responsibility accounting & transfer pricing

1、Decentralization, Responsibility Centers, and Transfer Pricing,,,Centralization and Decentralization Spectrum,High degree of delegation of duties, power, and authority to lower levels of the organization,High degree of r

2、etention of duties, power, and authority by top management,Decentralized,Centralized,Neither centralization nor decentralization is necessarily a desirable organizational goal!,Decentralization in Organizations,Benefits

3、ofDecentralization,Top managementfreed to concentrateon strategy.,Lower-level managersgain experience indecision-making.,Decision-makingauthority leads tojob satisfaction.,Lower-level decisionoften based onbette

4、r information.,Improves ability toevaluate managers.,Decentralization in Organizations,Disadvantages ofDecentralization,Lower-level managersmay make decisionswithout seeing the“big picture.”,May be a lack ofcoordin

5、ation amongautonomousmanagers.,Lower-level manager’sobjectives may notbe those of theorganization.,May be difficult tospread innovative ideasin the organization.,Decentralization and Segments,A segment is any part

6、 or activity of an organization about which a manager seeks cost, revenue, or profit data. A segment can be . . .,Quick Mart,An Individual Store,A Sales Territory,A Service Center,Cost, Profit, and Investments Centers,C

7、ost Center A segment whose manager has control over costs, but not over revenues or investment funds.,Cost,Cost,Cost,Cost, Profit, and Investments Centers,Profit Center A segment whose manager has control over b

8、oth costs and revenues, but no control over investment funds.,Revenues,SalesInterestOther,Costs,Mfg. costsCommissionsSalariesOther,Cost, Profit, and Investments Centers,Investment Center A segment whose manage

9、r has control over costs, revenues, and investments in operating assets.,Corporate Headquarters,Cost, Profit, and Investments Centers,ResponsibilityCenter,CostCenter,ProfitCenter,InvestmentCenter,,,,Cost, profit,and

10、 investmentcenters are allknown asresponsibilitycenters.,Return on Investment (ROI) Formula,Cash, accounts receivable, inventory,plant and equipment, and otherproductive assets.,,,Income before interestand taxes (

11、EBIT),Return on Investment (ROI) Formula,Regal Company reports the following: Net operating income $ 30,000 Average operating assets $ 200,000 Sales $ 500,000,

12、Controlling the Rate of Return,Three ways to improve ROI . . .,IncreaseSales,ReduceExpenses,ReduceAssets,Controlling the Rate of Return,Regal’s manager was able to increase sales to $600,000 which increased net opera

13、ting income to $42,000.There was no change in the average operating assets of the segment.,Let’s calculate the new ROI.,Return on Investment (ROI) Formula,Net operating income Sales,Salesaaaaaaaaa Av

14、erage operating assets,×,ROI =,$42,000 $600,000,×,$600,000$200,000,21%,We can modify our original formula slightly:,ROI =,ROI =,We increased ROI from 15% to 21%,Margin,Turnover,×,,Criticisms of ROI,

15、In the absence of the balancedscorecard, management maynot know how to increase ROI.,Managers often inherit manycommitted costs over whichthey have no control.,Managers evaluated on ROImay reject profitableinvestme

16、nt opportunities.,The Balanced Scorecard,Management translates its strategy into performance measures that employees understand and accept.,Performancemeasures,Financial,Customers,Learningand growth,Internalbusinessp

17、rocesses,Criticisms of ROI,As division manager at Winston, Inc., your compensation package includes a salary plus bonus based on your division’s ROI -- the higher your ROI, the bigger your bonus.The company requires an

18、ROI of 15% on all new investments -- your division has been producing an ROI of 30%.You have an opportunity to invest in a new project that will produce an ROI of 25%.,As division manager would you invest in this proje

19、ct?,Criticisms of ROI,As division manager,I wouldn’t invest inthat project becauseit would lower my pay!,Criticisms of ROI,Gee . . .I thought we weresupposed to do what was best for the company!,Residual Income -

