consider the following relationship between ROI vs. RI and their corresponding implications:
ROI = Minimum ROI Residual Income = 0 (nil) Indifference point
ROI > Minimum ROI Residual Income > 0 (positive) Performance is generally satisfactory
ROI < Minimum ROI Residual Income < 0 (negative) Performance is generally unsatisfactory
TRANSFER PRICING
 When one division of a manufacturing company supplies components or materials to another division, the
price charged by the selling (producing) division to the buying division is known as the TRANSFER PRICE.
 Transfer prices are usually determined by one of the following methods:
A) MARKET price – regarded as the best transfer price that maximizes the over-all company profit, provided
that: (1) a competitive market price exists, and (2) divisions are independent of each other.
B) COST-BASED price – easy to understand and convenient to use but inefficiencies of the selling division
may be passed on to the buying division – selling division will have little incentive to control costs. Cost-
based price can be based on selling division’s variable cost, full (absorption) cost or cost-plus.
C) NEGOTIATED price – widely used when market prices are subject to rapid fluctuation or when there is no
intermediate market price that exists. In negotiating a transfer price, the usual range shall be based on
the following:
➢ Maximum price (buying division): market price
➢ Minimum price (selling division): outlay cost + opportunity cost
D) ARBITRARY price – normally imposed by the corporate headquarters to promote over-all company goals
with neither the selling division nor the buying division having a control over the price.
 When managers of both selling and buying divisions act in their own individual interests, the entire
organization may suffer from sub-optimization. Management hence establishes the methodology for setting
transfer prices in such a way to promote GOAL CONGRUENCE, which occurs when division managers make
decisions that are consistent with the goals and objectives of the entire organization.
 Aside from goal congruence, other important factors considered in setting the transfer price include cost
structure, capacity constraints, segmental performance, negotiation flexibility and tax implications.
 The following transfer pricing rule helps to ensure goal congruence among divisions and managers:
Transfer price per unit = outlay cost per unit + opportunity cost per unit
➢ OUTLAY COST includes selling division’s variable production costs (e.g., materials, labor and variable
overhead) plus any additional costs incurred (e.g., storage, transportation, administrative).
➢ OPPORTUNITY COST refers to the margin or profit sacrificed by transferring units internally rather than
selling them to external customers. Depending on sales demand and production capacity of the selling
division, there may or may not be an opportunity cost associated with the internal transfer:
✓ Selling division is operating at capacity (FULL Capacity):
 Opportunity cost = contribution margin (given up for sacrificing external sales)
✓ Selling division is operating at less than full capacity (EXCESS/IDLE Capacity):
 Opportunity cost = zero (nothing to sacrifice when there is no need to give up external sales)
➢ When selling division is operating at capacity, market price is the ‘theoretically correct’ transfer price.
➢ When selling division has an excess capacity, transfer price must be based on the variable costs incurred
to produce each unit. In practice, this price usually serves as the MININUM (floor) or lower threshold in
a transfer price negotiation or as the basis for cost-based pricing.
 DUAL PRICING is an attempt to eliminate the internal conflicts associated with transfer prices by giving both
the buying and selling divisions the price that works best for them:
➢ Selling division: uses market price as its transfer-out price to prevent decrease in divisional income
➢ Buying division: uses variable cost as its transfer-in price to minimize divisional costs and avoid ‘profit
sharing’ with selling division by agreeing to a transfer price above cost.
Dual pricing is rarely used nowadays because of the little incentive to control costs -- neither manager from
both buying divisions (assured of a low price) and selling divisions (assured of high price) must exert much
effort to show a profit on segmental performance reports.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD MS-H
BALANCED SCORECARD
 BALANCED SCORECARD (BSC) is an approach to performance measurement that combines traditional
financial measures with non-financial performance measures.
 BSC was created by David Norton and Robert Kaplan in response to VALUE-BASED MANAGEMENT, which is a
performance evaluation technique that focuses on traditional financial measures.
 BSC translates an organization’s mission and strategy into a comprehensive set of financial (lagging
indicators) and non-financial (leading indicators) performance metrics classified into four (4) perspectives:
1) FINANCIAL perspective (“How do we look to shareholders?”)
Measures: profit, return on investment (RoI), operational cash flows
2) CUSTOMER perspective (“How do customers see us?”)
Measures: rank in customer surveys, repeat order rate, market share, number of complaints
3) INTERNAL BUSINESS PROCESSES perspective (“What must we excel at?”)
Measures: manufacturing cycle efficiency, delivery cycle time, scrap and rework, productivity factor
4) LEARNING & GROWTH perspective (“Can we continue to improve and create value?”)
Measures: employee satisfaction ratings, employee turnover rate, training days for employees
Measures in the internal business process, learning and growth perspectives (controllable factors) are the
primary drivers of measures in the customer and financial perspectives (non-controllable factors).
 BSC provides a framework not only for performance measurement but also for execution of company
strategies by helping management identify what needs to be done and how its achievement can be measured
to determine organizational success.
 STRATEGY MAPPING is a process that links the four BSC perspectives with company strategies based on a
cause-and-effect pattern (i.e., L&G → IBP → C → F) to see where value can be added further.
 A typical BSC report contains:
✓ STRATEGIC OBJECTIVES – statements of what the strategy must achieve & what is critical to its success.
✓ PERFORMANCE MEASURES – describe how success in achieving the strategy will be measured.
✓ BASELINE PERFORMANCE – the current level of performance for the performance measure.
✓ TARGETS – the level of performance or rate of improvement needed in the performance measure.
✓ STRATEGIC INITIATIVES – key action programs required to achieve strategic objectives.
Strategic objectives focus on WHAT is to be achieved. Performance measures, baseline performance and
targets relate to how it will be MEASURED. Strategic initiatives focus on HOW it will be achieved.

