Divisional performance and transfer pricing Flashcards
advantages of decentralisation
decsions can be made quickly
increased motivation of management
increased quality of decisions
better training for all levels of management
disadvantages of decentralisation
potential for decisions to be made that are not in the interests of the whole organisation
duplication amongst decisions is more expenses
senior management loss of control
what is the formula for ROI
divisional profit/ divisional investment x 100
or
divisional controllable PBIT / divisional net controllable assets x 100
how can a manager manipulate the ROI
increasing or decreasing payables and receivables by speeding up or delaying payments.
what is residual income
a measure of the centres profits after deducting a notional or imputed interest cost
formula for residual income
PBIT - imputed interest
how to calculate imputed interest
divisional investment X COST OF CAPITAL
what is a transfer price
a transfer price is the price at which goods or services are transferred from one department to another, or from one member of a group to another
what is an intermediate product
one used as a component in another product
what is the problem with transfer pricing at marginal costs
the supplying division does not cover its fixed costs
what is the optimum approach to setting transfer prices
opportunity cost based approach
