MANAGEMENT CONTROL SYSTEMS, TRANSFER PRICING, AND MULTINATIONAL CONSIDERATIONS
1.Describe a management control system and its three key properties
2.Describe the benefits and costs of decentralization
3.Explain transfer prices and four criteria used to evaluate them
4.Calculate transfer prices using three different methods
5.Illustrate how market-based transfer prices promote goal congruence in perfectly competitive markets
6.Avoid making suboptimal decisions when transfer prices are based on full cost plus a markup
7.Understand the range over which two divisions negotiate the transfer price when there is unused capacity
8.Construct a general guideline for determining a minimum transfer price
9.Incorporate income tax considerations in multinational transfer pricing
Chapter 22 examines management control systems of organizations with emphasis on the role of a subsystem, that of the accounting information system. In Chapter 6 the concept of management control systems was introduced through the budgeting process. The three key properties of a management control system are described in this chapter but studied in three different chapters: (1) alignment with strategy—Chapter 13, (2) fitness with organizational structure—Chapter 22, and (3) performance of managers and employees—Chapter 23.
The goal of a management control system is improving the collective decisions within an organization in an economically feasible manner. Throughout the text the importance of providing relevant and reliable information to decision makers via the accounting information system has been emphasized. Again that purpose is illustrated using transfer pricing in a decentralized organization as a way that accountants provide information to improve managers’ decisions.
This chapter progresses from a notation of a key property of the management control system—“designed to fit the company’s structure and the decision-making responsibility of individual managers”—to a closer look at organizational structure—centralized or decentralized—to a detailed study of the role of transfer prices for a decentralized organization. Included are multinational aspects and the impact of governmental levies, especially income taxes.
I.Management control systems
A.Overview of management control systems
1.Characteristics of an effective system
a.Achieves its stated goal of guiding and improving decisions for benefit of company
b.Is cost effective
c.Performs as designed
d.Influences behavior of people who use it
2.Role accounting information plays in system
B.Specifics of management control systems
Learning Objective 1:
Describe a management control system and its three key properties
1.Management control system: means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization and to guide the behavior of its managers and employees
i.Both financial data and nonfinancial data
ii.From within the company and outside the company
iii.Different kinds of information needed for different tasks
b.Report: some companies use single report of balanced scorecard [Chapter 13]
c.Behavior of managers and employees
i.Formal management control system
•Includes explicit rules, procedures, performance measures, and incentive plans
•Consists of several systems, including management accounting system and human resource system
ii.Informal management control system
•Includes shared values, loyalties, and mutual commitments among members of organization
•Includes company culture and unwritten norms about acceptable behavior
2.Key properties for evaluating an effective management control system
a.Closely aligned to an organization’s strategies and goals
Controls for Differentiated Strategies
FINA ELWASISTE 0910534030
M. ALVICKY SATYWARDANA 1210534006
MUHAMMAD IRVAN ADHA 1210534022
Controls for Differentiated Strategies
Focus of chapter is Contingency Theory: A specific structure and process for an organization depends upon various external and internal factors.
Research studies have identified important factors that influence controlsystem design:
Logic for linking controls to strategy depends on:
Different organizations operate in different strategic contexts.
Different strategies require different:
Key success factors
Controlsystems are measurement systems that influence people being measured
The design of the controlsystem should be monitored for behavior induced by system is consistent with corporate strategy.
Implications for Organization Structure
Corporate strategy is a continuum line from a single industry strategy to an unrelated diversification strategy on the other pole.
Various corporate strategies imply different organization structures and different...
...if the actual purchase AM division is less than the amount approved by the AM division when the budget is approved by the annual earnings of the factory upper management. There are three things to be thinking of upper management, namely: There is always strife on the transfer price of the parts were sold by product division to the AM division, Management feels that the product divisions often treated AM division as a consumer which is not free, and Upper level management felt the excess inventory throughout the year in each division. Analysis and Discussion The three things that concern the company's senior management Abrams are: The first problem is the transferpricing dispute between the three product divisions with AM divisions, especially on parts that are sold exclusively to the AM division. This is one of the weaknesses in the regulation of the business unit as a profit center. Disputes will increase because of the debate over the appropriate transfer price. Although sometimes these disputes can be resolved by the vice president of finance, this can affect the performance and efficiency of the company. Moreover, internal sales has its share of 20% of total sales of $ 100 million from $ 500 million and future sales AM division is also targeted at 50% of total sales. Those products are also sold to OEM that transfer price is the...
...(2008) in their study “A review of inventory management research in major logistics journals: Themes and future directions", discussed that logistics researchers have focused considerable attention on integrating traditional logistics decisions, such as transportation and warehousing, with inventory management decisions, using traditional inventory control models. Logistics researchers have more recently focused on examining inventory management through collaborative models.
