CHAPTER 8 LEARNING OBJECTIVES

Transcription

1 CHAPTER 8 LEARNING OBJECTIVES 1. COMPUTE A TARGET COST WHEN THE MARKET DETERMINES A PRODUCT PRICE. 2. COMPUTE A TARGET SELLING PRICE USING COST- PLUS PRICING. 3. USE TIME-AND-MATERIAL PRICING TO DETERMINE THE COST OF SERVICES PROVIDED. 4. DETERMINE A TRANSFER PRICE USING THE NEGOTIATED, COST-BASED, AND MARKET-BASED APPROACHES. *5. DETERMINE PRICES USING ABSORPTION-COST PRIC- ING AND VARIABLE-COST PRICING. *6. EXPLAIN ISSUES INVOLVED IN TRANSFERRING GOODS BETWEEN DIVISIONS IN DIFFERENT COUNTRIES. Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-1

2 CHAPTER REVIEW External Sales 1. (L.O. 1) Some of the many factors that can affect pricing decisions include: a. Pricing Objectives Gain market share Achieve a target rate of return b. Environment Political reaction to prices Patent or copyright protection c. Demand Price sensitivity Demographics d. Cost Considerations Fixed and variable costs Short-run or long-run 2. In most cases, a company does not set prices. Instead the price is set by the competitive market (laws of supply and demand). These companies are called price takers and price taking often happens when the product is not easily differentiated from competing products, such as farm products (corn or wheat) or minerals (coal or sand). 3. Companies can set prices (1) where the product is specially made for a customer, (2) when there are few or no other producers capable of manufacturing a similar item, or (3) when a company can effectively differentiate its product or service from others. Target Costing 4. Once a company has identified its segment of the market, it does market research to determine the target price. The target price is the price that the company believes would place it in the optimal position for its target audience. Once the company has determined the target price, it can determine its target cost by setting a desired profit. The difference between the target price and the desired profit is the target cost of the product. The target cost includes all product and period costs necessary to make and market the product. Cost-Plus Pricing 5. (L.O. 2) When the price is set by the company, price is commonly a function of the product or service. Cost-plus pricing involves establishing a cost base and adding to this cost base a markup to determine a target selling price. The size of the markup (the plus ) depends on the desired return on investment (ROI) for the product line, product, or service. The cost-plus pricing formula is expressed as follows: Target Selling Price = Cost + (Markup Percentage X Cost) 6. The cost-plus approach has a major advantage: it is simple to compute. However, the cost model does not give consideration to the demand side that is, will the customers pay the price. In addition, sales volume plays a large role in determining per unit costs. The lower the sales volume, the higher the price a company must charge to meet its desired ROI (because fixed costs are spread over fewer units and therefore the fixed costs per unit increases). Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-2

3 7. Instead of using both fixed and variable costs to set prices, some companies simply add a markup to their variable costs. Using variable-cost pricing avoids the problem of using poor cost information related to fixed cost per unit computations. Time-and-Material Pricing 8. (L.O. 3) Under time-and-material pricing, the company sets two pricing rates one for the labor used on a job and another for the material. The labor rate includes direct labor time and other employee costs. The material charge is based on the cost of direct parts and materials used and a material loading charge for related overhead costs. 9. Using time-and-material pricing involves three steps: (1) calculate the per-hour labor charge, (2) calculate the charge for obtaining and holding materials, and (3) calculate the charges for a particular job. The per-hour labor charge typically includes the direct labor cost of an employee, selling, administrative, and similar overhead costs, and an allowance for a desired profit per hour of employee time. The charge for materials typically includes the invoice price of any materials used on the job plus a material loading charge. The charges for any particular job are then a result of (1) the labor charge, (2) the direct charge for materials, and (3) the material loading charge. 10. To illustrate a time-and-material pricing situation, assume the following data for Rancho Park Golf Club Repair Service: Rancho Park Golf Club Repair Service Budgeted Costs for the Year 2017 Time Material Loading Charges Charges Repair service employee wages $26,000 $ 5,000 Administrative assistant salary 1,950 1,000 Other overhead (supplies, depreciation, advertising, utilities) 4,940 3,000 Total budgeted costs $32,890 $ 9,000 Step 1: During 2017 Rancho Park budgets 1,300 hours for repair time, and it desires a profit margin of $6 per hour of labor. Computation of the hourly charges are as follows: Per Hour Per Hour Total Cost Total Hours = Charge Hourly labor rate for repairs Repair service employee $26,000 1,300 = $20.00 Overhead costs Administrative assistant 1,950 1,300 = 1.50 Other overhead 4,940 1,300 = 3.80 $32,890 1,300 = $25.30 Profit margin 6.00 Rate charged per hour of labor $31.30 Step 2: Rancho Park estimates that the total invoice cost of parts and materials used in 2017 will be $30,000 and it desires a 10 percent profit margin markup on the invoice cost of parts and materials. The computation of the material loading charge used by Rancho Park during 2017 is as follows: Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-3

