Chapter 22: Management-Control Systems, Transfer Pricing, and Multinational Considerations

Question 1

Opportunity cost

Answer 1

Maximum contribution margin forgone by the selling product or service internally.

Question 2

Management control system

Answer 2

The means of gathering and using info to aid and coordinate the planning and control decisions of and organization and to guide the behavior of its managers and other employees.

Question 3

Transfer pricing

Answer 3

The price one subunit of a company charges for the services it provides another subunit of the same company.

Question 4

Goal congruence

Answer 4

Managers working in their own best interest take actions that align with the overall goal.

Question 5

What are benefits of decentralization?

Answer 5

• Greater responsiveness
• Faster decision-making
• Increase motivation
• Assists development and learning

Question 6

What makes an effective management control system?

Answer 6

• Aligned with strategies and goals
• Fit structure (decentralized vs. centralized) and decision-making responsiblity of individual manager
• Motivate managers and employees

Question 7

Incremental cost

Answer 7

Additional cost of producing and transferring a product.

Question 8

Decentralization

Answer 8

Freedom for managers at lower levels of the organization to make decisions.

Question 9

What are the costs of decentralization?

Answer 9

• Incongruent decision-making
• Focuses attention on subunit rather than company as a whole
• Duplication of output and activities
• Increased cost of coordination and communication

Question 10

Motivation

Answer 10

Desire (goal congruence) to attain a goal combined with the pursuit of that goal (effort).

Question 11

Minimum transfer price

Answer 11

Incremental cost per unit incurred up to the point of transfer

+

Opportunity cost per unit to the selling unit

Question 12

What are the components of a management control system?

Answer 12

• Formal - explicit rules, procedures, performance measures, and incentives that guide behavior
• Informal - shared values, loyalties, and mutual commitments expressed in culture and norms

Question 13

What are the 3 transfer pricing methods?

Answer 13

1. Market-based - price is similar to publicly available product
2. Cost-based - price based on costs
3. Hybrid - price based on cost and market info