Transfer Prices Should Not Be Based on Actual Costs Because

question 92

Multiple Choice

Transfer prices should not be based on actual costs because:

• A) inefficient producing divisions have higher costs of production, which would be passed on by buying divisions.
• B) producing divisions have no incentives to control costs.
• C) inefficient units with high costs of production have no opportunity for profit.
• D) inefficient producing divisions have higher costs of production, which would be passed on by buying divisions AND producing divisions have no incentives to control costs.

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Definitions:

Maturity

The date on which a financial instrument (such as a bond) or an investment becomes due for payment or is fully repaid.

Contract Rate

The interest rate stipulated in a contract or agreement, often related to loans, bonds, or other financial instruments.

Market Rate

The prevailing price or interest level determined by the supply and demand dynamics in a competitive marketplace.

Journal Entry

A record of a financial transaction in the accounting system that includes the date, accounts affected, amounts, and description of the transaction.