4 Material Total Invoice Material Loading Cost, Parts = Loading Charge and Materials Percentage Overhead costs Repair service employee $5,000 Administrative assistant 1,000 6,000 $30,000 = 20.00% Other overhead 3,000 30,000 = 10.00% $9,000 30,000 = 30.00% Profit margin 10.00% Material loading percentage 40.00% Step 3: Rancho Park prepares a price quotation to estimate the cost to fix a set of woods for a patron. Rancho Park estimates the job will require a half hour of labor and $150 in parts and materials. Rancho Park s price quotation is as follows: Internal Sales Rancho Park Golf Club Repair Service Time-and-Material Price Quotation Job: Arnold Palmer, repair of set of woods Labor charges: half $ $ Material charges Cost of parts and materials... $ Material loading charge (40% X $150) Total price of labor and materials... $ (L.O. 4) Divisions within vertically integrated companies normally transfer goods or services to other divisions within the same company, as well as to customers outside the company. When goods are transferred internally, the price used to record the transfer between the two divisions is called the transfer price. Three possible approaches for determining a transfer price are (1) negotiated transfer prices, (2) cost-based transfer prices, and (3) market-based transfer prices. Negotiated Transfer Prices 12. The negotiated transfer price is determined through agreement of division managers. Using the negotiated transfer pricing approach, a minimum transfer price is established by the selling division, and a maximum transfer price is established by the purchasing division. Calculating the minimum transfer price depends on whether the selling division has excess capacity or not. If the selling division has no excess capacity, then the minimum transfer price is the variable cost plus its lost contribution margin (also known as opportunity cost). If the selling division has excess capacity, then the minimum transfer price is the variable cost. Cost-Based Transfer Prices 13. Another method of determining transfer prices is to base the transfer price on the costs incurred by the division providing the goods. If a transfer price is used, the transfer price may be based on Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-4

5 variable costs alone, or on variable costs plus fixed costs. A markup may be added to these cost numbers. This method, however, may lead to a loss of profitability for the company and unfair evaluations of division performance. Market-Based Transfer Prices 14. The market-based transfer price is based on existing market prices of competing goods or services. A market-based system is often considered the best approach because it is objective and generally provides the proper economic incentives. Unfortunately, however, there is often not a well-defined market for the good or service being transferred and thus companies resort to a cost-based system. Transfers Between Divisions in Different Countries *Absorption Cost Pricing *15. (L.O. 5) Absorption-cost pricing is consistent with generally accepted accounting principles (GAAP) because it defines the cost base as the manufacturing cost. Both variable and fixed selling and administrative costs are excluded from this cost base. Thus, selling and administrative costs plus the target ROI must be provided for through the markup. The steps in using absorption-cost pricing are as follows: a. Compute the unit manufacturing cost. b. Compute the markup percentage using the formula: Desired ROI Per Unit + Selling and Administrative Expenses Per Unit = Markup Percentage X Manufacturing Cost Per Unit c. Set the target selling price using the formula: Manufacturing Cost Per Unit + ( Markup Percentage X Manufacturing Cost Per Unit ) = Target Selling Price Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-5

