MANAGEMENT CONTROL SYSTEMS, TRANSFER PRICING,
AND MULTINATIONAL CONSIDERATIONS
A management control system is a means of gathering and using information to aid and coordinate the planning and control decisions throughout the organization and to guide the behavior of its managers and employees. The goal of the system is to improve the collective decisions within an organization.
To be effective, management control systems should be (a) closely aligned to an organization's strategies and goals, (b) designed to fit the organization's structure and the decision-making responsibility of individual managers, and (c) able to motivate managers and employees to put in effort to attain selected goals desired by top management.
Motivation combines goal congruence and effort. Motivation is the desire to attain a selected goal specified by top management (the goal-congruence aspect) combined with the resulting pursuit of that goal (the effort aspect).
The chapter cites five benefits of decentralization:
Creates greater responsiveness to local needs
Leads to gains from faster decision making
Increases motivation of subunit managers
Aids management development and learning
Sharpens the focus of subunit managers
The chapter cites four costs of decentralization:
Leads to suboptimal decision making
Results in duplication of activities
Focuses managers’ attention on the subunit rather than the company as a whole 4.
Increases costs of gathering information
No. Organizations typically compare the benefits and costs of decentralization on a function-by-function basis. For example, companies with highly decentralized operating divisions frequently have centralized income tax strategies.
No. A transfer price is the price one subunit of an organization charges for a product or service supplied to another subunit of the same organization. The two segments can be cost centers, profit centers, or investment centers. For example, the allocation of service department costs to production departments that are set up as either cost centers or investment centers is an example of transfer pricing.
The three general methods for determining transfer prices are: 1.
Market-based transfer prices
Cost-based transfer prices
Negotiated transfer prices
Transfer prices should have the following properties. They should 1.
promote goal congruence,
be useful for evaluating subunit performance,
motivate management effort, and
4. preserve a high level of subunit autonomy in decision making.
9. No, the chapter illustration demonstrates how division operating incomes differ dramatically under the variable costs, full costs, and market price methods.
10. Transferring products or services at market prices generally leads to optimal decisions when (a) the market for the intermediate product market is perfectly competitive, (b) interdependencies of subunits are minimal, and (c) there are no additional costs or benefits to the company as a whole from buying or selling in the external market instead of transacting internally.
One potential limitation of full-cost-based transfer prices is that they can lead to suboptimal decisions for the company as a whole. An example of a conflict between divisional action and overall company profitability resulting from an inappropriate transfer-pricing policy is buying products or services outside the company when it is beneficial to overall company profitability to source them internally. This situation often arises where full-cost-based transfer prices are used. This situation can make the fixed costs of the supplying division appear to be variable costs of the purchasing division. Another limitation is that the supplying division may not have sufficient incentives to control costs if the full-cost-based transfer price uses actual costs rather than standard costs.
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