EXERCISES: RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD

1. Responsibility Centers
Indicate how each of the business situations below is most likely to be organized: cost center (CC), revenue
center (RC), profit center (PC), or investment center (IC)
A. The HR department of RZBZ Bank.
B. The Ezem Mall car park ticket outlets.
C. The Magnolia product division of Zan Miguel Corporation.
D. The accounting department of Zebu Pazific.
E. The Morayta branch of KFZ (Kinatay na Fried Zicken).
F. The College of Accountanzy of the Ezpaña Univerzity.
G. The convenience store (Zeven-Eleven) that is owned by a chain organization; the head office supplies
all the goods to be sold and determines the selling prices.

2. Controllable vs. Non-Controllable Costs, Direct vs. Indirect Costs

The supervisor of the ASSEMBLY DEPARTMENT of Mitzubizi Cars is in-charge of (1) purchasing supplies, (2)
authorizing repairs, and (3) hiring labor for the department. Various costs are given:
1 2 3
A) Sales, salaries and commission A P 50,000 ×
B) Salary, supervisor of Assembly department B 40,000 ×
C) Factory heat and light C 30,000 ×
D) General office salaries D 20,000 ×
E) Depreciation, factory E 10,000 ×
F) Supplies, Assembly department F 20,000 ✓
G) Repairs and maintenance, Assembly department G 30,000 ✓
H) Factory insurance H 40,000 ×
I) Labor costs, Assembly department I 50,000 ✓
J) Salary of factory supervisor J 40,000 ×
TOTAL COSTS
REQUIRED: Determine the following:
1. Total costs controllable by the supervisor of the Assembly department.
2. Total costs directly identified with the Assembly department.
3. Total costs allocated to the factory departments.
4. Based on the answers above, which is a FALSE statement?
a. All controllable costs by the supervisor are direct costs of the Assembly department.
b. All direct costs of the Assembly department are controllable costs by its supervisor.
c. Assembly department costs not controllable by its supervisor may be controlled by others.
d. Common costs allocated to the Assembly department are not controllable by its supervisor.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD MS-H
3. Segmented Income Statement
The QZ branch manager of ReZA Company, recently reported annual sales of P 1,000,000 and presented the
following cost information:
Variable manufacturing costs 450,000
Allocated corporate overhead costs 160,000
Variable selling & administrative expenses 220,000
Controllable fixed costs traceable to QZ branch 130,000
Uncontrollable fixed costs traceable to QZ branch 240,000
REQUIRED:
1. Determine the following:
A) Manufacturing CM B) Controllable or performance margin C) Segment margin
2. Identify the appropriate margin that shall be used to evaluate the performance of:
A) Manager B) Business unit (QZ Branch)
4. Return on Investment, Residual Income & ROI Pricing
For each of the following independent cases, the minimum desired Return on Investment (RoI) is 20%.
Division Z2 Division Z5
Sales P 400,000 P 700,000 Division Z2
Operating Income (1) _____ P 42,000  Unit selling price: P 20
Operating Assets (2) _____ (5) _____  Total fixed costs: P 100,000
Margin 15% (6) _____
Turnover (3) _____ (7) _____ Division Z5
Return on Investments 30% (8) _____  Unit selling price: P 700
Residual Income (4) _____ P 22,000  Total fixed costs: P 258,000

REQUIRED:
1. Compute for each division’s missing items (1) to (8).
2. How many more units shall be sold by Z2 to achieve a 40% ROI?
3. How much increase in selling price will allow Z5to reach 50% ROI from its current unit sales?