20、Another Measure of Performance,Net operating incomeabove some minimumreturn on operatingassets,Residual Income,A division of Zepher, Inc. has average operating assets of $100,000 and is required to earn a return of 20

21、% on these assets.In the current period the division earns $30,000.,Let’s calculate residual income.,Residual Income,Motivation and Residual Income,Residual income encourages managers to make profitable investments tha

22、t wouldbe rejected by managers using ROI.,Company A's return on investment (ROI) is: A)36%. B) 20%. C) 15%. D) 4%.,The following information is available on Company A:Sales$900,000Net operatin

23、g income 36,000Stockholders' equity 100,000Average operating assets 180,000Minimum required rate of return15%,,The following data are available for the South Division of Redride Products, Inc. an

24、d the single product it makes: Unit selling price$20Variable cost per unit$12Annual fixed costs$280,000Average operating assets$1,500,000  How many units must South sell each year to h

25、ave an ROI of 16%? A) 240,000. B) 1,300,000. C) 65,000. D) 52,000.,,All other things equal, a company's return on investment (ROI) would generally increase when: A) sales decrease. B) aver

26、age operating assets increase. C) operating expenses increase. D) operating expenses decrease.,,TRANSFER PRICING,A transfer price is the price charged when one segment (for example, a division) provides goods or se

27、rvices to another segment of the same company.,TRANSFER PRICING – Some Points,Transfer prices are necessary to calculate costs in a cost, profit, or investment center.The purchasing division will naturally want a low tr

28、ansfer price and selling division will want a high transfer price. From the standpoint of the firm as a whole, transfer prices involve “taking money out of one pocket and putting it into the other.”An optimal tran

29、sfer price is one that leads division managers to make decisions that are in the best interests of the firm as a whole.,Production capacity (number of batteries) 300,000Selling price per battery to outsiders $

30、 40Variable costs per battery $ 18Fixed costs per battery (based on capacity) $ 7 Barker Company has a Vehicle Division that could use this battery in its forklift trucks. The Vehicle Divis

31、ion would like to buy 50,000 batteries per year. It is presently buying these batteries from an outside supplier for $39 per battery.,EXAMPLE: The Battery Division of Barker Company makes a standard 12-volt battery.,From

32、 the standpoint of the entire company, no transfer should take place since the company gives up $40 in revenues, but saves only $39 in costs.,Suppose the Battery Division is operating at capacity.What is the lowest acce

33、ptable transfer price from the viewpoint of the selling division?,But, the purchasing division will not pay more than $39, the cost from buying the batteries from the outside. So the two managers will not be able to agre

34、e to a transfer price and no transfer will voluntarily take place.,Assume again that the Battery Division is operating at capacity, but suppose that the division can avoid $4 in variable costs, such as selling commission

35、s, on intracompany sales. What is the lowest acceptable transfer price from the viewpoint of the selling division?,Once again, the purchasing division will not pay more than $39, the cost from buying the batteries from

36、the outside.,In this case an agreement is possible. Any transfer price within the range $36 ? Transfer price ? $39,From the standpoint of the entire company, this transfer should take place since the cost of the transfe

37、r is $36 and the company saves $39, for a net gain of $3.,COST-BASED TRANSFER PRICES,Transfer prices based on cost are easily understood and convenient to use and do not require negotiation. Unfortunately, cost-based tr

38、ansfer prices have several disadvantages:Cost-based transfer prices can lead to bad decisions. (For example, they don’t include opportunity costs from lost sales.)The only division that will show any profit on the tran

39、saction is the one that makes the final sale to an outside party.Cost-based transfer prices provide no incentive for control of costs unless transfers are made at stan­dard cost.,MARKET-BASED TRANSFER PRICES,When t

40、here is an active market for the item being transferred, the market price may be a suitable transfer price. However, when there is idle capacity, the market price will overstate the real cost to the company of the trans