Week 9.1 : Organisational control, responsibility accounting and transfer pricing

Question 1

What is organisational control?

Answer 1

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)

Question 2

What are the 3 Types of control?

Answer 2

1) Action/ Bureaucratic controls
2) Personnel and cultural controls
3) Results/ Output control

Question 3

What is action/ Bureaucratic controls (Explain the two types) ?

Answer 3

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

Question 4

What are the advantage of action/ bureaucratic control?

Answer 4

Most direct form of control- not much room for misinterpretation.

Question 5

What are the disadvantages of action/ bureaucratic control?

Answer 5

• Requires precise knowledge of desired action.
• Reduces enthusiasm and innovation

Question 6

What is personnel and cultural controls?

Answer 6

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.

Question 7

What is the advantage and disadvantage of personnel and cultural controls?

Answer 7

ADV: Commitment- can encourage employees to go above and beyond.

DIS: Informal- certain grey areas, not fully clear.

Question 8

what is the Results/ Output controls?

Answer 8

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.

Question 9

what are the advantages/ disadvantages of results/ output controls?

Answer 9

ADV:
- Relatively cheap
- Doesn’t require exact knowledge of desirable action.
- Can be empowering

DIS:
- Can lead to game-playing/ manipulation.

Question 10

What is the control mix?

Answer 10

When organisations use all 3 controls to different extents.

Question 11

What is divisionalisation?

Answer 11

When the organisation is split into different centres and they have a managers that are responsible for each.

Question 12

What is responsibility accounting ?

Answer 12

A system of accounting where specific individuals are made responsible for accounting in particular areas of cost control.

Question 13

What are the limitations/ problems of responsibility accounting?

Answer 13

1) Controllability
2) Transfer pricing

Question 14

What is controllability?

Answer 14

Factors beyond the control of managers can have significant implications on the performance of their units
E.g. recession, natural disaster

Question 15

What are the reasons for and against excluding effects of uncontrollable factors in performance measurement?

Answer 15

FOR:
- Fairer
- Better motivated

Against:
- Factors are not always completely beyond control
- May inspire flexibility and innovation

Question 16

What is transfer pricing?

Answer 16

the pricing of transactions within and between enterprises under common ownership or control.

Question 17

what are the characteristics of a good transfer pricing system?

Answer 17

• Should be perceived Fair
• Should provide the right incentives
• Should promote goal congruence

Question 18

What are the 4 main approaches to transfer pricing?

Answer 18

1) Cost-based transfer prices
2) Market-based transfer prices
3) Negotiated transfer prices
4) Dual transfer prices

Question 19

What are cost-based transfer prices?

Answer 19

Prices that are calculated by adding a percentage mark-up onto the unit cost of the product transferred.

Question 20

What are the advantages and disadvantages of cost-based transfer prices?

Answer 20

ADV: simple, easy to calculate
DIS: Doesn’t create goal congruence

Question 21

What is market-based transfer pricing?

Answer 21

use market prices as the basis for transfer pricing

Question 22

Whats the advantages and disadvantages of Market-based transfer?

Answer 22

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

Question 23

What are negotiated transfer prices?

Answer 23

negotiated between the managers of the selling and buying divisions

Question 24

what are the advantages and disadvantages of negotiated transfer prices?

Answer 24

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

Question 25

What is dual transfer prices?

Answer 25

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.

Question 26

How can transfer pricing be used for tax management?

Answer 26

shift costs to high tax countries and away from low tax countries
and transfer profits to a low tax country, to minimise tax liabilities.