5. Economic Value Added (EVA)

Marvel Company presents the following year-end data:
Book Value Fair Value
Current assets P 800,000
Non-current assets 3,200,000
Current liabilities 400,000
Non-current liabilities (10% interest rate) 1,000,000 P 1,000,000
Stockholders’ equity 2,600,000 3,000,000
Additional data:
 Income before interests and taxes: P 600,000.
 Income tax rate: 20%.
 Cost of equity capital: 12%.
REQUIRED:
1. Weighted Average Costs of Capital (WACC)
2. Economic Value-Added (EVA)

6. Transfer Pricing
DC Company’s Division ‘S’ (selling division) produces a small tool used by other companies as a key part in
their products. Cost and sales data related to the small tool are given below:

Selling price per unit P 50

Variable costs per unit P 30
Fixed costs per unit* P 12
* based on capacity of 40,000 tools per year.
The company’s Division ‘B’ (buying division) is introducing a new product that will use the same tool being
produced by Division S. An outside supplier has quoted the Division B a price of P 48 per tool. Division B
would like to purchase the tools from Division S, only if an acceptable transfer price can be worked out.

REQUIRED: Consider the following independent cases:

1. Division S has ample idle capacity to handle all the Division B’s needs:
A) What is the minimum transfer price for Division S?
B) What is the maximum transfer price for Division B?
2. Division S is presently selling all the tools it can produce to outside customers:
A) What is the minimum transfer price?
B) Shall the Division B purchase the tools from Division or from the outside supplier? Why?
3. Division S is presently selling 36,000 tools per year to outside customers while Division B requires
10,000 tools per year:
A) What is the minimum transfer price for Division S?
B) Shall the company make-and-transfer 10,000 tools or buy the tools from the outside supplier?
Why?

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD MS-H
7. Transfer Price Computation
Disney Company is operating with two divisions. Division S is producing a product line that is required as a
component part of the product being manufactured by Division B.

For Division S, the costs of producing the component part per unit are:
Direct materials P 10
Direct labor P8
Variable factory overhead P5
Fixed factory overhead P2
The product of Division S is being sold in a highly competitive market for P 30 per unit.

Division B is currently buying 80% of the production output of Division S at a negotiated price of P 28 per
unit. It is expected that 25,000 units of product will be produced by Division S.

With emphasis on divisional welfare rather than the company’s welfare, a new transfer price must be
developed. It is suggested that a 40% mark-up on cost will be added when transferring the product from
Division S to Division B.

The unit selling price of the product of Division B is P 45 while the additional unit processing cost is P 8.

REQUIRED:
Determine Division B’s gross profit per unit under each of the following independent assumptions:
A) Transfer price is full-cost based.
B) Transfer price is cost-based plus mark-up.
C) Transfer price is based on a negotiated price.
D) Transfer price is market-based.

8. Manufacturing Cycle Efficiency

Star Cinema Company keeps careful track of the time related to orders and their production. During the most
recent quarter, the following average times were recorded for each unit or order:
Inspection time 12 days
Process time 16 days
Queue time 4 days
Move time 8 days
Wait time 10 days

REQUIRED:
A) How long in days is the manufacturing cycle time or throughput time?
B) What is the manufacturing cycle efficiency ratio?
C) What percentage of the production time is spent on non-value-added activities?
D) How long in days is the delivery cycle time?

9. Productivity Measures
Netflix Company manufactures and sells a single product. The following information was made available:
2022 2023
Unit sales (P 60 per unit) 10,000 15,000
Material usage 4,000 pounds 5,000 pounds
Material cost P 5 per pound P 10 per pound
Labor hours 2,000 hours 2,500 hours
Labor cost P 20 per hour P 25 per hour
5A) Determine the operational partial productivity of DIRECT MATERIAL for (1) 2022 and (2) 2023.
a. (1) 2.50 (2) 3.00 c. (1) 0.25 (2) 0.24
b. (1) 5.00 (2) 6.00 d. (1) 0.50 (2) 0.30
5B) Determine the financial partial productivity of DIRECT MATERIAL for (1) 2022 and (2) 2023.
a. (1) 2.50 (2) 3.00 c. (1) 0.25 (2) 0.24
b. (1) 5.00 (2) 6.00 d. (1) 0.50 (2) 0.30
5C) Determine the operational partial productivity of DIRECT LABOR for (1) 2022 and (2) 2023.
a. (1) 2.50 (2) 3.00 c. (1) 0.25 (2) 0.24
b. (1) 5.00 (2) 6.00 d. (1) 0.50 (2) 0.30
5D) Determine the financial partial productivity of DIRECT LABOR for (1) 2022 and (2) 2023.
a. (1) 2.50 (2) 3.00 c. (1) 0.25 (2) 0.24
b. (1) 5.00 (2) 6.00 d. (1) 0.50 (2) 0.30
5E) Determine the total productivity for 2022 as measured in both (1) units and (2) sales pesos.
a. (1) 0.667 (2) 40.00 c. (1) 1.667 (2) 100.00
b. (1) 0.167 (2) 10.00 d. (2) 6.667 (2) 400.00

