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1、Financial Performance and Transfer Pricing,ACCT7320 Controllership December 1, 2010,Management Control Systems,A management control system - involves gathering and using information for planning and control decisions. A management control system guides the behavior of managers and employees Basis fo
2、r evaluation and reward Consistent with “agency theory”,2,Management Control Systems,A management control system collects: Financial data such as cost, revenue, and net income Usually an important factor! Nonfinancial data As seen on BSC,3,Four Types of Financial Responsibility Centers,Cost center m
3、anager accountable for costs only. Revenue center manager accountable for revenues only. Profit center manager accountable for revenues and costs. Investment center manager accountable for investments, revenues, and costs.,4,Evaluating Management Control Systems,Motivation desire to attain a selecte
4、d goal combined with the resulting drive or pursuit toward that goal. Goal congruence subordinates individual goals are consistent with top managements goals. Effort exertion toward a goal.,5,Organization Structure,Total decentralization means minimum constraints, maximum freedom for managers at the
5、 lowest levels to make decisions. Total centralization means maximum constraints, minimum freedom for managers at the lowest levels to make decisions.,6,Benefits of Decentralization,Creates greater responsiveness to local needs Leads to gains from quicker decision making Increases motivation of subu
6、nit managers Aids management development and learning Sharpens the focus of subunit managers,7,Recall the Costs of Decentralization,Leads to suboptimal decision making (incongruent or dysfunctional decision making due to loss of control) Focuses managers attention on the subunit rather than the orga
7、nization as a whole Increases costs of gathering information Results in duplication of activities,8,Decentralization in Multinational Companies,Multinational corporations are often decentralized centralized control of subunits in three or four different continents is hard Decentralization enables ma
8、nagers to apply their knowledge of local business and political conditions.,9,Decentralization in Multinational Companies,Often rotate managers between foreign locations and corporate headquarters. Job rotation with decentralization helps develop managers abilities to operate in the global environme
9、nt. A drawback to decentralizing multinational companies is the lack of control.,10,Transactions between Divisions,What happens when transactions occur between divisions (subunits)? Effects on individual divisional performance Effects on the overall organization The control design of the control sys
10、tem affects the outcome,11,Transfer Pricing,A transfer price is the price one subunit charges for a product/service supplied to another subunit of the same organization. Creates revenues for the selling subunit and purchase costs for the buying subunit, affecting each subunits operating income.,12,T
11、ransfer Pricing,What is the behavioral objective for transfer prices? Subunit managers need only consider how their actions will affect subunit performance without evaluating their impact on companywide performance. A well designed TP policy will lead to goal congruence,13,Major Decisions about TPs,
12、Two major decisions in transfer pricing policy: Sourcing - should segments be free to decide whether to sell/buy from other segments Pricing method- what transfer price should be set for any transfer Criteria for “good” policy? goal congruence managerial effort subunit autonomy where desired,14,Tran
13、sfer-Pricing Methods,Three general methods for transfer pricing: Market-based Price of a similar product/ service publicly listed Cost-based Some basis of “cost” (plus a margin?) Negotiated Whatever the subunit managers agree Also Dual Method: Revenue to seller, cost to buyer not equal,15,Effects on
14、 Income,Except for tax impacts, no impact on overall consolidated income Affects distribution of income among segments,16,The Importance of Transfer Pricing,Evaluation of a division for sale (What earnings are relevant?) Minority interest in a subsidiary (Is subsidiary being “plundered“?) Tax minimi
15、zation (Can shift income to some degree.) Governmental contracting (Endorses full-cost TPs.),17,What Can Happen Regarding Goal Congruity?,18,Setting Transfer Prices,Range of Acceptable Prices: Ceiling: The outside market price that buyer would pay Room to share benefit. Floor: The outlay costs of su
16、pplier + opportunity cost. If idle capacity, its just outlay cost If no idle capacity, then its sales price to current outside customer.,19,Comparison of Methods,Market Price: Yes, if markets competitive Cost-Based: Often, but not always Negotiated: Yes,Achievement of Goal Congruence,20,Comparison of Methods,Market Price: Yes, if markets competitive Cost-Based: Difficult, unless transfer price exceeds full cost Negotiated: Yes,Usefulness for Evaluating Subunit Perfo
