Management Control Systems And Transfer Pricing Flashcards
Management control systems
Gather information for making planning and control decisions.
Guide the behaviour of managers and employees.
Gathers and reports information at various levels.
Total organisation level
Customer/market level
Individual-facility level
Individual-activity level
A management control system collects:
Financial data: e.g net profit, material costs and storage costs.
Non-financial data: e.g response times, absenteeism rates and accidents
Management control systems refer to both formal and informal control systems.
Formal management control systems include:
Management accounting system
Human resource system.
Informal management control systems include:
Shares values among members of the organisation
Organisational culture
Unwritten norms about acceptable behaviour for managers and employees
Motivation - Evaluating management control systems
Is the desire to attain a selected goal, combined with the resulting drive or pursuit towards that goal
Goal congruence- Evaluating management control systems
Exists when individuals and groups work towards achieving the organisation’s goals
Effort - Evaluating management control systems
Defined as exertion towards a goal
Management control systems motivate managers and employees to
Exert effort towards attaining organisation goals through a variety of rewards tides to the achievement of those goals both monetary and non-monetary
Organisation structure: centralisation.
Total centralisation means maximum constraints and minimum freedom for managers at the lowest levels of an organisation to make decisions
Decentralisation - organisation structure
Total decentralisation means minimum constraints and maximum freedom for managers at the lowest levels of an organisation to make decisions.
- Creates greater responsiveness to local needs
- Leads to gains from quicker decision making
- Increase motivation of subunit managers
- Aids management development and learning
- Sharpens the focus of subunit managers
However decentralisation also:
Leads to suboptimal decision making (incongruent or dysfunctional decision making due to loss of control)
Focuses managers attention on the subunit rather than the organisation as a whole
Increases costs of gathering information
Results in duplication of activities
Comparison
In order to choose an appropriate organisation structure, top managers must compare the benefits and costs of decentralisation, often on a function by function basis
Decentralisation in multinational companies
Often it becomes decentralised because centralised control of geographically dispersed subunits can be physically and practically impossible.
Enables country managers to make decisions that exploit their knowledge of local business and political conditions.
Often they rotate managers between foreign locations and corporate headquarters.
Job rotation combined with decentralisation helps develop managers abilities to operate in the global environment.
However, there is a relative lack of control.
Cost centre - responsibility
The manger is accountable for costs only
Revenue centre - responsibility
Manager is accountable for revenues only.
Profit centre - responsibility
Manager is accountable for revenues and costs
Investment centre - responsibility
Manager is accountable for investments, revenues and costs
Responsibility centres
Each unit can be found in either centralised or decentralised organisations.
Profit centres can be coupled with a highly centralised organisation and cost centres can be coupled with a highly decentralised organisation.
Transfer pricing
TP = the price one subunit charges for a product or service supplied to another subunit of the same organisation.
The transfer price creates revenues for the selling subunit and purchase costs for the buying subunit, affecting each sub unit’s operating profit.
Intermediate products
Are the products transferred between subunits of an organisation.
Can either be processed further by the receiving subunit or be resold to an external customer.
Three methods of transfer pricing
1) market based transfer price
2) cost based transfer price
3) negotiated transfer price
Different transfer pricing methods produce different operating profits for individual subunits.
The chosen transfer-pricing method should ideally lead each subunit manger to make optimal decisions for the organisation as a whole.
Negotiated transfer pricing
May eliminate the potential for friction between managers.
Arise from the outcome of a bargaining process between selling and buying divisions.