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD MS-H
WRAP-UP EXERCISES (MULTIPLE-CHOICE)
1. Which sequence reflects increasing level of responsibility?
a. Cost center, profit center, investment center
b. Cost center, investment center, profit center
c. Profit center, cost center, investment center
d. Investment center, cost center, profit center
2. “A business within a business” most likely refers to a (an)
a. Investment center c. Profit center
b. Service center d. Cost center
3. A manager of a profit center is responsible for all of the following, except:
a. Sales revenue c. Expanding into new geographic areas
b. Selling and marketing costs d. Cost of merchandise purchase for resale
4. In responsibility accounting, what is the most relevant classification of costs?
a. Fixed and variable c. Controllable and non-controllable
b. Discretionary and committed d. Incremental and non-incremental
5. A controllable cost is any cost that can be ___ by the responsibility center manager for a period of time.
a. Allocated c. Segregated
b. Influenced d. Eliminated
6. Which technique is most appropriate to evaluate the management performance of a cost center?
a. Payback method c. Return on assets ratio
b. Variance analysis d. Return on investment ratio
7. The segment margin of the Division KBS of TVN Corporation should NOT include
a. Net sales of KBS c. Variable selling expenses of KBS
b. Fixed selling expenses of KBS d. KBS’s share of company president’s salary
8. When using a contribution margin format for internal reporting purposes, the major distinction between
segment manager performance and segment performance is:
a. Unallocated fixed cost
b. Direct fixed cost controllable by others
c. Direct variable cost of selling the product
d. Direct fixed cost controllable by the segment manager
9. Which of the following describes the computation of Return on Investment (ROI)?
a. Sales x Investment Turnover c. Income – (Investment x Minimum ROI)
b. Return on Sales x Investment Turnover d. Return on Sales x Investment
10. Residual income (RI) is
a. Contribution margin less the minimum return on average operating assets
b. Contribution margin plus the minimum return on average operating assets
c. Net operating income less the minimum return on average operating assets
d. Net operating income plus the minimum return on average operating assets
11. ROI and RI can be used to evaluate performance of
a. Cost centers c. Profit centers
b. Revenue centers d. Investment centers
12. Economic value added (EVA) is similar to (I) but uses (II) as minimum desired rate of return.
a. (I) RI (II) imputed interest rate
b. (I) ROI (II) imputed interest rate
c. (I) RI (II) weighted-average costs of capital
d. (I) ROI (II) weighted-average costs of capital
13. The objective of a transfer pricing system should be to:
a. Minimize transfer price c. Promote goal congruence
b. Maximize transfer price d. Minimize product outsourcing
14. What is usually considered as the best transfer price to use in intracompany sales given that company
divisions are independent from one another?
a. Cost-based price c. Arbitrary price
b. Market-based price d. Negotiated price
15. Which of these methods is described by a transfer price equal to 120% of a certain base amount?
a. Cost-based transfer price c. Market-based transfer price
b. Negotiated transfer price d. Administered transfer price
16. The minimum transfer price generally is equal to the
a. Opportunity costs plus incremental costs
b. Opportunity costs less additional outlay costs
c. Opportunity costs divided by the additional outlay costs
d. Opportunity costs times 125% plus the additional outlay costs
Items 17 and 18 are based on the following information
Division S sells one of its products to division B in the same group. The cost of the said product consists
of P 1,600 for materials, P 600 for direct labor, P 100 for variable overhead and P 1,100 for fixed overhead.
Division S sets its profit margin equal to 40% of the variable cost.
17. What is the appropriate transfer price if Division S is operating at less than full capacity?
a. P 2,300 c. P 4,320
b. P 3,400 d. P 4,760
18. What is the appropriate transfer price if Division S is operating at full capacity?
a. P 2,300 c. P 4,320
b. P 3,400 d. P 4,760

