Transfer Pricing Is Used When

question 39

Multiple Choice

Transfer pricing is used when:

• A)multiple cost centres are conducting business within the company.
• B)a decentralized company has profit centres or investment centres.
• C)the return on investment ratio cannot be computed.
• D)a company is transferring goods to the government.

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Definitions:

Gross Margin

represents the difference between revenue and cost of goods sold divided by revenue, showcasing the percentage of sales that exceeds the cost of goods sold.

Arbitrary Allocation

The distribution of indirect costs to specific cost objects without a clear or direct basis, often based on convenience or convention rather than actual usage or benefits derived.

Common Cost

A cost that is incurred to support a number of cost objects but that cannot be traced to them individually. For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot’s wage is caused by any one passenger taking the flight.

Variable Costing

A costing method that includes only variable production costs (costs that change with the level of output) in product costs, excluding fixed manufacturing overhead.