Transfer Pricing
Self Test
Cost Accounting
Self Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. A transfer price is
a. the price of inventory transferred in from another company
b. the cost of shipping inventory to another division or segment
c. the cost of providing a good or service to another company.
d. the cost of purchasing a good or service from another division or segment
Answer
2. When recording a transfer price transaction
a. both divisions record a sale
b. both divisions record a purchase
c. one division records a sale and the other records a purchase
d. only a purchase is recorded by the purchasing division
Answer
C. In a transfer price transaction, one division records a sale and the other division records a purchase. This is an inter-company transaction.
3. Common methods for determining a transfer price are
a. cost based and market based
b. variable cost based and fixed cost based
c. product cost based and period cost based
d. negotiated is the only method
Answer
A. The three common methods for determining a transfer price are 1) cost based 2) market based, and 3) negotiated. The cost-based method can include a variety of combinations of costs.
4. A dual transfer pricing arrangement is one where
a. both divisions record the same sales price
b. no inter-company profit account is used
c. one division records a sales price that is different from the other division’s purchase price
d. both b. and c.
Answer
C. Dual pricing means that the sales price recorded by the selling division is different than the purchase price recorded by the purchasing division. An inter-company transfer/profit account is used to account for the difference in the sales price and the purchase price.
5. An advantage of a fair transfer pricing system is
a. it motivates management to work together to achieve corporate goals
b. it allows for fair evaluation of division performance
c. it reports profits of divisions at economic values
d. all of the above
Answer
D. All of the above are characteristics are advantages of using a fair transfer price.
6. A key issue impacting international companies when setting transfer prices is
a. the ability to purchase low priced materials elsewhere in the world
b. management must communicate in different international languages
c. top management makes all significant decisions
d. tax rates vary among different countries
Answer
D. A multi-national company can increase total profits by minimizing taxes paid by divisions in different countries. The company should minimize profits in higher tax rate countries by setting high purchase costs for divisions in high tax rate countries. All other choices are not a consideration when setting transfer prices.
7. A cost-based transfer pricing system considers
a. all costs of providing the goods/service the company chooses to include
b. only fixed costs
c. the lowest market price the goods or services can be purchased for
d. only the current sales price to outside customers
Answer
A. A cost-based transfer system considers variable costs, fixed cost or absorption costs, depending on the goals of the company. Market prices are not considered when using a cost-based system.
8. A market based transfer pricing system considers
a. all costs to make or sell the product
b. the external market price of the goods or services
c. the internal market price of the goods or services
d. absorption costs
Answer
B. The market-based transfer price is set using external market prices. The cost of the product is not considered when using a market-based system.
9. The minimum transfer price should cover
a. all incremental costs to make and sell the product
b. all incremental costs to make the product
c. variable costs incurred only
d. the absorption cost to make and sell the product
Answer
A. The minimum transfer price should cover all incremental costs. Incremental costs should include any type of incremental cost, not just production.
10. The maximum transfer price when there is capacity should be
a. the highest external price of outside suppliers
b. the lowest external price of outside suppliers
c. a price that is equal to all variable costs
d. a price that is equal to absorption cost
Answer
B. The maximum transfer price when there is excess capacity should be the lowest external price available. The selling division should not expect the purchasing division to pay more than they would pay to someone outside the company.