chapter 22final
TRANSCRIPT
Management-Control Systems,Transfer Pricing,
and Multinational Considerations
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Management Control SystemsManagement 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
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Management Control Systems Many management control systems contain
some or all of the balanced scorecard perspectives:
1. Financial2. Customer3. Internal Business Process4. Learning and Growth
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Management Control SystemsConsist 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
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Evaluating Management Control SystemsTo 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
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Evaluating Management Control SystemsEffective management control systems should
also motivate managers and their employeesMotivation is the desire to attain a selected
goal (goal-congruence) combined with the resulting pursuit of that goal (effort)
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Two Aspects of MotivationGoal 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
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Organization Structure and DecentralizationDecentralization 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
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Decentralization vs. CentralizationTotal 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
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Benefits of DecentralizationCreates greater responsiveness to local
needsLeads to gains from faster decision makingIncreases motivation of subunit managersAssists management development and
learningSharpens the focus of subunit managers
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Costs of DecentralizationLeads 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
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Costs of DecentralizationFocuses manger’s attention on the subunit
rather than the company as a wholeIncreases costs of gathering informationResults in duplication of activities
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Decentralization and Multinational FirmsMultinational 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
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Choices About Responsibility CentersRegardless of the degree of decentralization,
management control systems uses one or a mix of the four types of responsibility centers:Cost CenterRevenue CenterProfit CenterInvestment Center
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Transfer PricingTransfer 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
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Transfer PricingThe 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
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Three Transfer Pricing Methods1. Market-based Transfer Prices2. Cost-based Transfer Prices3. Negotiated Transfer Prices
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Market-Based Transfer PricesTop management chooses to use the price of
similar product or service that is publicly available. Sources of prices include trade associations, competitors, etc.
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Market-Based Transfer Prices Lead to optimal decision-making when
three conditions are satisfied:1. The market for the intermediate product is
perfectly competitive2. Interdependencies of subunits are minimal3. 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
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Market-Based Transfer PricesA 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”
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Cost-Based Transfer PricesTop management chooses a transfer price
based on the costs of producing the intermediate product. Examples include:Variable Production CostsVariable and Fixed Production CostsFull Costs (including life-cycle costs)One of the above, plus some markup
Useful when market prices are unavailable, inappropriate, or too costly to obtain
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Cost-Based Transfer Pricing AlternativesProrating 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
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Negotiated Transfer PricesOccasionally, 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 volatileRepresent the outcome of a bargaining
process between the selling and buying subunits
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Comparison of Transfer-Pricing Methods
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Transfer Pricing Illustration
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Transfer Pricing Illustration
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Minimum Transfer PriceThe 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
Minimum Transfer Price =
Incremental cost per unit incurred up to the point of
transfer +Opportunity Cost per unit
to the selling subunit
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Multinational Transfer Pricing and Tax ConsiderationsTransfer prices often have tax implicationsTax factors include income taxes, payroll
taxes, customs duties, tariffs, sales taxes, value-added taxes, environment-related taxes and other government levies
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Multinational Transfer Pricing and Tax ConsiderationsSection 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 transactionTransfer price could be market-based or “cost-plus”
based
© 2009 Pearson Prentice Hall. All rights reserved.
© 2009 Pearson Prentice Hall. All rights reserved.