Transfer Pricing and Divisional Performance Flashcards
7 cards from real AAT L4 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Transfer Pricing and Divisional Performance flashcards as text
Under a two-part tariff system for transfer pricing, how does the buying division pay for transferred units?
Answer: A fixed fee plus variable cost per unit transferred
A two-part tariff charges variable cost per unit for short-run decision-making efficiency, plus a fixed fee to recover the selling division's fixed costs.
Which non-financial performance indicator would MOST appropriately measure customer satisfaction in a retail division?
Answer: Customer complaint rate
Customer complaint rate directly captures customers' experience with the division's product or service.
The 'arm's length principle' in international transfer pricing requires that:
Answer: Transfer prices are set as if the divisions were independent companies dealing at open-market rates
Tax authorities require intra-group transfer prices to reflect what unrelated third parties would charge each other in a competitive market.
Benchmarking as a performance measurement tool primarily involves:
Answer: Comparing performance against best practice in the industry or other organisations
Benchmarking identifies external best practice and uses it as a performance target to drive continuous improvement.
Which of the following is a key limitation of Residual Income (RI) as a divisional performance measure?
Answer: It cannot easily be compared across divisions of different sizes
RI is an absolute monetary figure, so a larger division will naturally show a higher RI, making like-for-like comparisons between divisions misleading.
A company uses a 10% cost of capital. Division C has operating profit of £45,000 and capital employed of £300,000. What is Division C's Residual Income?
Answer: £15,000
Imputed interest = 10% × £300,000 = £30,000; RI = £45,000 − £30,000 = £15,000.
Which dysfunctional behaviour can result from using ROI as the sole measure of divisional performance?
Answer: Managers may reject profitable projects that would lower their current divisional ROI
If a new project's ROI is below the division's current ROI, accepting it reduces the average even if the project adds value overall, incentivising rejection.