6 *Variable-Cost Pricing *16. Under variable-cost pricing, the cost base consists of all of the variable costs associated with a product, including variable selling and administrative costs. Because fixed costs are not included in the base, the markup must provide for fixed costs (manufacturing and selling and administrative) and the target ROI. Variable-cost pricing is more useful for making short-run decisions because it displays variable cost and fixed cost behavior patterns separately. The steps in using variable-cost pricing are as follows: a. Compute the unit variable cost. b. Compute the markup percentage using the formula: Desired ROI Per Unit + Fixed Costs Per Unit = Markup Percentage X Variable Costs Per Unit c. Set the target selling price using the formula: Variable Cost Per Unit + ( Markup Percentage X Variable Cost Per Unit ) = Target Selling Price *17. (L.O. 6) As more companies globalize their operations, an increasing number of transfers are between divisions that are located in different countries. Companies must pay income tax in the country where income is generated. In order to maximize income, and minimize income tax, many companies prefer to report more income in countries with low tax rates, and less income in countries with high tax rates. This is accomplished by adjusting the transfer prices they use on internal transfers between divisions located in different countries. The division in the low-tax-rate country is allocated more contribution margin, and the division in the high-tax-rate country is allocated less. Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-6

7 LECTURE OUTLINE A. External Sales. 1. Establishing the price for any good or service is affected by the following factors: pricing objectives, environment, demand, and cost considerations. 2. In the long run a company must price its product to cover its costs and earn a reasonable profit. In most cases, a company does not set the price it is set by the competitive market (laws of supply and demand). In this situation, companies are called price takers because the price of the product is set by market forces. 3. In some situations the company does set the price. This occurs where the product is specially made for a customer or when there are few or no other producers capable of manufacturing a similar item. It also occurs when a company can effectively differentiate its product from others. MANAGEMENT INSIGHT At one time, Apple s ipad represented 75% of tablets being sold. And, about 50% of consumers read newspapers and magazines on their tablets. This commanding share of the market made Apple feel like it had publishers right where it wanted them. However, when Apple announced that it would charge publishers a fee of 30% of subscription revenue for subscriptions sold through Apple s App store, Google announced it would only charge a fee of about 10% of subscription revenue for users of its Android system. Do the substantially different prices that Apple and Google charge for a similar service reflect different costs incurred by each company, or is the price difference due to something else? Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-7

8 Answer: While it is possible that the companies incur different costs to provide this service, that would not explain this huge price difference. Instead, Apple apparently felt that its commanding lead in terms of the percentage of tablet computer users enabled it to charge a substantial premium for subscription services. On the other hand, Google s decision most likely reflects a strategic decision to try to grow its market share by providing a substantially lower price B. Target Costing. 1. In a competitive market, the price of a product is greatly affected by supply and demand. No company in the market can affect the price to a significant degree. 2. A company chooses the segment of the market it wants to compete in (its market niche) in a competitive market. 3. Once the company has identified its market segment, it conducts market research to determine the target price. The target price is the price the company believes would place it in the best position for its target audience. 4. Once the company determines the target selling price it determines its target cost by setting a desired profit. 5. The difference between the target price and the desired profit is the target cost of the product. The target cost includes all product and period costs necessary to make and market the product. MANAGEMENT INSIGHT Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-8

9 Wal-Mart told jean maker Levi Strauss the price should be $19 per pair of jeans instead of $23. Wal-Mart often sets the price, and the manufacturer has to find out how to make a profit at that price. Levi Strauss revamped its distribution and production to improve its overall record of timely deliveries. The chief executive of Levi Strauss stated we had to change people and practice. What are some issues that Levi Strauss should consider in deciding whether it should agree to meet Wal-Mart s target price? Answer: Levi may be tempted to reduce the quality of its product, or it may be forced to move more of its operations to low-wage suppliers. A big concern is that other retailers may complain that Levi is selling its jeans to Wal-Mart at a price that is lower than they receive. Also, customers may no longer be willing to pay for Levi s other models of higher-priced jeans that it sells in other stores because they can get the low-price jeans (those with the lower gross margin) at Wal-Mart. All of these are issues that a manufacturer must consider in deciding whether to be a supplier to Wal-Mart. C. Cost-Plus Pricing. 1. In a noncompetitive environment, the company is faced with the task of setting its own price, which is commonly a function of the cost of the product. 2. The typical approach is to use cost-plus pricing which involves establishing a cost base and adding to this cost base a markup to determine a target selling price. 3. The size of the markup depends on the desired return on investment (ROI) for the product line or product. 4. The cost-plus pricing formula is expressed as follows: Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-9