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD MS-H
19. It is a management system aimed at translating an organization’s strategic goals into a set of performance
objectives that are measured and monitored based on both financial and non-financial metrics.
a. Focus c. Balanced scorecard
b. Cost leadership d. Product differentiation
20. What is the MOST important purpose of a balanced scorecard?
a. Develop strategy c. Develop cause-and-effect linkages
b. Measure performance d. Set priorities
21. The balanced scorecard is said to be “balanced” because it measures
a. Internal and external objectives c. Short-term and long-term objectives
b. Financial and non-financial objectives d. All of the choices
22. Which balance scorecard perspective is a lagging (rather than leading) indicator?
a. Customer c. Learning & growth
b. Financial d. Internal business processes
23. What is the correct sequence of strategy mapping that links the four balanced scorecard perspectives?
a. Financial, customer, internal business processes, learning & growth
b. Internal business processes, learning & growth, financial, customer
c. Learning & growth, internal business processes, customer, financial
d. Customer, financial, learning & growth, internal business processes
24. Which of the following is NOT a component of a typical balanced scorecard report?
a. Strategic objectives c. Strategy initiatives
b. Targets d. Assessment of human resources
25. What is the correct formula for manufacturing cycle efficiency (MCE) ratio?
a. Value-added time ÷ Lead time c. Throughput time ÷ Delivery cycle time
b. Value-added time ÷ Throughput time d. Non-value-added time ÷ Throughput time
26. In MCE computation, which of the following is considered as a value-added activity?
a. Inspection time c. Move time
b. Processing time d. Idle time
27. Which of the following scenarios is considered as counter-productive?
a. More outputs, same inputs c. More outputs, fewer inputs
b. Same outputs, fewer inputs d. Fewer outputs, same inputs
SELF-TEST QUESTIONS - with suggested answers
(Sources: CMA/CIA/RPCPA/AICPA/Various test banks)
1. A successful responsibility accounting reporting system is dependent upon
C a. The correct allocation of controllable variable costs
b. Identification of the management level at which all costs are controllable
c. The proper delegation of responsibility and authority
d. A responsible separation of costs into their fixed and variable components since fixed costs are not
controllable and must be eliminated from the performance report
2. What is the basic purpose of a responsibility accounting system?
B a. Budgeting c. Authority
b. Motivation d. Variance analysis
3. What is the LEAST complex segment or area of responsibility for which costs are allocated?
D a. Profit center c. Contribution center
b. Investment center d. Cost center
4. The manager of a revenue center is responsible for all of the following, except:
D a. Product mix and pricing c. Service quality and units sold
b. Sales and promotional activities d. Acquisition cost of products sold
5. Comparing budgeted and actual amounts is important in evaluating the performance of
D a. The manager of a cost center c. The manager of an investment center
b. The manager of a profit center d. Any manager
6. Decentralized firms can delegate authority, retain control and monitor manager’s performance by structuring the
organization into responsibility centers. Which center is almost like an independent business?
D a. Revenue center c. Cost center
b. Profit center d. Investment center
7. A management decision may be beneficial for a given profit center but not for the entire company. From the over-all
company viewpoint, this decision leads to
A a. Sub-optimization c. Goal congruence
b. Centralization d. Maximization
8. The following is the summarized income statement of Ruby Co.’s profit center for October:
Contribution Margin P 70,000
Period Expenses:
Manager’s salary P 20,000
Facility depreciation 8,000
Corporate expense allocated 5,000 (33,000)
Profit center income P 37,000
Which of the following amounts is most likely subject to the control of the profit center’s manager?
A a. P 70,000 c. P 37,000
b. P 50,000 d. P 33,000
9. If a manufacturing company uses responsibility accounting, which one of the following items is least likely to appear in
a performance report for a manager of an assembly line?
D a. Labor payroll c. Repairs and maintenance
b. Materials d. Depreciation on equipment
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RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD MS-H
10. In responsibility accounting, a center’s performance is measured by controllable costs. Controllable costs are best
describe as including
D a. Only discretionary costs
b. Direct material and direct labor only
c. Those costs about which the manager is knowledge and informed
d. Only those costs that the manager can influence in the current time period
11. When used for performance evaluation, internal reports based on a responsibility accounting system should not
A a. Include allocated fixed costs.
b. Be related to the organizational chart.
c. Distinguish between controllable and non-controllable costs.
d. Include variances between actual and budgeted controllable costs.
12. In evaluating an investment center, top management should concentrate on
D a. Peso rates c. Profit percentages
b. Net income d. Return on investment
13. The following information pertains to Bronze Co. for the year ended December 31, 2023:
Sales: P 600,000 Income: P 100,000 Capital investment: P 400,000
Which of the following equations should be used to complete Bronze’s return on investment?
B a. (4/6) x (6/1) = ROI c. (4/6) x (1/6) = ROI
b. (6/4) x (1/6) = ROI d. (6/4) x (6/1) = ROI
14. If Division Copper as a 10% return on sales, income of P 5,000, and an investment turnover of 4 times, divisional
investment is
B a. P 5,000 c. P 20,000
b. P 12,500 d. P 50,000
15. If asset turnover increased by 50% and the profit margin increased by 50%, then RoI would increase by
D a. 50% c. 225%
b. 25% d. 125%
16. Compared to a jewelry store, a supermarket has
C a. Higher margin and higher turnover c. Lower margin and higher turnover
b. Higher margin and lower turnover d. Lower margin and lower turnover
17. The following information pertains to Silver Co.’s Gold Division for the current year:
Sales P 311,000
Variable cost 250,000
Traceable fixed cost 50,000
Average invested capital 40,000
Imputed interest rate 10%
What was Gold’s return on investment?
C a. 10% c. 27.50%
b. 13.33% d. 30%
18. Listed below is selected financial information for Western Division of the Pearl Company for 2023:
Average working capital P 625
General and administrative expenses 75
Net sales 4,000
Average plant and equipment 1,775
Cost of goods sold 3,525
If Pearl treats the Western Division as an investment center, what is the before-tax ROI for 2023?
D a. 34.78% c. 19.79%
b. 22.54% d. 16.67%
19. A firm earning a profit can increase its return on investment by
D a. Increasing sales revenues and operating expenses by the same peso amount
b. Decreasing sales revenues and operating expenses by the same percentage
c. Decreasing sales revenues and operating expenses by the same percentage
d. Increasing sales revenue and operating expenses by the same percentage
20. Mercury Co. plans to sell 200 units using P 20,000 of assets. The company incurs total costs of P 8,000 for these units.
If a return on investment of 10% is targeted, how much should be the selling price?
A a. P 50 c. P 30
b. P 40 d. Cannot be determined from given information
21. The segment margin of an investment center after deducting the imputed interest on the assets used by the investment
center is known as
B a. Return on investment c. Operating income
b. Residual income d. Return on assets
22. If a division’s ROI and the minimum required ROI are the same, what is the division’s residual income?
B a. Positive c. Negative
b. Zero d. None of the above
Items 23 and 24 are based on the following information
Jade Co.’s industrial photo finishing division VVV incurred the following costs and expenses in 2023:
Variable Fixed
Direct materials P 200,000
Direct labor 150,000
Factory overhead 70,000 P 42,000
General, selling and administrative 30,000 48,000
TOTAL P 450,000 P 90,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD MS-H
During 2023, VVV produced 300,000 units of industrial photo-prints, which were sold for P 2.00 each. Jade’s investment
in VVV was P 500,000 and P 700,000 at January 1, 2023 and December 31, 2023, respectively. Jade normally imputes
interest on investment at 15% of average invested capital.
23. For the year ended December 31, 2023, what was VVV’s return on investment?
B a. 15.0% c. 8.6%
