Management-Control Systems, Transfer Pricing, and Multinational Considerationsl.ppt

Management-Control Systems,
Transfer Pricing,
and Multinational Considerations

1. Management-Control Systems,
Transfer Pricing,
and Multinational Considerations
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2. Management Control Systems
Management Control Systems are a means of
gathering and using information to aid and
coordinate the planning and control decisions
throughout an organization and to guide the
behavior of its managers and other employees
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3. Management Control Systems
Many management control systems contain
some or all of the balanced scorecard
perspectives:
1.Financial
2.Customer
3.Internal Business Process
4.Learning and Growth
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4. Management Control Systems
Consist of Formal and Informal control systems:
Formal systems include explicit rules, procedures,
performance measures, and incentive plans that
guide the behavior of its managers and other
employees
Informal systems include shared values, loyalties,
and mutual commitments among members of the
company, corporate culture, and unwritten norms
about acceptable behavior
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5. Evaluating
Management Control Systems
To be effective, management control systems
should be closely aligned to the firm’s strategies
and goals
Systems should be designed to fit the company’s
structure and decision-making responsibility of
individual managers
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6. Evaluating
Management Control Systems
Effective management control systems should
also motivate managers and their employees
Motivation is the desire to attain a selected goal
(goal-congruence) combined with the resulting
pursuit of that goal (effort)
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7. Two Aspects of Motivation
Goal Congruence exists when individuals and
groups work toward achieving the organization’s
goals – managers working in their own best
interest take actions that align with the overall
goals of top management
Effort is exertions toward reaching a goal,
including both physical and mental actions
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8. Organization Structure and Decentralization
Decentralization is the freedom for managers at
lower levels of the organization to make
decisions
Autonomy is the degree of freedom to make
decisions. The greater the freedom, the greater
the autonomy
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9. Decentralization vs. Centralization
Total decentralization means minimum
constraints and maximum freedom for managers
at the lowest levels of an organization to make
decisions
Total centralization means maximum constraints
and minimum freedom for managers at the
lowest levels of an organization to make decisions
Companies structures generally fall somewhere
in between these two extremes, as each has
benefits and costs. Structure chosen cost vs.
benefit analysis
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10. Benefits of Decentralization
Creates greater responsiveness to local needs
Leads to gains from faster decision making
Increases motivation of subunit managers
Assists management development and learning
Sharpens the focus of subunit managers
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11. Costs of Decentralization
Leads to Suboptimal Decision Making, which
arises when a decision’s benefit to one subunit is
more than offset by the costs or loss of benefits to
the organization as a whole.
Also called Incongruent Decision Making or
Dysfunctional Decision Making
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12. Costs of Decentralization
Focuses manger’s attention on the subunit rather
than the company as a whole
Increases costs of gathering information
Results in duplication of activities
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13. Decentralization and
Multinational Firms
Multinational firms – companies that operate in
multiple countries – are often decentralized
because centralized control of a company with
subunits around the world is often physically and
practically impossible
Decentralization enables managers in different
countries to make decisions that exploit their
knowledge of local business and political
conditions and to deal with uncertainties in their
individual environments
Biggest Drawback to International
Decentralization: Loss or lack of control
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14. Choices About
Responsibility Centers
Regardless of the degree of decentralization,
management control systems uses one or a mix
of the four types of responsibility centers:
Cost Center
Revenue Center
Profit Center
Investment Center
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15. Transfer Pricing
Transfer Price – the price one subunit
(department or division) charges for a product or
service supplied to another subunit of the same
organization
Management control systems use transfer prices
to coordinate the actions of subunits and to
evaluate their performance
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16. Transfer Pricing
The transfer price creates revenues for the
selling subunit and purchase costs for the buying
subunit affecting each subunit’s operating
income
Intermediate Product – the product or service
transferred between subunits of an organization
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17. Three Transfer Pricing Methods
1.Market-based Transfer Prices
2.Cost-based Transfer Prices
3.Negotiated Transfer Prices
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18. Market-Based Transfer Prices
Top management chooses to use the price of
similar product or service that is publicly
available. Sources of prices include trade
associations, competitors, etc.
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19. Market-Based Transfer Prices
Lead to optimal decision-making when three
conditions are satisfied:
1.The market for the intermediate product is
perfectly competitive
2.Interdependencies of subunits are minimal
3.There are no additional costs or benefits to the
company as a whole from buying or selling in
the external market instead of transacting
internally
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20. Market-Based Transfer Prices
A perfectly competitive market exists when there
is a homogeneous product with buying prices
equal to selling prices and no individual buyer or
seller can affect those prices by their own actions
Allows a firm to achieve goal congruence,
motivating management effort, subunit
performance evaluations, and subunit autonomy
Perhaps should not be used if the market is
currently in a state of “distress pricing”
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21. Cost-Based Transfer Prices
Top management chooses a transfer price
based on the costs of producing the
intermediate product. Examples include:
Variable Production Costs
Variable and Fixed Production Costs
Full Costs (including life-cycle costs)
One of the above, plus some markup
Useful when market prices are unavailable,
inappropriate, or too costly to obtain
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22. Cost-Based Transfer Pricing
Alternatives
Prorating the difference between the maximum
and minimum cost-based transfer prices
Dual-Pricing – using two separate transfer-
pricing methods to price each transfer from one
subunit to another. Example: selling division
receives full cost pricing, and the buying division
pays market pricing
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23. Negotiated Transfer Prices
Occasionally, subunits of a firm are free to
negotiate the transfer price between
themselves and then to decide whether to buy
and sell internally or deal with external parties
May or may not bear any resemblance to cost
or market data
Often used when market prices are volatile
Represent the outcome of a bargaining process
between the selling and buying subunits
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24. Comparison of Transfer-Pricing
Methods
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25. Transfer Pricing Illustration
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26. Transfer
Pricing
Illustration
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27. Minimum Transfer Price
The minimum transfer price in many situations
should be:
Incremental cost is the additional cost of
producing and transferring the product or service
Opportunity cost is the maximum contribution
margin forgone by the selling subunit if the
product or service is transferred internally
Minimum
Transfer Price=
Incremental cost per unit
incurred up to the point of
transfer +
Opportunity Cost per unit
to the selling subunit
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28. Multinational Transfer Pricing and Tax
Considerations
Transfer prices often have tax implications
Tax factors include income taxes, payroll taxes,
customs duties, tariffs, sales taxes, value-added
taxes, environment-related taxes and other
government levies
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29. Multinational Transfer Pricing and Tax
Considerations
Section 482 of the US Internal Revenue Code
governs taxation of multinational transfer
pricing
Section 482 requires that transfer prices between
a company and its foreign division or subsidiary
equal the price that would be charged by an
unrelated third party in a comparable
transaction
Transfer price could be market-based or “cost-plus”
based
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30. © 2009 Pearson Prentice Hall. All rights
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