10 Target Selling Price = Cost + (Markup Percentage X Cost). Markup Percentage = Desired ROI Per Unit Total Unit Cost. 5. The cost-plus pricing approach s major advantage is that it is simple to compute. However, it does not give consideration to the demand side. In addition, sales volume plays a large role in determining per unit costs which in turn affect selling price. 6. The lower the sales volume, the higher the selling price the company must charge to meet its desired ROI. This occurs because fixed costs are spread over fewer units and the fixed cost per unit increase. MANAGEMENT INSIGHT For nearly 90 years Parker Hannifin calculated the production cost, then added on a percentage of the cost to arrive at the price. If Parker reduced its production costs, it also cut the price for the product. This approach made it difficult for the company to ever substantially increase its profit margins. So the company s CEO decided to implement strategic pricing schemes similar to other retailers. It decided to charge a higher markup for about a third of its products because it had a competitive advantage. What kind of help might the sales staff need in implementing this new approach? Answer: Many customers might object to the price increase, and some might even threaten to buy a competing product. The company needed to provide the sales staff with justifications for the product. For example, salespeople needed evidence to demonstrate that the superior quality of the product justified the higher price. D. Time-and-Material Pricing. Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-10

11 1. Under time-and-material pricing, the company sets two pricing rates one for the labor used on a job and another for the material. 2. The labor rate includes direct labor time and other employee costs. The material charge is based on the cost of direct parts and materials used and a material loading charge for related overhead costs. 3. Using time-and-material pricing involves three steps: a. Calculate the per hour labor charge. b. Calculate the charge for obtaining and holding materials. c. Calculate the charges for a particular job. 4. The charge for labor time is expressed as a rate per labor hour which includes: a. The direct labor cost of the employee (hourly rate or salary and fringe benefits). b. Selling, administrative, and similar overhead costs. c. An allowance for a desired profit or ROI per hour of employee time. 5. The charge for materials typically includes a material loading charge which covers the costs of purchasing, receiving, handling, and storing materials, plus any desired profit margin on the materials themselves. 6. The material loading charge is expressed as a percentage of the total estimated costs of parts and materials for the year. The company determines this percentage by doing the following: a. Estimating the total annual costs for purchasing, receiving, handling, and storing materials. b. Dividing the amount in a. by the total estimated cost of parts and materials. Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-11

12 c. Adding a desired profit margin on the materials themselves. 7. The charges for any particular job are the sum of the a. Labor charge, b. Charge for materials, and c. Material loading charge. SERVICE COMPANY INSIGHT For many decades, professionals in most service industries have used some form of hourly based price, regardless of the outcome. Many customers are now demanding that the bill be tied to actual performance instead of the amount of hours of work provided. What implications does this have for a service company s need for managerial accounting? Answer: When service companies billed by the hour, they were better able to ensure their profitability because labor hours is their primary cost. But when billing schemes become performance-based, the company cannot be assured that the bill will cover its hourly costs. As a consequence, companies will need to be far more accurate in their estimates of the likelihood of achieving desired outcomes, or their costs may well exceed their revenues. E. Internal Sales. 1. The transfer of goods between divisions of the same company is called internal sales. Divisions within vertically integrated companies normally sell goods to other company divisions as well as to outside customers. 2. When companies transfer goods internally, the price used to record the transfer between the divisions is the transfer price. Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-12

