Financial Responsibility Centres - Chapter 7 Flashcards
What are the three core elements of financial results control systems?
- Financial responsibility centres - apportioning financial responsibility
- Planning and Budgeting systems - eg setting targets
- Incentive contracts - links between results and various rewards
What are profit centres?
Profit centres are responsibility centres whose managers are held accountable for some measure of profits, which is the difference between revenues generated and the costs of generating those revenues.
what are revenue centres?
Responsibility centres whose managers are held accountable for generating revenues, which is a financial measure of output.
What are cost centres?
Cost centres are responsibility centres whose managers are held accountable for some elements of cost. Costs are a financial measure of input to, or resources consumed by, the responsibility centre.
A TP system can be used for the following purposes: 4
(1) To provide information that motivates divisional managers to make good economic decisions. This will happen when the actions of divisional managers, taken to improve the profitability of their individual divisions, also improve the profit of the company as a whole.
(2) To provide information that is useful for evaluating the managerial and economic performance of the division.
(3) To intentionally move profits between divisions or locations.
(4) To ensure that divisional independence is not undermined
What are Market-based Transfer Prices
This is where intermediate products can be sold to an external market. TP should therefore be set at this price as it would otherwise be unfair to the department as it would lose out on profits if it were to sell at a reduced price to the internal market.
If spare capacity exists however, then it can transfer to the internal team at a lower price.
What is TP equal to marginal cost?
When there is no external market for the intermediate product, a transfer price equal to the marginal (i.e. variable) cost of the intermediate division allows the organization as a whole to maximize its profits. (This will be illustrated in a later example). However, it is likely to be demotivating for the manager of the transferring division, as the transferring division does not make any profits, or even any contribution towards its fixed costs.
What is TP equal to Full Cost?
Same as at marginal cost except also covers fixed costs of manufacturing.
What is TP equal to Cost plus a mark-up?
This allows the transferring division to make a contribution towards fixed costs (if variable cost is used as the cost base), or to make a profit (if full cost is used as the cost base). The problem with this transfer pricing system is that it can also lead to the organization as a whole making less than the maximum possible profits.
