Management Control Systems And Transfer Pricing

Question 1

Management control systems

Answer 1

Gather information for making planning and control decisions.
Guide the behaviour of managers and employees.

Question 2

Gathers and reports information at various levels.

Answer 2

Total organisation level
Customer/market level
Individual-facility level
Individual-activity level

Question 3

A management control system collects:

Answer 3

Financial data: e.g net profit, material costs and storage costs.
Non-financial data: e.g response times, absenteeism rates and accidents

Question 4

Management control systems refer to both formal and informal control systems.

Answer 4

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

Question 5

Motivation - Evaluating management control systems

Answer 5

Is the desire to attain a selected goal, combined with the resulting drive or pursuit towards that goal

Question 6

Goal congruence- Evaluating management control systems

Answer 6

Exists when individuals and groups work towards achieving the organisation’s goals

Question 7

Effort - Evaluating management control systems

Answer 7

Defined as exertion towards a goal

Question 8

Management control systems motivate managers and employees to

Answer 8

Exert effort towards attaining organisation goals through a variety of rewards tides to the achievement of those goals both monetary and non-monetary

Question 9

Organisation structure: centralisation.

Answer 9

Total centralisation means maximum constraints and minimum freedom for managers at the lowest levels of an organisation to make decisions

Question 10

Decentralisation - organisation structure

Answer 10

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

Question 11

However decentralisation also:

Answer 11

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

Question 12

Comparison

Answer 12

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

Question 13

Decentralisation in multinational companies

Answer 13

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.

Question 14

Cost centre - responsibility

Answer 14

The manger is accountable for costs only

Question 15

Revenue centre - responsibility

Answer 15

Manager is accountable for revenues only.

Question 16

Profit centre - responsibility

Answer 16

Manager is accountable for revenues and costs

Question 17

Investment centre - responsibility

Answer 17

Manager is accountable for investments, revenues and costs

Question 18

Responsibility centres

Answer 18

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.

Question 19

Transfer pricing

Answer 19

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.

Question 20

Intermediate products

Answer 20

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.

Question 21

Three methods of transfer pricing

Answer 21

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.

Question 22

Negotiated transfer pricing

Answer 22

May eliminate the potential for friction between managers.

Arise from the outcome of a bargaining process between selling and buying divisions.