Week 6 Transfer Pricing

Question 1

What is decentralisation?

Answer 1

restructuring of the organisation into units, such as divisions and departments, each with specific operations and decision-making responsibilities

Question 2

what are the benefits of decentralisation? (x5)

Answer 2

• better local info about markets and operations
• managerial training for future higher-level managers
• greater motivation and job satisfaction
• corporate managers more time for strategic issues
• org quicker response to oppo and problems

Question 3

what are the negatives of decentralisation? (x3)

Answer 3

• narrow focus on own unit rather than org overall goal
• duplication of tasks and services e.g. accting, HR< IT
• increase cost of gathering and processing info

Question 4

what are responsibility centres?

Answer 4

unit of org where manager held accountable for unit’s activities and performance e.g. packaging dpt of food producing company

Question 5

what are the 4 main responsibility centres?

Answer 5

investment
profit
cost
revenue

Question 6

Responsibility centres: Cost? Example, financial responsibility and financial performance measures

Answer 6

manager responsible for costs only

• admin dept, production dept
• cost of running dpt or area
• cost variances and detail

Question 7

Responsibility centres: revenue?

Example, financial responsibility and financial performance measures

Answer 7

manager only accountable for revenue

• sales dpt
• revenues of dpt
• revenues

Question 8

Responsibility centres Profit?

Example, financial responsibility and financial performance measures

Answer 8

manager accountable for revenues and costs

• subsidiary companies; divisions production plants
• profit - all revenue and cost - of centre
• measure of profit

Question 9

Responsibility centres Investment?

Example, financial responsibility and financial performance measures

Answer 9

manager accountable for revenues and costs, but also investment (or assets) under his control

• subsidiary companies; divisions
• above def used to generate profit
• return on investment

Question 10

Transfer price - what is it?

Answer 10

internal selling price used when goods/services are transferred from one responsibility centre to another (Internal selling price)

Question 11

Transfer price - 
results in 
preserve and encourage 
motivate 
encourage

Answer 11

• Result in unit profits that are a reliable and accurate
  measure of unit performance
• Preserve and encourage unit autonomy
• Motivate a high level of management effort
• Encourage goal-congruent behaviour

Question 12

transfer price - who sets it?

Answer 12

managers of responsibility centre have autonomy in deciding whether:

• accept or reject orders
• source materials internally or externally
• set and accept transfer price

Question 13

transfer price - who sets it? corporate management involvement?

Answer 13

• direct intervention by corporate managers to dictate transfer price may be inconsistent with philosophy of decentralisation
• corporate management may develop general policies for transfer pricing

Question 14

what are the 3 transfer pricing method?

Answer 14

• Market-based prices
• Cost-plus prices
• Negotiated prices

Question 15

Transfer Pricing Methods Market based prices set the price at… and need…

Answer 15

• Sets the price at which the product internally transferred could be sold to outside buyers
• Need competitive external markets for a product

Question 16

Transfer Pricing Methods – Cost-plus prices

Answer 16

involves adding a markup to the cost of goods and services to arrive at a selling price

• standard VC + markup to show CM on transferred product
• standard absorption cost may lead to overpricing of products and dysfunctional decisions
• standard costs in favour of actual costs to prevent cost inefficiencies being passed onto buying unit

Question 17

Transfer Pricing Methods

Negotiated prices?

Answer 17

Market price may form the starting point, and cost may be the lower boundary

Question 18

Transfer pricing: the influence of taxation? gov involvement?

Answer 18

product/services transferred between segments located in diff locations with diff tax rates, attempt transfer price minimise total income tax liability

Government tax regulators try to reduce transfer pricing manipulation.

Question 19

Transfer pricing: the influence of taxation Segment in higher tax country?

Answer 19

Reduce taxable income in that country by charging high prices on imports and low prices on exports.

Question 20

Transfer pricing: the influence of taxation - Segment in lower tax country

Answer 20

Increase taxable income in that country by charging low prices on imports and high prices on exports

Question 21

Transfer pricing and service level agreements are?

Answer 21

contract between two units/divisions which establishes the nature of the service that will be provided by one unit to the other

Question 22

Transfer pricing and service level agreements outlines?

Answer 22

• outlines the responsibilities of each party
• outlines price, quality and timing of service delivery,
  performance targets, problem-solving arrangements, ways in which the agreement can be changed or terminated

Question 23

A financial performance report shows?

Answer 23

key financial results appropriate for the types of responsibility centre

Question 24

Segmented profit statements may show?

Answer 24

profits for major responsibility centres and the entire organisation

Question 25

Evaluating Manager’s performance may be based on?

Answer 25

revenues and costs that the manager can control or significantly influence

Question 26

Evaluating Unit’s performance?

Answer 26

Reports that evaluate the economic performance of a unit should focus on revenues and costs that are attributable to that unit

Question 27

Financial Performance Reports – Cost allocation: when use ABC method?

Answer 27

costs attributable to a unit may be incurred outside of that unit and therefore need to be allocated to the unit (e.g. Council rates from plant location)

Question 28

Financial Performance Reports – Cost allocation: common costs result from? arbitrary allocation?

Answer 28

activities that are performed for the benefit of more than one responsibility centre (e.g. Senior management salary)

CAREFUL: Arbitrary allocation of common cost to units may not provide useful information in reports

Question 29

Financial Performance Reports – hierarchy of reports may be prepared to reflect?

Answer 29

organisational structure

Question 30

Financial Performance Reports – what should be included?

Answer 30

budgets and variances may be included

allocated costs SHOULD be included when relevant

Question 31

Financial Performance Reports – real time reporting involves?

Answer 31

managers having access to up- to-date information whenever they require it. The difficulties in achieving a virtual close may prevent real-time reporting