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Chapter 22final
 
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    Chapter 22final Chapter 22final Presentation Transcript

    • Management-Control Systems, Transfer Pricing, and Multinational Considerations © 2009 Pearson Prentice Hall. All rights reserved.
    • Management Control Systems
      • Management Control Systems are a 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 other employees
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Management Control Systems
      • Many management control systems contain some or all of the balanced scorecard perspectives:
        • Financial
        • Customer
        • Internal Business Process
        • Learning and Growth
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Management Control Systems
      • Consist of Formal and Informal control systems:
        • Formal systems include explicit rules, procedures, performance measures, and incentive plans that guide the behavior of its managers and other employees
        • Informal systems include shared values, loyalties, and mutual commitments among members of the company, corporate culture, and unwritten norms about acceptable behavior
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Evaluating Management Control Systems
      • To be effective, management control systems should be closely aligned to the firm’s strategies and goals
      • Systems should be designed to fit the company’s structure and decision-making responsibility of individual managers
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Evaluating Management Control Systems
      • Effective management control systems should also motivate managers and their employees
      • Motivation is the desire to attain a selected goal (goal-congruence) combined with the resulting pursuit of that goal (effort)
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Two Aspects of Motivation
      • Goal Congruence exists when individuals and groups work toward achieving the organization’s goals – managers working in their own best interest take actions that align with the overall goals of top management
      • Effort is exertions toward reaching a goal, including both physical and mental actions
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Organization Structure and Decentralization
      • Decentralization is the freedom for managers at lower levels of the organization to make decisions
      • Autonomy is the degree of freedom to make decisions. The greater the freedom, the greater the autonomy
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Decentralization vs. Centralization
      • Total decentralization means minimum constraints and maximum freedom for managers at the lowest levels of an organization to make decisions
      • Total centralization means maximum constraints and minimum freedom for managers at the lowest levels of an organization to make decisions
      • Companies structures generally fall somewhere in between these two extremes, as each has benefits and costs. Structure chosen cost vs. benefit analysis
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Benefits of Decentralization
      • Creates greater responsiveness to local needs
      • Leads to gains from faster decision making
      • Increases motivation of subunit managers
      • Assists management development and learning
      • Sharpens the focus of subunit managers
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Costs of Decentralization
      • Leads to Suboptimal Decision Making, which arises when a decision’s benefit to one subunit is more than offset by the costs or loss of benefits to the organization as a whole.
        • Also called Incongruent Decision Making or Dysfunctional Decision Making
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Costs of Decentralization
      • Focuses manger’s attention on the subunit rather than the company as a whole
      • Increases costs of gathering information
      • Results in duplication of activities
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Decentralization and Multinational Firms
      • Multinational firms – companies that operate in multiple countries – are often decentralized because centralized control of a company with subunits around the world is often physically and practically impossible
      • Decentralization enables managers in different countries to make decisions that exploit their knowledge of local business and political conditions and to deal with uncertainties in their individual environments
      • Biggest Drawback to International Decentralization: Loss or lack of control
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Choices About Responsibility Centers
      • Regardless of the degree of decentralization, management control systems uses one or a mix of the four types of responsibility centers:
        • Cost Center
        • Revenue Center
        • Profit Center
        • Investment Center
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Transfer Pricing
      • Transfer Price – the price one subunit (department or division) charges for a product or service supplied to another subunit of the same organization
      • Management control systems use transfer prices to coordinate the actions of subunits and to evaluate their performance
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Transfer Pricing
      • The transfer price creates revenues for the selling subunit and purchase costs for the buying subunit affecting each subunit’s operating income
      • Intermediate Product – the product or service transferred between subunits of an organization
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Three Transfer Pricing Methods
      • Market-based Transfer Prices
      • Cost-based Transfer Prices
      • Negotiated Transfer Prices
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Market-Based Transfer Prices
      • Top management chooses to use the price of similar product or service that is publicly available. Sources of prices include trade associations, competitors, etc.
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Market-Based Transfer Prices
      • Lead to optimal decision-making when three conditions are satisfied:
        • The market for the intermediate product is perfectly competitive
        • Interdependencies of subunits are minimal
        • 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
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Market-Based Transfer Prices
      • A perfectly competitive market exists when there is a homogeneous product with buying prices equal to selling prices and no individual buyer or seller can affect those prices by their own actions
      • Allows a firm to achieve goal congruence, motivating management effort, subunit performance evaluations, and subunit autonomy
      • Perhaps should not be used if the market is currently in a state of “distress pricing”
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Cost-Based Transfer Prices
      • Top management chooses a transfer price based on the costs of producing the intermediate product. Examples include:
        • Variable Production Costs
        • Variable and Fixed Production Costs
        • Full Costs (including life-cycle costs)
        • One of the above, plus some markup
      • Useful when market prices are unavailable, inappropriate, or too costly to obtain
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Cost-Based Transfer Pricing Alternatives
      • Prorating the difference between the maximum and minimum cost-based transfer prices
      • Dual-Pricing – using two separate transfer-pricing methods to price each transfer from one subunit to another. Example: selling division receives full cost pricing, and the buying division pays market pricing
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Negotiated Transfer Prices
      • Occasionally, subunits of a firm are free to negotiate the transfer price between themselves and then to decide whether to buy and sell internally or deal with external parties
      • May or may not bear any resemblance to cost or market data
      • Often used when market prices are volatile
      • Represent the outcome of a bargaining process between the selling and buying subunits
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Comparison of Transfer-Pricing Methods © 2009 Pearson Prentice Hall. All rights reserved.
    • Transfer Pricing Illustration © 2009 Pearson Prentice Hall. All rights reserved.
    • Transfer Pricing Illustration © 2009 Pearson Prentice Hall. All rights reserved.
    • Minimum Transfer Price
      • The minimum transfer price in many situations should be:
        • Incremental cost is the additional cost of producing and transferring the product or service
        • Opportunity cost is the maximum contribution margin forgone by the selling subunit if the product or service is transferred internally
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Multinational Transfer Pricing and Tax Considerations
      • Transfer prices often have tax implications
      • Tax factors include income taxes, payroll taxes, customs duties, tariffs, sales taxes, value-added taxes, environment-related taxes and other government levies
      © 2009 Pearson Prentice Hall. All rights reserved.
    • Multinational Transfer Pricing and Tax Considerations
      • Section 482 of the US Internal Revenue Code governs taxation of multinational transfer pricing
      • Section 482 requires that transfer prices between a company and its foreign division or subsidiary equal the price that would be charged by an unrelated third party in a comparable transaction
        • Transfer price could be market-based or “cost-plus” based
      © 2009 Pearson Prentice Hall. All rights reserved.
    • © 2009 Pearson Prentice Hall. All rights reserved.