b. 10.0% d. (5.0%)
24. Assume that the net operating income was P 60,000 and that average invested capital was P 600,000. For the year
ended December 31, 2023, what was VVV’s residual income (loss)?
D a. P 150,000 c. (P 45,000)
b. P 60,000 d. (P 30,000)
25. Copper Co. is a computer service center. For the month of May, Copper had the following operating statistics:
Sales P 450,000 Total assets P 500,000
Operating income P 25,000 Shareholder’s equity P 200,000
Net profit after taxes P 8,000 Cost of capital 6%
Based on the above information, which one of the following statements is correct?
B a. Return on investment of 4% c. Return on investment of 1.6%
b. Residual income of (P 5,000) d. Residual income of (P 22,000)
26. Managerial performance can be measured in many different ways, including return on investment (ROI) and residual
income. A good reason for using residual income instead of ROI is that
B a. Residual income can be computed without regard to identifying an investment base.
b. Goal congruence is more likely to be promoted by using residual income.
c. Residual income is well understood and often used in the financial press.
d. ROI does not take into consideration both investment turnover ratio and return-on-sales percentage.
27. Residual income (RI) is a performance evaluation that is used in conjunction with, or instead of, return on investment
(ROI). In many cases, RI is preferred to ROI because
B a. RI is a measure over time, while ROI represents the results for one period
b. RI concentrates on maximizing absolute amount of income rather than a percentage return like ROI
c. The imputed interest rate used in calculating RI is more easily derived than the target rate that is
compared to the calculated ROI
d. Average investment is employed with RI while year-end investment is employed with ROI
28. Residual income is a better measure for performance evaluation of an investment center manager than return on
investment because
B a. The problems associated with measuring the asset base are eliminated
b. Desirable investment decisions will not be neglected by high-return divisions
c. Only the gross book value of assets needs to be calculated
d. The arguments about the implicit cost of interest are eliminated
29. Ms. Goldy is the general manager of the Silver Division, and his performance is measured using the residual income
method. Ms. Goldy is reviewing the following forecasts for his division for the next year:
Category Amounts
Working capital P 1,800,000
Revenue 30,000,000
Plant and equipment 17,200,000
If the imputed interest charge is 15% and Ms. Goldy wants to achieve a residual income of P 2,000,000, what will costs
have to be in order to achieve the targeted residual income?
C a. P 9,000,000 c. P 25,150,000
b. P 10,800,000 d. P 25,690,000
30. Lead Company presented the following information:
Units to be sold 50,000 units
Total costs of the units P 550,000
Fixed capital investments P 1,000,000
Variable capital on sales 20%
What would be the selling price in order to produce a 20% return on investment?
D a. P 15.652 c. P 16.525
b. P 15.256 d. P 15.625
31. The following information is available for the wholesale products division of Aluminum Company:
Net operating profit before interests and taxes P 30,000,000
Depreciation expense 10,000,000
Change in net working capital 5,000,000
Capital expenditures 4,000,000
Invested capital (total assets – current liabilities) 50,000,000
Weighted-average cost of capital 10%
Tax rate 40%
What is the economic value added (EVA) for the division?
D a. P 25,000,0000 c. P 13,500,000
b. P 18,000,0000 d. P 13,000,000
32. Myrrh Co. reported these data at year-end:
Pre-tax operating income P 4,000,000 Current liabilities P 2,000,000
Current assets 4,000,000 Long-term liabilities 5,000,000
Long-term assets 16,000,000 Tax Rate 25%
Assuming a weighted average cost of capital (WACC) of 9%, what is Myrrh Company’s economic value-added (EVA)?
A a. P 1,380,000 c. P 1,830,000
b. P 1,620,000 d. P 3,000,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD MS-H
33. In theory, what is the optimal method for establishing a transfer price?
D a. Flexible budget cost c. Budgeted cost with or without a markup
b. Incremental cost d. Market price
34. The most fundamental responsibility center affected by the use of market-based transfer prices is a(n)
D a. Production center c. Cost center
b. Investment center d. Profit center
35. A limitation of transfer prices based on actual cost is that they
B a. Charge inefficiencies to the department that is transferring the goods
b. Can lead to suboptimal decisions for the company as a whole
c. Must be adjusted by some markup
d. Lack clarity and administrative convenience
36. Negotiated price is often employed when
B a. Market prices are stable c. Goal congruence is not a major objective
b. Market prices are volatile d. Market prices change by a constant rate each year
37. The Titanium Division of a company, which is operating at capacity, produces and sells 1,000 units of a certain
electronic component in a perfectly competitive market. Revenue and cost data are as follows:
Sales: P 50,000 Fixed costs: P 12,000 Variable costs: P 34,000
What is the minimum transfer price that should be charged to the Magnesium Division for each component?
D a. P 12.00 c. P 46.00
b. P 34.00 d. P 50.00
38. Division A of company is currently operating at 50% capacity. It produces a single product and sells all its production
to outside customers for P 13 per unit. Variable costs are P 7 per unit, and fixed costs are P 6 per unit at the current
production level. Division B, which currently purchases this product from an outside supplier for P 12 per unit, would
like to purchase the product from Division A. Division A will operate at 80% capacity to meet outside customer’s and
Division B’s demand. What is the minimum price that Division A should charge Division B?
A a. P 7.00 per unit c. P 12.00 per unit
b. P 10.40 per unit d. P 13.00 per unit
39. An appropriate transfer price between two divisions of the Emerald Co. can be determined from the following data:
Fabricating Division: Assembling Division:
Market price of sub-assembly P 50 Number of items needed 900
Variable cost of sub-assembly P 20
Excess capacity 1,000
What is the natural bargaining range for the two divisions?
A a. Between P 20 and P 50 c. Any amount less than P 50
b. Between P 50 and P 70 d. P 50 is the only acceptable price
40. The 1st division of Gold Company produces Part I that is to be used by Gold as a key part in its products. Costs and
sales data on Part I are as follows:
Selling price per unit: P 100 Variable cost per unit: P 60
Fixed cost per unit: P 24 (based on 40,000 units capacity per annum)
Gold’s 2nd division is introducing a new product that will use Part I. An outside supplier has quoted 2 nd division a price
of P 96 per unit. This represents the usual P 100 price less a quantity discount due to the large number of 2nd division’s
requirement. If the 2nd division would buy 15,000 units of Part I from the 1st division, the effect on the corporate
profit would be:
D a. Increase by P 240,000 c. Increase by P 210,000
b. Increase by P 1,500,000 d. Reduce by P 60,000
41. If a transfer price of P 84 is determined using the transfer pricing formula and the lost contribution margin per unit on
outside sales is P 28, then the variable cost per unit must be
B a. P 3 c. P 112
b. P 56 d. P 2,352
42. Division A has the capacity for making 3,000 motors per month and regularly sells 1,950 motors each month on the
intermediate market at a contribution margin of P 62 per motor. Division B, a sister division, would like to obtain 1,400
motors each month from Division A. In computing a transfer price per motor using the transfer pricing formula, the lost
contribution margin per unit portion of the transfer price computation would be
B a. P 26.57 c. P 35.70
b. P 15.50 d. P 62.00
Items 43 to 45 are based on the following information
ABC and XYZ are the only two divisions in the Alphabet Company. ABC makes and sells units that can be sold either to
outside customers or to XYZ. The following data are available from last month:
ABC Division:
Unit selling price to outside customers P 45
Unit variable costs when sold to outside customers P 30
Capacity in units 12,000
Units sold to outside customers 6,000
XYZ Division:
Number of units needed per month 4,000
Unit price paid to an outside supplier P 42
If ABC sells the units to XYZ, ABC can avoid P 2 per wheel in sales commissions.
43. What transfer price would be used according to the transfer pricing formula?
A a. P 28 c. P 42
b. P 30 d. P 45
44. What is the maximum price per wheel that XYZ should be willing to pay ABC if a transfer were to take place?
C a. P 28 c. P 42
b. P 30 d. P 45

