Divisionalisation and Transfer Pricing Flashcards
What are the four advantages of Divisionalisation?
- More responsive to local conditions
- Motivation (make own decisions)
- Training for junior managers
- Better performance evaluations
What are the three disadvantages of Divisionalisation?
- Hard to achieve goal congruence
- Duplication of tasks
- Lack of expertise
What are three responsibility centres?
- Cost centre
- Profit centre
- Investment centre
What does a cost centre do?
Just incurs costs
What does a profit centre do?
Just incurs profits
What does an investment centre do?
Incurs costs, profits and Invests. (Controls capital)
What is the formula for ROI?
(Controllable profit) ÷ (Capital Employed)
What is the formula for RI?
Controllable profit - Notional Cost of Capital
What is controllable profit?
Profit after depreciation but before interest and tax.
How do you calculate capital employed?
Total assets - Current liabilities
What is ROI good for?
Internal and external comparisons
What is notional cost of capital?
Return required for lenders of equity
What is difficult to do with RI?
Comparisons
What does RI encourage?
Investment
What are the five goals of transfer pricing?
- Goal congruence
- Performance evaluation
- Divisional autonomy
- Maintain financial records
- Optimise tax liability
