MCS Transfer Pricing Multinational Ch22

Management Control Systems,
Transfer Pricing, and

Multinational Considerations
Chapter 22
2009 Foster School of Business
Cost Accounting
L.DuCharme
Overview
What is a Management Control System?
Centralized vs. decentralized control structure
Transfer pricing:
Function
Setting TPs
Dual TPs
Negotiated TPs (Calculating Min. & Max. range)
International tax issues
Cost Accounting
L.DuCharme
Management Control Systems

A management control system is a means
of gathering and using information.
It guides the behavior of managers and
employees.
Cost Accounting
L.DuCharme
Management Control Systems

Financial data
Nonfinancial data
Formal control system
Informal control system
Cost Accounting
L.DuCharme
Evaluating Management
Control Systems
Motivation
Goal congruence
Effort
Lead to rewards
Monetary
Cost Accounting
Nonmonetary
L.DuCharme
Organization (control) Structure

Total decentralization
Total centralization
Cost Accounting
L.DuCharme
Benefits of Decentralization
Creates greater responsiveness to local needs
Leads to gains from quicker decision making
Increases motivation of subunit managers
Assists management development and learning
Sharpens the focus of subunit managers
Cost Accounting
L.DuCharme
Limitations of Decentralization
Suboptimal decision making may occur
Focuses the managers attention on the subunit
rather than the organization as a whole
Increases the costs of gathering information
Results in duplication of activities
Cost Accounting
L.DuCharme
Decentralization in
Multinational Companies
Decentralization enables country managers to
make decisions that exploit their knowledge
of local business and political conditions.
Multinational corporations often rotate
managers between foreign locations
and corporate headquarters.
Control Problem: Barings Bank (200 yrs old)1995 Nick Leeson caused
over 1 B loss.
Cost Accounting
L.DuCharme
Responsibility Centers
Cost
center
Revenue
center
Profit
center
Investment
center
Cost Accounting
L.DuCharme
10
Transfer Pricing
A transfer price is the price one subunit charges
for a product or service supplied to another
subunit of the same organization.
Intermediate products are the products
transferred between subunits of an
organization.
Cost Accounting
L.DuCharme
11
Transfer Pricing
Transfer pricing should: (1) help achieve
a companys strategies and goals.
(2) fit the organizations structure
(3) promote goal congruence
(4) promote a sustained high level
of management effort
Cost Accounting
L.DuCharme
12
Transfer-Pricing Methods
Market-based transfer prices
Cost-based transfer prices
Negotiated transfer prices
Cost Accounting
L.DuCharme
13
Market-Based Transfer Prices

By using market-based transfer prices
in a perfectly competitive market, a
company can achieve the following:
Goal congruence
Management effort
Subunit performance evaluation
Subunit autonomy
Cost Accounting
L.DuCharme
14

Market prices also serve to evaluate the
economic viability and profitability
of divisions individually.
Cost Accounting
L.DuCharme
15

When supply outstrips demand, market prices
may drop well below their historical average.
Distress prices are the drop in prices
expected to be temporary.
Basing transfer prices on depressed market prices will not
always lead to optimal decisions for an organization.
Cost Accounting
L.DuCharme
16
Cost-based Transfer Prices

When transfer prices are
based on full cost plus a
markup, suboptimal
decisions can result.
Cost Accounting
L.DuCharme
17
Dual Transfer Prices

An example of dual pricing is for Larry & Co.
to credit the Selling Division with
112% of the full cost transfer price of $24.64
per barrel of crude oil.
Debit the Buying Division with the market-based
transfer price of $23 per barrel of crude oil.
And debit a corporate account for the difference!
Cost Accounting
L.DuCharme
18
Negotiated Transfer Prices

Negotiated transfer prices arise from the
outcome of a bargaining process between
selling and buying divisions.
Cost Accounting
L.DuCharme
19
General Guideline: min. & max.

transfer price
Maximum transfer price = Market price
Minimum transfer price
= Incremental costs per unit incurred
up to the point of transfer
+ Opportunity costs per unit to the selling division
Incremental cost often times = variable cost
Opportunity costs often times = lost CM
Opportunity costs could = lost savings
Cost Accounting
L.DuCharme
20
Min. & Max. transfer price--examples

Some examples:
(1) Slowcar
(2) S.F. Manufacturing
Cost Accounting
L.DuCharme
21
Slowcar Company
The Assembly Division of SLOWCAR Company has offered to purchase

