Transcript No Slide Title

Chapter 23
Management Control Systems,
Transfer Pricing, and
Multinational Considerations
Copyright © 2003 Pearson Education Canada Inc.
Slide 23-223
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
Copyright © 2003 Pearson Education Canada Inc.
Pages 845 - 846
Slide 23-224
Decentralization
• Decentralization is the freedom of managers at lower
levels of the organization to make decisions
Benefits of Decentralization
1. Creates greater responsiveness to local needs
2. Leads to quicker decision-making
3. Increases motivation
4. Aids management development and learning
5. Sharpens the focus of managers
Costs of Decentralization
1. Leads to sub-optimal decision-making
2. Results in duplication of activities
3. Decreases loyalty toward the total organization
4. Increases costs of gathering information
Copyright © 2003 Pearson Education Canada Inc.
Pages 846 - 848
Slide 23-225
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
Copyright © 2003 Pearson Education Canada Inc.
Page 849
Slide 23-226
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
Copyright © 2003 Pearson Education Canada Inc.
Pages 849 - 851
Slide 23-227
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
Copyright © 2003 Pearson Education Canada Inc.
Pages 854 - 859
Slide 23-228
General Guideline for Transfer Pricing
Minimum
Transfer =
Price
Additional incremental
or outlay costs per unit
incurred up to the point
of transfer
Opportunity costs
per unit to the
+
supplying division
• 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
Copyright © 2003 Pearson Education Canada Inc.
Market Price
Maximum
Transfer
Price
Range
Minimum
Variable Cost
Pages 859 - 860
Slide 23-229
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
Copyright © 2003 Pearson Education Canada Inc.
Pages 860 - 862
Slide 23-230
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
Copyright © 2003 Pearson Education Canada Inc.
Page 861
Slide 23-231