C. Clifford Defee, Brent Williams, Wesley S. Randall, Rodney Thomas, (2010) in their research paper "An inventory of theory in logistics and SCM research", analysed the theoretical categories and presented to explain the type and frequency of theory usage. They concluded that over 180 specific theories were found within the sampled articles. Theories grouped under the competitive and microeconomics categories made up over 40 per cent of the theoretical incidences. This does not imply all articles utilize theory. The research found that theory was explicitly used in approximately 53 per cent of the sampled articles.
Vikram Tiwari, Srinagesh Gavirneni, (2007) in their article“ASP, The Art and Science of Practice: Recoupling Inventory Control Research and Practice: Guidelines for Achieving Synergy” focused on the widening...
22-1 A managementcontrolsystem 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 thesystem is to improve the collective decisions within an organization.
22-2 To be effective, managementcontrolsystems 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.
22-3 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).
22-4 The chapter cites five benefits of decentralization:
1. Creates greater responsiveness to local needs
2. Leads to gains from faster decision making
3. Increases motivation of subunit managers
4. Aids management development and learning
...Chap 1 : MANAGEMENT AND CONTROL 1) Causes of Management -Lack of Direction -Motivational Problems -Personal Limitation 2) Avoidance -Activity elimination : Eliminate what is not working properly -Automation -Centralization -Risk Sharing Chapter 2 SECTION II 3) Result Control : Preventive type Control Helps Mgr to address strategy, org, employees are performing - Steps : 1. Define Performance dimension 2. Measure Performance 3. Setting Target 4. Provide Reward Requirement for Effective Result control : - Knowledge of desired result : Org should know what result are desired - Ability to influence desired result : Employee have influence on result (Controllable) -Ability to measure Controllable result effectively : Org can measure result effectively (Measurable) Result measure should be : Precise, Objective, Timely, Understandable
Chapter 3 4) Action Control : To ensure employees act in org’s best interest a. Form of Action control - Behavioral constraints – Negative Form (You can’t do this You can’t do that) - Pre action Review – Scrutiny(详查정밀조사) of action plan (What will they do?) - Action Accountability – (의무義務) Hold employees for action required (You should do this and that) Requires : Define actions acceptable or unacceptable Communicate definitions to employees Observe what happens (reaction) Reward or Punish - Redundancy (과잉過剩) : Set more Human...
LEARNING OBJECTIVES :
After studying this chapter students will understand.
* Purpose of transferpricing
* Responsibility of a division as responsibility centre
* Conflicts between the divisions
* Setting of transfer price where the profit of the organisation can be higher.
The whole organisation can be divided into a number of divisions, the performance of each division can be measured in terms of both the income earned and the costs which are incurred. In profit centred divisional approach the manager of each division is responsible for cost, income and profit of his division. Further he is given freedom to make all decisions affecting his division. In such a decentralised organisation there may be transfer of goods from one division to another division. The price charged for transfer of goods of one division to another division is the cost to receiving division and income of supplying division. It means that the transfer price fix will affect the profitability of both divisions.
7.1.2. Definition : Transfer price can be defined as the price charged for products exchanged in internal transactions between sellers (or transferors) and buyers (or transferees) who belong to the same organisation usually a decentralised organisation.
7.2 Objectives of Transfer...
...report is based on discussion of adopting transferpricing regime in Bangladesh and needed initiatives for it. In this regard it is necessary first to develop clear perception about the concepts related with the issue. Keeping in view this need this section consists of review of the literature that is focused on how to adopt transferpricing regime in Bangladesh, what initiatives to follow to adopting transferpricing regime. The section further unfolds the impacts of transferpricing regime in Bangladesh and then discusses the trends and current scenario transferpricing regime in Bangladesh so that with the help of the review of related research works, a picture can be portrayed.
In today’s globalised world, transferpricing is assuming growing importance both from the perspective of tax agencies which are interested to combat the abusive use of it, and of many of the multinational corporations (MNCs) with cross‐border operations and transactions for which this is becoming a common practice. MNCs are increasingly operating in regions with differentiated taxation systems and diverse regulatory situations. Global trade and trade mispricing are two closely bonded issues; growing volume of global trade has been creating increasing opportunities for trade mispricing. Indeed, the...
Control w it h
A transfer price is useless
unless unit managers feel
they are being treated fairly
while top management
Robert G. Eccles
It seems straightforward on the face of it:
when a unit in a company sells a product
to another unit, it ought to charge a fair
price. That price may be based on what it
cost to make the product, or on the market
price of the product, or on some combination of these two. But as most managers
involved in setting the transfer price know,
it is hard to define a price that both buyer
and seller see as fair.
After studying numbers of companies and
their transferpricing policies, the author of
this article concluded that what makes a
transferpricing policy work is an effective
management process whereby top management monitors the interaction between
the units and alters the transferpricing
policy to reflect changes in strategy. This
holds true in vertically integrated companies where cooperation and mutuality
are emphasized as well as in diversified
companies, where each manager is out to
increase his or her ovm profits.
Mr. Ecclesis an assistant professor of hoth
business policy and organizational behavior at the Harvard Business School. This...