chapter 18

Question 1

management control system

Answer 1

a means of gathering and using information to aid and coordinate the process of making planning- and control decisions throughout the organisation and to guide employee behaviour. the goal is to improve the collective decisions within an organisation.

Question 2

management control system levels

Answer 2

1. total-organisation level (stock price, net income, etc.)
2. customer/market level (customer satisfaction, etc.)
3. individual-facility level (material costs, labour costs, etc.)
4. individual-activity level (time taken for receiving and storing goods, etc.)

Question 3

formal management control system

Answer 3

includes explicit rules, procedures, performance measures and incentive plans that guide the behaviour of its managers and employees. it consists of several systems.

Question 4

informal management control system

Answer 4

includes aspects such as shared values, loyalties, and mutual commitments among members of the organisation and the unwritten norms about acceptable behaviour for promotion that also influence employee behaviour.

Question 5

motivation

Answer 5

the desire to attain a selected goal (the goal-congruence aspect) combined with the resulting drive towards that goal (effort aspect).

Question 6

goal congruence

Answer 6

exists when individuals and groups work towards the organisational goals that top management desires. so, managers working in their best interests take actions that further the overall goals of top management.

Question 7

effort

Answer 7

the exertion towards a goal.

Question 8

decentralisation

Answer 8

the freedom for managers at lower levels of the organisation to make decisions. total decentralisation means minimum constraints and maximum freedom for managers at the lowest levels of an organisation to make decisions.

Question 9

total centralisation

Answer 9

means maximum constraints and minimum freedom for managers at the lowest levels.

Question 10

benefits of decentralisation

Answer 10

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

Question 11

costs of decentralisation

Answer 11

1. leads to suboptimal decision-making
2. results in duplication of activities
3. focuses managers’ attention on the subunit rather than the organisation as a whole
4. increase costs of gathering information

Question 12

suboptimal decision-making/incongruent decision-making

Answer 12

arises when a decision’s benefit to one subunit is more than offset by the costs or loss of benefits to the organisation as a whole. it may occur when (1) there’s a lack of harmony or congruence among the organisational goals, subunit goals, and the individual goals of decision-makers or (2) when no guidance is given to sub-unit managers concerning the effects of their decisions on other parts of the organisation. it is most likely to occur when sub-units are highly interdependent.

Question 13

intermediate product

Answer 13

a product transferred from one sub-unit to another sub-unit of the same organisation. this product may be further processed and sold to an external customer.

Question 14

transfer price

Answer 14

the price one sub-unit of an organisation charges for a product or service supplied to another sub-unit of the same organisation. it creates revenue for the selling sub-unit and a purchase cost for the buying sub-unit, affecting operating profit for both sub-units.

Question 15

market-based transfer prices

Answer 15

upper management may choose the price of a similar product or service publicly listed or the external price that a sub-unit charges to outside customers.

Question 16

cost-based transfer prices

Answer 16

upper management may choose a transfer price based on the costs of producing the product in question. the costs used can be actual costs or budgeted costs.

Question 17

negotiated transfer prices

Answer 17

the sub-units are free to negotiate the price between themselves and are then to decide whether to buy and sell internally or deal with outside parties. they are often employed when the market prices are volatile and change constantly.

Question 18

autonomy

Answer 18

the degree of freedom to make decisions.

Question 19

transfer prices criteria

Answer 19

1. promote goal congruence
2. induce managers to exert a high level of effort
3. help top managers evaluate the performance of individual sub-units
4. preserve autonomy of subunits if top managers favour a high degree of decentralisation

Question 20

criteria for optimal decisions in market-based transfer pricing

Answer 20

1. the intermediate market is perfectly competitive
2. interdependencies of sub-units is minimal
3. there are no additional costs or benefits to the corporation as a whole in using the market instead of transacting internally

Question 21

perfectly competitive market

Answer 21

exists when there is a homogenous product with equivalent buying and selling prices and no individual buyers or sellers can affect those prices by their own actions. this promotes goal congruence, management effort, and autonomy.

Question 22

‘distress prices’

Answer 22

when a market price temporarily drops well below its historical average.

Question 23

cost-based transfer prices

Answer 23

1. full-cost base
2. splitting the difference between the maximum transfer price one division is willing to pay and the minimum transfer price the other division wants on some equitable basis.

Question 24

dual pricing

Answer 24

using two separate transfer-pricing methods to price each interdivisional transaction. eg. when the selling division receives a full cost mark-up price and the buying division pays the market price. it reduces goal congruence problems.

Question 25

minimum transfer price

Answer 25

additional incremental/outlay costs per unit incurred up to the point of transfer + opportunity costs per unit to the supplying division.

Question 26

incremental/outlay costs

Answer 26

the additional costs that are directly associated with the production and transfer of the products or services.

Question 27

opportunity costs

Answer 27

the maximum contribution forgone by the supplying division if the products or services are transferred internally.

Question 28

transfer-pricing schedule

Answer 28

yields the transfer price for various quantities supplied and demanded depending on the incremental costs and opportunity costs of the units transferred when the market is not perfectly competitive.