The Primary Limitation of a Full-Cost Based Transfer Pricing System

question 67

Multiple Choice

The primary limitation of a full-cost based transfer pricing system is that:

• A) The supplying and purchasing divisions are more likely to make decisions that are inconsistent with the goals of the organization as a whole.
• B) There will be little incentive on the part of the supplying manager to supply goods and services efficiently.
• C) Managers may spend too much time negotiating the transfer price.
• D) Managers may find that the transfer price is difficult to compute.
• E) Such transfer prices are not currently allowed for federal income tax purposes.

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Definitions:

Periodic Inventory System

An inventory accounting method where inventory levels and cost of goods sold are calculated at set intervals, such as monthly or yearly.

Closing Entries

The journal entries made at the end of an accounting period to transfer the balances of temporary accounts to permanent ones, preparing the books for the next period.

Retained Earnings

Profits that a company keeps to use within the business after dividends have been paid out to shareholders.

Fiscal Year

A one-year period used for financial reporting and budgeting, which may or may not align with the calendar year.