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
RESPONSIBILITY ACCOUNTING, TRANSFER PRICING & BALANCED SCORECARD MS-H
45. Suppose that ABC sells 9,000 units each month to outside customers and the transfer pricing formula is used to determine
the transfer price, what is the appropriate transfer price per unit?
B a. P 29.50 c. P 39.25
b. P 31.75 d. P 42.00
46. A management system that measures financial and non-financial performance for various units in a single report is a(n):
A a. Balanced scorecard c. Imbalanced scorecard
b. Financial report scorecard d. Unbalanced scorecard
47. A balanced scorecard is primarily concerned with
B a. Staff c. Systems
b. Strategy d. Structure
48. Measures of those aspects of the firm’s performance that are crucial to its competitive advantage, and therefore to its
success, are termed:
B a. Cost targets c. Operational controls
b. Critical success factors d. Cost and activity drivers
49. Which one of the following is not one of the perspectives on the business into which critical success factors are commonly
grouped in the balanced scorecard?
B a. Employee innovation and learning c. Internal business processes
b. Competitor business strategies d. Financial performance
50. In balanced scorecard, a survey of employee satisfaction is a potential measure in which of the four perspectives?
D a. Financial c. Internal business processes
b. Customer d. Learning and growth
51. Which is a performance measurement that is a non-financial rather than a financial measure?
C a. Return on investment c. Customer satisfaction
b. Economic valued-added d. Profit margin
52. Which of the following is an example of an efficiency measure?
C a. The rate of absenteeism
b. The goal of becoming a leader manufacturer
c. The number of insurance claims processed per day
d. The rate of customer complaints
53. Which performance measure would be part of those used for internal business processes perspective?
A a. Cycle time c. Hours of training per employee
b. Employee satisfaction d. Customer retention
54. Which of the following represents value-added time in the manufacturing cycle?
D a. Inspection time. c. Move time.
b. Queue time. d. Process time.
Items 55 to 57 are based on the following information
Metallic Manufacturing Corporation (MMC) has the following information:
Moving time 8 days
Inspection time 2 days
Processing time 10 days
Storage time 30 days
55. What is the total amount of value-added time?
A a. 10 days c. 40 days
b. 30 days d. 50 days
56. What is the product’s cycle time?
D a. 10 days c. 40 days
b. 30 days d. 50 days
57. What is the manufacturing cycle efficiency (MCE)?
C a. 25.0% c. 20.0%
b. 80.0% d. 60.0%

