Mgt. Control and Transfer Pricing Flashcards
What is a Management Control System (MCS)?
A system that integrates organizational processes to guide people toward achieving short-term objectives, long-term goals, and the company’s mission and vision.
What is the difference between centralization and decentralization?
Centralization: Decision-making authority resides at the highest levels of the firm.
Decentralization: Managers have independence to make decisions within their jurisdictions.
Define goal congruence.
Aligning decisions at all levels of the organization to ensure business units’ objectives support the company’s overall goals.
What are the four components of a Management Control System?
Budgeting
Responsibility Centers
Transfer Pricing
Performance Measurement
What is a responsibility center?
A business unit organized by its area of control, such as cost centers, revenue centers, profit centers, or investment centers.
How is ROI calculated?
ROI = (Return) / (Investment), representing the percentage of return per dollar invested.
What is residual income (RI)?
The excess of actual income over the required rate of return on investment.
What is Economic Value Added (EVA)?
A measure of investment performance that accounts for the excess return over the Weighted Average Cost of Capital (WACC) after taxes.
What is transfer pricing?
The internal transaction price at which two business units within the same company exchange goods or services.
Why can transfer pricing cause competition between managers?
The seller benefits from a higher transfer price (revenue), while the buyer prefers a lower transfer price (cost).
What are the three main methods for setting transfer prices?
Cost-Based Transfer Pricing
Market-Based Transfer Pricing
Negotiated Transfer Pricing
When is cost-based transfer pricing used?
It is based on manufacturing costs (variable or absorption cost) and may include a markup.
What is the advantage of market-based transfer pricing?
It uses an objective standard for pricing based on external market prices, facilitating performance evaluation.
What conditions must be met for negotiated transfer prices?
Seller has available capacity.
Buyer’s alternative market price exceeds the seller’s cost.
The outcome is subject to negotiation.
How should transfer prices be set if the seller has no idle capacity?
The minimum transfer price equals the market price, as the seller sacrifices external sales to supply internally.