90,000 batteries from the Electrical Division (ED) for $104 per unit. At a
normal volume of 250,000 batteries per year, production costs per battery are:
Direct materials
$40
Direct labor
20
Variable factory overhead 12
Fixed factory overhead
42
Total
$114
The Electrical Division has been selling 250,000 batteries per year to outside
buyers for $136 each. Capacity is 350,000 batteries/year. The Assembly
Division has been buying batteries from outside suppliers for $130 each.
Should the Electrical Division manager accept the offer? Will an internal
transfer be of any benefit to the company?
Cost Accounting
L.DuCharme
22
SF Manufacturing
The SF Manufacturing Co. has two divisions in Iowa, the Supply Division and
the BUY Division. Currently, the BUY Division buys a part (3,000 units)
from Supply for $12.00 per unit. Supply wants to increase the price to BUY
to $15.00. The controller of BUY claims that she cannot afford to go that
high, as it will decrease the divisions profit to near zero. BUY can purchase
the part from an outside supplier for $14.00. The cost figures for Supply are:
Direct Materials
$3.25
Direct Labor
4.75
Variable Overhead
0.60
Fixed Overhead
1.20
A. If Supply ceases to produce the parts for BUY, it will be able to avoid onethird of the fixed MOH. Supply has no alternative uses for its facilities.
Should BUY continue to get the units from Supply or start to purchase the
units from the outside supplier? (From the standpoint of SF as a whole).
(What is the min. & max. transfer price if BUY and SUPPLY negotiate?)
Cost Accounting
L.DuCharme
23
SF Mfg.continued
Now, assume that Supply could use the facilities currently used to produce the
3,000 units for BUY to make 5,000 units of a different product. The new
product will sell for $16.00 and has the following costs:
Direct Materials
$3.00
Direct Labor
4.30
Variable Overhead
5.40
B. What is the min. & max. transfer price if BUY and SUPPLY negotiate?
C. What should be done from the companys point of view? Why?
Cost Accounting
L.DuCharme
24
Comparison of Methods
Achieves Goal Congruence
Market Price: Yes, if markets competitive
Cost-Based:
Often, but not always
Negotiated:
Yes
Cost Accounting
L.DuCharme
25
Useful for Evaluating Subunit Performance
Cost-Based:
Negotiated:
Difficult, unless transfer

price exceeds full cost
Yes
Cost Accounting
L.DuCharme
26
Motivates Management Effort
Market Price: Yes
Cost-Based:
Negotiated:
Yes, if based on budgeted

costs; less incentive if
based on actual cost
Yes
Cost Accounting
L.DuCharme
27
Preserves Subunit Autonomy
Cost-Based:
No, it is rule based
Negotiated:
Yes
Cost Accounting
L.DuCharme
28
Other Factors
Market Price: No market may exist
Cost-Based:
Negotiated:
Useful for determining

full-cost; easy to implement
Bargaining takes time and
may need to be reviewed
Cost Accounting
L.DuCharme
29
Multinational Transfer Pricing

IRC Section 482 requires that transfer prices
for both tangible and intangible property
between a company and its foreign division
be set to equal the price that would be
charged by an unrelated third party in a
comparable transaction (arms length).
This still leaves a little room to wiggle.
Cost Accounting
L.DuCharme
30

MCS Transfer Pricing Multinational Ch22

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

MCS Transfer Pricing Multinational Ch22

Încărcat de

Drepturi de autor:

Formate disponibile

Management Control Systems,

Transfer Pricing, and

2009 Foster School of Business

Management Control Systems

2009 Foster School of Business

Management Control Systems

Organization (control) Structure

2009 Foster School of Business

Market-Based Transfer Prices

Market-Based Transfer Prices

2009 Foster School of Business

Market-Based Transfer Prices

Cost-based Transfer Prices

Dual Transfer Prices

Negotiated Transfer Prices

2009 Foster School of Business

General Guideline: min. & max.

2009 Foster School of Business

Min. & Max. transfer price--examples

2009 Foster School of Business

The Assembly Division of SLOWCAR Company has offered to purchase

2009 Foster School of Business

2009 Foster School of Business

C. What should be done from the companys point of view? Why?

2009 Foster School of Business

Often, but not always

2009 Foster School of Business

Difficult, unless transfer

Yes, if based on budgeted

No, it is rule based

2009 Foster School of Business

Useful for determining

Multinational Transfer Pricing

S-ar putea să vă placă și