copyright © 2003 pearson education canada inc. slide 23-223 chapter 23 management control systems,...

Copyright © 2003 Pearson Education Canada Inc. Slide 23-1

Chapter 23

Management Control Systems, Transfer Pricing, and Multinational Considerations


Management Control Systems

• Management control system (MCS) is a means of gathering and using information to aid and coordinate the process of making planning and control decisions throughout the organization and to guide behaviour

• Align the MCS with the organization’s strategies and goals

• MCS must be designed to fit the organization’s structure and the decision-making responsibility of individual managers

• MCS must motivate managers and employees to attain the selected goals of the organization

• Goal congruence occurs when individuals and groups work toward the goals that top management desires

Pages 845 - 846


Decentralization

• Decentralization is the freedom of managers at lower levels of the organization to make decisions

Benefits of Decentralization1. Creates greater responsiveness to local needs2. Leads to quicker decision-making3. Increases motivation4. Aids management development and learning5. Sharpens the focus of managers

Costs of Decentralization1. Leads to sub-optimal decision-making2. Results in duplication of activities3. Decreases loyalty toward the total organization 4. Increases costs of gathering information

Pages 846 - 848


Responsibility Centres

Cost centre• manager is accountable for costs only

Revenue centre• manager is accountable for revenues only

Profit centre• manager is accountable for revenues and costs

Investment centre• manager is accountable for investments, revenues

and costs

Page 849


Transfer Pricing

• A transfer price is the price one subunit (segment, department, division) of an organization charges for a product or service supplied to another subunit of the same organization

• Transfer price is revenue for the selling subunit and a cost for the buying subunit

• Transfer pricing can create problems if the managers of both units are motivated to maximize their operating incomes

• Methods of determining transfer prices:• Market-based transfer prices• Cost-based transfer prices• Negotiated transfer prices

Pages 849 - 851


Methods of Setting the Transfer Price

Market-Based Transfer Price• base the transfer price on the market price if the

market is perfectly competitive• may use “distress” prices or “long-run average”

market prices

Cost-Based Transfer Prices• useful when market prices are unavailable• based on full costs or some other variation of cost• some firms allow for prorating the difference

between the maximum and minimum transfer prices or the use of dual transfer prices

• Remember that all transfer prices are negotiated to some extent

Pages 854 - 859


General Guideline for Transfer Pricing

Additional incremental Opportunity costsor outlay costs per unit per unit to theincurred up to the point supplying division

of transfer

Pages 859 - 860

= +

• If supplying division has no idle capacity, this formula yields the market price

• If supplying division has enough excess capacity to fill the order, the formula yields a number equal to incremental (variable) costs

• Also consider the competitive nature of the market

Market PriceMaximum

MinimumVariable Cost

TransferPriceRange

MinimumTransfer

Price


Multinational Transfer Pricing

• Transfers between subunits of an organization in different countries must consider tax implications

• Tax factors include • income taxes• payroll taxes• customs duties• tariffs• sales and value-added taxes• environment-related taxes• other government levies

Pages 860 - 862


Multinational Transfer Pricing and Taxes

• Canada Customs and Revenue Agency (Revenue Canada) approach to tax issues concerning international transfer prices

• Expected to report taxable income on the basis of having charged a fair price for goods and services provided to non-resident affiliates and having paid no more than a fair price for goods and services received from non-resident affiliates

• Keeping two sets of books (one for management use and one for tax reporting) may be interpreted as a sign of manipulation of taxable income

• Many companies are seeking advance approval from CCRA for multinational transfer prices

Page 861

copyright © 2003 pearson education canada inc. slide 23-223 chapter 23 management control systems,...

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