Chapter 22final

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Chapter 22final

  1. 1. Management-Control Systems, Transfer Pricing, and Multinational Considerations © 2009 Pearson Prentice Hall. All rights reserved.
  2. 2. Management Control Systems <ul><li>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 </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  3. 3. Management Control Systems <ul><li>Many management control systems contain some or all of the balanced scorecard perspectives: </li></ul><ul><ul><li>Financial </li></ul></ul><ul><ul><li>Customer </li></ul></ul><ul><ul><li>Internal Business Process </li></ul></ul><ul><ul><li>Learning and Growth </li></ul></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  4. 4. Management Control Systems <ul><li>Consist of Formal and Informal control systems: </li></ul><ul><ul><li>Formal systems include explicit rules, procedures, performance measures, and incentive plans that guide the behavior of its managers and other employees </li></ul></ul><ul><ul><li>Informal systems include shared values, loyalties, and mutual commitments among members of the company, corporate culture, and unwritten norms about acceptable behavior </li></ul></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  5. 5. Evaluating Management Control Systems <ul><li>To be effective, management control systems should be closely aligned to the firm’s strategies and goals </li></ul><ul><li>Systems should be designed to fit the company’s structure and decision-making responsibility of individual managers </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  6. 6. Evaluating Management Control Systems <ul><li>Effective management control systems should also motivate managers and their employees </li></ul><ul><li>Motivation is the desire to attain a selected goal (goal-congruence) combined with the resulting pursuit of that goal (effort) </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  7. 7. Two Aspects of Motivation <ul><li>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 </li></ul><ul><li>Effort is exertions toward reaching a goal, including both physical and mental actions </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  8. 8. Organization Structure and Decentralization <ul><li>Decentralization is the freedom for managers at lower levels of the organization to make decisions </li></ul><ul><li>Autonomy is the degree of freedom to make decisions. The greater the freedom, the greater the autonomy </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  9. 9. Decentralization vs. Centralization <ul><li>Total decentralization means minimum constraints and maximum freedom for managers at the lowest levels of an organization to make decisions </li></ul><ul><li>Total centralization means maximum constraints and minimum freedom for managers at the lowest levels of an organization to make decisions </li></ul><ul><li>Companies structures generally fall somewhere in between these two extremes, as each has benefits and costs. Structure chosen cost vs. benefit analysis </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  10. 10. Benefits of Decentralization <ul><li>Creates greater responsiveness to local needs </li></ul><ul><li>Leads to gains from faster decision making </li></ul><ul><li>Increases motivation of subunit managers </li></ul><ul><li>Assists management development and learning </li></ul><ul><li>Sharpens the focus of subunit managers </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  11. 11. Costs of Decentralization <ul><li>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. </li></ul><ul><ul><li>Also called Incongruent Decision Making or Dysfunctional Decision Making </li></ul></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  12. 12. Costs of Decentralization <ul><li>Focuses manger’s attention on the subunit rather than the company as a whole </li></ul><ul><li>Increases costs of gathering information </li></ul><ul><li>Results in duplication of activities </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  13. 13. Decentralization and Multinational Firms <ul><li>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 </li></ul><ul><li>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 </li></ul><ul><li>Biggest Drawback to International Decentralization: Loss or lack of control </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  14. 14. Choices About Responsibility Centers <ul><li>Regardless of the degree of decentralization, management control systems uses one or a mix of the four types of responsibility centers: </li></ul><ul><ul><li>Cost Center </li></ul></ul><ul><ul><li>Revenue Center </li></ul></ul><ul><ul><li>Profit Center </li></ul></ul><ul><ul><li>Investment Center </li></ul></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  15. 15. Transfer Pricing <ul><li>Transfer Price – the price one subunit (department or division) charges for a product or service supplied to another subunit of the same organization </li></ul><ul><li>Management control systems use transfer prices to coordinate the actions of subunits and to evaluate their performance </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  16. 16. Transfer Pricing <ul><li>The transfer price creates revenues for the selling subunit and purchase costs for the buying subunit affecting each subunit’s operating income </li></ul><ul><li>Intermediate Product – the product or service transferred between subunits of an organization </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  17. 17. Three Transfer Pricing Methods <ul><li>Market-based Transfer Prices </li></ul><ul><li>Cost-based Transfer Prices </li></ul><ul><li>Negotiated Transfer Prices </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  18. 18. Market-Based Transfer Prices <ul><li>Top management chooses to use the price of similar product or service that is publicly available. Sources of prices include trade associations, competitors, etc. </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  19. 19. Market-Based Transfer Prices <ul><li>Lead to optimal decision-making when three conditions are satisfied: </li></ul><ul><ul><li>The market for the intermediate product is perfectly competitive </li></ul></ul><ul><ul><li>Interdependencies of subunits are minimal </li></ul></ul><ul><ul><li>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 </li></ul></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  20. 20. Market-Based Transfer Prices <ul><li>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 </li></ul><ul><li>Allows a firm to achieve goal congruence, motivating management effort, subunit performance evaluations, and subunit autonomy </li></ul><ul><li>Perhaps should not be used if the market is currently in a state of “distress pricing” </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  21. 21. Cost-Based Transfer Prices <ul><li>Top management chooses a transfer price based on the costs of producing the intermediate product. Examples include: </li></ul><ul><ul><li>Variable Production Costs </li></ul></ul><ul><ul><li>Variable and Fixed Production Costs </li></ul></ul><ul><ul><li>Full Costs (including life-cycle costs) </li></ul></ul><ul><ul><li>One of the above, plus some markup </li></ul></ul><ul><li>Useful when market prices are unavailable, inappropriate, or too costly to obtain </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  22. 22. Cost-Based Transfer Pricing Alternatives <ul><li>Prorating the difference between the maximum and minimum cost-based transfer prices </li></ul><ul><li>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 </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  23. 23. Negotiated Transfer Prices <ul><li>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 </li></ul><ul><li>May or may not bear any resemblance to cost or market data </li></ul><ul><li>Often used when market prices are volatile </li></ul><ul><li>Represent the outcome of a bargaining process between the selling and buying subunits </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  24. 24. Comparison of Transfer-Pricing Methods © 2009 Pearson Prentice Hall. All rights reserved.
  25. 25. Transfer Pricing Illustration © 2009 Pearson Prentice Hall. All rights reserved.
  26. 26. Transfer Pricing Illustration © 2009 Pearson Prentice Hall. All rights reserved.
  27. 27. Minimum Transfer Price <ul><li>The minimum transfer price in many situations should be: </li></ul><ul><ul><li>Incremental cost is the additional cost of producing and transferring the product or service </li></ul></ul><ul><ul><li>Opportunity cost is the maximum contribution margin forgone by the selling subunit if the product or service is transferred internally </li></ul></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  28. 28. Multinational Transfer Pricing and Tax Considerations <ul><li>Transfer prices often have tax implications </li></ul><ul><li>Tax factors include income taxes, payroll taxes, customs duties, tariffs, sales taxes, value-added taxes, environment-related taxes and other government levies </li></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  29. 29. Multinational Transfer Pricing and Tax Considerations <ul><li>Section 482 of the US Internal Revenue Code governs taxation of multinational transfer pricing </li></ul><ul><li>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 </li></ul><ul><ul><li>Transfer price could be market-based or “cost-plus” based </li></ul></ul>© 2009 Pearson Prentice Hall. All rights reserved.
  30. 30. © 2009 Pearson Prentice Hall. All rights reserved.

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