13 3. Setting a transfer price is often complicated because of competing interests among divisions within the company. A transfer price that is too high will benefit the selling division, but hurt the purchasing division. 4. There are three possible approaches for determining a transfer price: a. Negotiated transfer prices. b. Cost-based transfer prices. c. Market-based transfer prices. F. Negotiated Transfer Prices. 1. The negotiated transfer price is determined through agreement of division managers. It will range between the external purchase price per unit and the sum of the unit variable cost plus unit opportunity cost. 2. Opportunity cost is the contribution margin per unit of goods sold externally. 3. The minimum transfer price equals variable cost plus opportunity cost whether the seller is at full capacity or has excess capacity. However, opportunity cost will vary depending on whether a division is at full capacity or has excess capacity. 4. Given excess capacity (zero opportunity cost) to the selling division, it would be in the company s best interest for the buying division to purchase goods internally as long as the selling division s variable cost is less than the outside price. 5. When the selling division has excess capacity, it will receive a positive contribution margin from any transfer price above its variable cost while the buying division will benefit from any price below the outside price. Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-13

14 6. In the minimum transfer price formula, variable cost is defined as the variable cost of units sold internally which will differ from the variable cost of units sold externally in some instances (i.e. reduced variable selling expenses for internal sales). 7. Under negotiated transfer pricing, the selling division establishes a minimum transfer price and the purchasing division establishes a maximum transfer price. 8. Companies often do not use negotiated transfer pricing because: a. Market price information is sometimes not easily obtainable. b. A lack of trust between the two negotiating divisions may lead to a breakdown in negotiations. c. Negotiations often lead to different pricing strategies from division to division which is sometimes costly to implement. G. Cost-Based Transfer Prices. 1. One method of determining transfer prices is to base the transfer price on the costs incurred by the division producing the goods. 2. A cost-based transfer price may be based on full cost, variable cost, or some modification including a markup. 3. The cost-based approach often leads to poor performance evaluations and purchasing decisions. Under this approach, divisions sometimes use improper transfer prices which leads to a loss of profitability and unfair evaluations of division performance. 4. The cost-based approach does not provide the selling division with proper incentive. In addition, this approach does not reflect the selling division s true profitability, and doesn t even provide adequate incentive for the selling division to control costs since the division s costs are passed on to the buying division. Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-14

15 H. Market-Based Transfer Prices. 1. The market-based transfer price is based on existing market prices of competing goods. This system is often considered the best approach because it is objective and generally provides the proper economic incentives. 2. When the selling division has no excess capacity, it receives market price and the purchasing division pays market price. 3. If the selling division has excess capacity, the market-based system can lead to actions that are not in the best interest of the company. 4. In many cases, there is not a well-defined market for the good being transferred. As a result, a reasonable market value cannot be developed, and companies must resort to a cost-based system. *I. Absorption-Cost Pricing. 1. Absorption-cost pricing uses total manufacturing cost as the cost base and provides for selling/administrative costs plus the target ROI through the markup. 2. Absorption-cost pricing involves three steps: a. Compute the unit manufacturing cost. b. Compute the markup percentage (the percentage must cover both the desired ROI and selling and administrative expenses). c. Set the target selling price. 3. The markup percentage is computed by dividing the sum of the desired ROI per unit and selling and administrative expenses per unit by the manufacturing cost per unit. 4. The target selling price is computed as: Manufacturing cost per unit + (Markup percentage X Manufacturing cost per unit). Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-15

16 5. Most companies that use cost-plus pricing use either absorption cost or full cost as the basis because: a. Absorption-cost information is most readily provided by a company s cost accounting system. b. Basing the cost-plus formula on only variable costs could encourage managers to set too low a price to boost sales. c. Absorption-cost or full-cost pricing provides the most defensible base for justifying prices to managers, customers, and government. *J. Variable-Cost Pricing. 1. Variable-cost pricing uses all of the variable costs, including selling and administrative costs, as the cost base and provides for fixed costs and target ROI through the markup. 2. Variable-cost pricing is more useful for making short-run decisions because it considers variable cost and fixed cost behavior patterns separately. 3. Variable-cost pricing involves the following steps: a. Compute the unit variable cost. b. Compute the markup percentage. c. Set the target selling price. 4. The markup percentage is computed by dividing the sum of the desired ROI per unit and fixed costs per unit by the variable cost per unit. 5. The target selling price is computed as: Variable cost per unit + (Markup percentage X Variable cost per unit). 6. The specific reasons for using variable-cost pricing are: Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-16

