Week 9.1 : Organisational control, responsibility accounting and transfer pricing Flashcards
What is organisational control?
A process by which managers aim to motivate and encourage employees to act in desired way to meet the firms objectives.
(Increase overlap between organisation and employees goals)
What are the 3 Types of control?
1) Action/ Bureaucratic controls
2) Personnel and cultural controls
3) Results/ Output control
What is action/ Bureaucratic controls (Explain the two types) ?
It constrains the behaviour of employees.
Action accountability: Prescribe certain behaviours or paths of action E.g. Rules
Behavioural constraints: stop people from doing undesirable things. E.g. passwords, locks
What are the advantage of action/ bureaucratic control?
Most direct form of control- not much room for misinterpretation.
What are the disadvantages of action/ bureaucratic control?
- Requires precise knowledge of desired action.
- Reduces enthusiasm and innovation
What is personnel and cultural controls?
1) Personnel controls: Recruit people who share the same goals and values as the organisation.
2) Cultural control: Develop a culture of shared goals and values. Employees feel obliged to act in the same way.
What is the advantage and disadvantage of personnel and cultural controls?
ADV: Commitment- can encourage employees to go above and beyond.
DIS: Informal- certain grey areas, not fully clear.
what is the Results/ Output controls?
Focuses on the outcomes of workers.
Involves 3 main stages:
1) Setting performance targets
2) Measuring actual performance compared to targets.
3) Providing rewards or punishment.
what are the advantages/ disadvantages of results/ output controls?
ADV:
- Relatively cheap
- Doesn’t require exact knowledge of desirable action.
- Can be empowering
DIS:
- Can lead to game-playing/ manipulation.
What is the control mix?
When organisations use all 3 controls to different extents.
What is divisionalisation?
When the organisation is split into different centres and they have a managers that are responsible for each.
What is responsibility accounting ?
A system of accounting where specific individuals are made responsible for accounting in particular areas of cost control.
What are the limitations/ problems of responsibility accounting?
1) Controllability
2) Transfer pricing
What is controllability?
Factors beyond the control of managers can have significant implications on the performance of their units
E.g. recession, natural disaster
What are the reasons for and against excluding effects of uncontrollable factors in performance measurement?
FOR:
- Fairer
- Better motivated
Against:
- Factors are not always completely beyond control
- May inspire flexibility and innovation
What is transfer pricing?
the pricing of transactions within and between enterprises under common ownership or control.
what are the characteristics of a good transfer pricing system?
- Should be perceived Fair
- Should provide the right incentives
- Should promote goal congruence
What are the 4 main approaches to transfer pricing?
1) Cost-based transfer prices
2) Market-based transfer prices
3) Negotiated transfer prices
4) Dual transfer prices
What are cost-based transfer prices?
Prices that are calculated by adding a percentage mark-up onto the unit cost of the product transferred.
What are the advantages and disadvantages of cost-based transfer prices?
ADV: simple, easy to calculate
DIS: Doesn’t create goal congruence
What is market-based transfer pricing?
use market prices as the basis for transfer pricing
Whats the advantages and disadvantages of Market-based transfer?
ADV:
- Provides incentives to buying and selling departments to remain competitive.
- Reflects economics contribution.
DIS:
- Not always available (e.g. specialised products)
- market may be volatile
What are negotiated transfer prices?
negotiated between the managers of the selling and buying divisions
what are the advantages and disadvantages of negotiated transfer prices?
ADV:
- Doesn’t require a market
- More flexible and can take advantage of managers local knowledge.
Dis:
- More powerful managers may abuse bargaining power
- Can be time-consuming and costly to operate
What is dual transfer prices?
a system whereby the price paid by the buying department is not the same as the one received by the selling department.
Can be useful when discrepancies occur.
How can transfer pricing be used for tax management?
shift costs to high tax countries and away from low tax countries
and transfer profits to a low tax country, to minimise tax liabilities.
