Week 6 Transfer Pricing Flashcards
What is decentralisation?
restructuring of the organisation into units, such as divisions and departments, each with specific operations and decision-making responsibilities
what are the benefits of decentralisation? (x5)
- better local info about markets and operations
- managerial training for future higher-level managers
- greater motivation and job satisfaction
- corporate managers more time for strategic issues
- org quicker response to oppo and problems
what are the negatives of decentralisation? (x3)
- narrow focus on own unit rather than org overall goal
- duplication of tasks and services e.g. accting, HR< IT
- increase cost of gathering and processing info
what are responsibility centres?
unit of org where manager held accountable for unit’s activities and performance e.g. packaging dpt of food producing company
what are the 4 main responsibility centres?
investment
profit
cost
revenue
Responsibility centres: Cost? Example, financial responsibility and financial performance measures
manager responsible for costs only
- admin dept, production dept
- cost of running dpt or area
- cost variances and detail
Responsibility centres: revenue?
Example, financial responsibility and financial performance measures
manager only accountable for revenue
- sales dpt
- revenues of dpt
- revenues
Responsibility centres Profit?
Example, financial responsibility and financial performance measures
manager accountable for revenues and costs
- subsidiary companies; divisions production plants
- profit - all revenue and cost - of centre
- measure of profit
Responsibility centres Investment?
Example, financial responsibility and financial performance measures
manager accountable for revenues and costs, but also investment (or assets) under his control
- subsidiary companies; divisions
- above def used to generate profit
- return on investment
Transfer price - what is it?
internal selling price used when goods/services are transferred from one responsibility centre to another (Internal selling price)
Transfer price - results in preserve and encourage motivate encourage
- Result in unit profits that are a reliable and accurate
measure of unit performance - Preserve and encourage unit autonomy
- Motivate a high level of management effort
- Encourage goal-congruent behaviour
transfer price - who sets it?
managers of responsibility centre have autonomy in deciding whether:
- accept or reject orders
- source materials internally or externally
- set and accept transfer price
transfer price - who sets it? corporate management involvement?
- direct intervention by corporate managers to dictate transfer price may be inconsistent with philosophy of decentralisation
- corporate management may develop general policies for transfer pricing
what are the 3 transfer pricing method?
- Market-based prices
- Cost-plus prices
- Negotiated prices
Transfer Pricing Methods Market based prices set the price at… and need…
- Sets the price at which the product internally transferred could be sold to outside buyers
- Need competitive external markets for a product
Transfer Pricing Methods – Cost-plus prices
involves adding a markup to the cost of goods and services to arrive at a selling price
- standard VC + markup to show CM on transferred product
- standard absorption cost may lead to overpricing of products and dysfunctional decisions
- standard costs in favour of actual costs to prevent cost inefficiencies being passed onto buying unit
Transfer Pricing Methods
Negotiated prices?
Market price may form the starting point, and cost may be the lower boundary
Transfer pricing: the influence of taxation? gov involvement?
product/services transferred between segments located in diff locations with diff tax rates, attempt transfer price minimise total income tax liability
Government tax regulators try to reduce transfer pricing manipulation.
Transfer pricing: the influence of taxation Segment in higher tax country?
Reduce taxable income in that country by charging high prices on imports and low prices on exports.
Transfer pricing: the influence of taxation - Segment in lower tax country
Increase taxable income in that country by charging low prices on imports and high prices on exports
Transfer pricing and service level agreements are?
contract between two units/divisions which establishes the nature of the service that will be provided by one unit to the other
Transfer pricing and service level agreements outlines?
- outlines the responsibilities of each party
- outlines price, quality and timing of service delivery,
performance targets, problem-solving arrangements, ways in which the agreement can be changed or terminated
A financial performance report shows?
key financial results appropriate for the types of responsibility centre
Segmented profit statements may show?
profits for major responsibility centres and the entire organisation