17 a. It is more consistent with cost-volume-profit analysis used to measure the profit implications of changes in price and volume. b. This approach provides the type of data managers need for pricing special orders. c. It avoids arbitrary allocation of common fixed costs to individual product lines. *K. Transfers Between Divisions in Different Countries. 1. An increasing number of transfers are between divisions that are located in different countries. Differences in tax rates across countries can complicate the determination of the appropriate transfer price. 2. Companies must pay income tax in the country where they generate the income. Many companies prefer to report more income in countries with low tax rates in order to maximize income, and minimize income tax. 3. Companies maximize income by adjusting the transfer prices they use on internal transfers between divisions located in different countries. They allocate more contribution margin to the division in the low-tax-rate country while they allocate less to the division in the high-tax-rate country. 4. Adjusting the transfer prices to maximize income can result in inappropriate purchasing decisions and unfair evaluations. In addition, a company must consider whether it is legal and ethical to use a lower transfer price when the market price is clearly higher. 20 MINUTE QUIZ Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-17

18 Circle the correct answer. True/False 1. Once a company has determined the target price, it can determine its target cost by setting a desired profit. True False 2. In a competitive, common-product environment the company must set a target selling price using cost-plus pricing. True False 3. Under cost-plus pricing, the markup percentage is computed by dividing desired ROI per unit by variable cost per unit. True False 4. The labor charge includes the direct labor cost of employees, selling, administrative, and similar overhead costs; and an allowance for a desired profit per hour. True False 5. The charges for any particular job are the sum of the labor charge, the materials charge, and the material loading charge. True False 6. An appropriate transfer price should assist the company in making proper purchasing decisions. True False 7. An advantage of the cost-based transfer price approach is that it can increase a division manager s control over the division s performance. True False 8. The market-based transfer price approach provides a fairer allocation of the company s contribution margin to each division than the cost-based approach. True False 9. In order to maximize income, and minimize income tax, companies can adjust the transfer prices they use on transfers between divisions located in different countries. True False *10. Absorption cost pricing is more consistent with cost-volume-profit analysis used to measure the profit implications of changes in price and volume. True False Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-18

19 Multiple Choice 1. The target cost of a product a. includes product costs but not period costs. b. is determined before the target price is established. c. is the difference between the target price and the desired profit. d. is determined by the target audience. 2. In the cost-plus pricing approach, the markup percentage is computed by dividing the a. desired ROI/unit by variable cost/unit. b. desired ROI/unit by total unit cost. c. total unit cost by desired ROI/unit. d. selling price/unit by desired ROI/unit. 3. All of the following are steps in the time-and-material pricing approach except calculating the a. labor charge. b. material loading charge. c. manufacturing overhead charge. d. charges for a particular job. 4. The total contribution margin to a company in the market-based transfer price approach is a. greater than in the cost-based approach. b. less than in the cost-based approach. c. the same as in the cost-based approach. d. either greater than or less than in the cost-based approach. *5. Absorption-cost pricing a. includes all variable costs in the cost base. b. excludes fixed manufacturing overhead from the cost base. c. provides the data needed for pricing special orders. d. uses a markup percentage that covers the desired ROI and the selling and administrative expenses. Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-19

20 ANSWERS TO QUIZ True/False 1. True 6. True 2. False 7. False 3. False 8. True 4. True 9. True 5. True *10. False Multiple Choice 1. c. 2. b. 3. c. 4. c. *5. d. Copyright 2015 John Wiley & Sons, Inc. Weygandt, Managerial Accounting, 7/e, Instructor s Manual (For Instructor Use Only) 8-20