Clarifications/Solutions to Selected Self-Test Questions

17. ROI = (311,000 – 250,000 – 50,000) ÷ 40,000
18. ROI = (4,000 - 3,525 – 75) ÷ (625 + 1,775)
23. ROI = (600,000 – 450,000 – 90,000) ÷ [(500,000 + 700,000) ÷ 2]
24. RI = 60,000 – 15% (600,000)
29. RI = 2M = (30M – costs) – 15% (1.8M + 17.2M)
30. SP – selling price: Sales – Costs = Profit → 50,000 (SP) – 550,000 = 20% [1M + 20% (50,000 SP)]
31. EVA = 30M (1 – 0.4) – 10% (50 M)
32. EVA = 4M (1 - 0.25) – 9% (4M + 16M – 2M)
35. Minimum transfer price (at capacity): P 50,000 ÷ 1,000 units
41. Transfer price = outlay costs + opportunity costs → 84 = variable costs + 28
42. Excess capacity: 3,000 – 1,950 = 1,050 units Lost CM: (1,400 – 1,050) 62 = 21,700
Lost CM per unit: 21,700 ÷ 1,400 units
43. Transfer price: 30 – 2
44. Maximum transfer price (for buying vision) is based on the purchase price from outside supplier.
45. Excess capacity: 12,000 – 9,000 = 3,000 units Lost CM: (4,000 – 3,000) x (45 – 30) = 15,000
Transfer price: 28 + (15,000 ÷ 4,000)
55. Value-added time is based on processing time of 10 days.
56. Product or manufacturing cycle time = 8 + 2 + 10 + 30
57. MCE = 10 ÷ 50

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