Journal of Accounting Education 53 (2020) 100692

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Journal of Accounting Education

journal homepage: www.elsevier.com/locate/jaccedu

Educational case

Fitting responsibility center structures to strategy: Bakery

Products International
Sophie Hoozée a, Sophie Maussen a,⇑, Werner Bruggeman a,b, Geert Scheipers b,c
a
Ghent University, Department of Accounting, Corporate Finance and Taxation, Sint-Pietersplein 7, 9000 Ghent, Belgium
b
Delaware Consulting Belgium, Kapel ter Bede 86, 8500 Kortrijk, Belgium
c
Antwerp Management School, Boogkeers 5, 2000 Antwerp, Belgium

a r t i c l e i n f o a b s t r a c t

Article history: This case is about Bakery Products International, a family-owned company headquartered
Received 16 July 2019 in Belgium that produces bakery ingredients. It owns 40 sales subsidiaries around the
Received in revised form 4 September 2020 world that operate as profit centers. The transfer pricing system is based on standard man-
Accepted 7 September 2020
ufacturing cost plus a profit mark-up. The company has been following a product leader-
ship strategy focusing on the artisanal market, but due to changes in the market
environment top management wishes to increase market share in the price-sensitive
Keywords:
industrial market. You are hired as a business consultant to redesign the responsibility cen-
Corporate strategy
Responsibility center structures
ter structure and transfer pricing system in line with the new competitive strategy.
Transfer pricing methods Ó 2020 Elsevier Ltd. All rights reserved.

1. Case materials

1.1. Company background

Bakery Products International,1 a family-owned company headquartered in Belgium, develops and produces a wide range of
innovative high-quality bakery ingredients for artisanal bakeries, industrial bakeries, and supermarkets around the world. At
the outset, the company worked with external distributors to sell its products. However, over the years, Bakery Products Inter-
national has built a strong global presence and established 40 company-owned subsidiaries around the world responsible for
selling the company’s products.
Since its foundation after World War II, the company has developed and launched several innovative bread improvers
that offered bakeries the opportunity to give their bread and pastries an authentic taste. Bread improvers are enzymes and
emulsifiers that provide specific handling, baking and taste characteristics to the bakery product (e.g., dough-
strengthening properties, gluten reduction, minimizing the risk of sticky dough, enhanced handling of the dough, and
improved volume and crumb structure of the end product). In an attempt to escape the risk of future commoditization of
the bread improvers market, Bakery Products International also offers special bakery mixes (also called pre-mixes) to its cus-

⇑ Corresponding author.
E-mail addresses: sophie.hoozee@ugent.be (S. Hoozée), sophie.maussen@ugent.be (S. Maussen), werner.bruggeman@ugent.be (W. Bruggeman),
geert.scheipers@ams.ac.be (G. Scheipers).
1
This educational case is based on an actual company.

https://doi.org/10.1016/j.jaccedu.2020.100692
0748-5751/Ó 2020 Elsevier Ltd. All rights reserved.
S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

tomers. These are commercially-prepared mixtures of ingredients, ready to produce a certain quantity of a certain end prod-
uct. Bakery mixes are obtained by adding additional ingredients (e.g., salt, specific types of flour, and vitamins) to the bread
improvers in order to create extra value for the customer in terms of more convenience and assured quality and consistency
of the end product. When baking, bakers can use these bakery mixes rather than creating bread and pastries from scratch.
The company’s wide offering of bakery mixes allows bakeries to make and sell a wider range of bread products, enabling
them to better respond to changing customer demands (such as the increasing demand for healthier products), with an opti-
mal use of flour, shorter production times, and less laborious material handling and storage. As such, the offered bakery
mixes enable Bakery Products International to further differentiate the added value delivered to their customers, which cre-
ates an enhanced customer experience and a higher product and customer loyalty in the mature bread improvers market.
In the bread improvers market, Bakery Products International faces two types of competitors: on the one hand, the ‘‘local
heroes” (i.e., country-specific producers and distributors) and, on the other hand, ‘‘major multinationals” (i.e., bigger indus-
trial conglomerates) that operate in multiple countries. Some of these ‘‘major multinationals” are niche players like Bakery
Products International (e.g., Hollandia, a Dutch family-owned rival), while others are big food conglomerates that do not
limit their operations to the bakery market.
The company’s dual goal is to create shareholder value and to be the worldwide market leader in bread improvers. A dif-
ferentiated quality focus based on patented bread improvers and adaptation to local taste has proven to be a very successful
strategy in achieving this goal, especially in the artisanal market. In this segment of the market, the company gained a leading
market position in different countries thanks to its product leadership strategy. The bread improvers helped artisanal bak-
eries to differentiate the quality and the taste of their bread and pastries. Till now, the bakers have been willing to pay a high
price premium for the products and the price sensitivity in the market has been low. However, during the last five years, the
market of artisanal bakeries in some countries has started to decline. To ensure future profitable growth, the company still
has an opportunity to build market share in the growing segment of industrial customers, i.e., industrial bakeries and super-
markets. In this segment, till now, the company could only gain a limited market share. The industrial market has a limited
number of large customers, buying large volumes of bread improvers at price levels much lower than in the artisanal market.
In this market, price sensitivity is very high and ‘‘good enough” quality is the standard.

1.2. Responsibility center structure and transfer pricing system

The parent company takes care of manufacturing, R&D and corporate overhead services, and is responsible for sales in
Belgium. It also owns 40 subsidiaries, who are responsible for selling and marketing the company’s products in their own
countries. The subsidiaries are organized as separate legal entities and managed as profit centers. Subsidiaries are divisions
led by country general managers, who are responsible for the EBIT (Earnings Before Interest and Taxes) of their division. The
country general managers’ yearly bonus depends on the achievement of their EBIT objective.
The products (e.g., bread improvers and bakery mixes) sold by the subsidiaries in the different countries are produced by
the parent company in Belgium. All internal product deliveries to the subsidiaries are invoiced by the parent company based
on a standard manufacturing cost plus transfer price. In determining the selling price charged to the end customer, the sub-
sidiaries can add a local profit margin to the transfer price, taking into account their subsidiary-specific costs for freight and
duties.
The transfer price is determined as follows: standard manufacturing cost + a profit margin of 40%. The standard manu-
facturing cost is a full cost and includes production costs and corporate manufacturing overhead costs. The level of the profit
margin (40%) was set at the time of the introduction of the profit center structure. At that time, the company was positioned
in the market as first mover and quality leader, and price sensitivity of its products was very low. For example, Crusty, the
most innovative bread improver product, was in high demand in the market and bakeries were willing to pay a high price for
it. Given the current standard cost of 1.00 EUR per kilogram, the internal transfer price for this product was 1.40 EUR per
kilogram.
In determining the internal transfer price, the company’s top management felt it was appropriate and fair to apply such a
high profit mark-up, because they were convinced that the profitability of their bread improver business was mainly deter-
mined by the powerful innovation and R&D capability of the parent company and was less due to the sales efforts of the sales
divisions. They also believed that applying high internal transfer prices would stimulate the sales representatives and divi-
sion managers in the countries to ask high prices from their customers and to minimize discounts. This pricing strategy was
believed to be consistent with their differentiated market positioning.

1.3. Changing competitive landscape

A few years ago, the competitive landscape gradually changed. New competitors entered the market and rivalry among
competitors also increased, which resulted in an enhanced pressure on prices. These new entrants focused on the growing
segment of industrial customers, i.e., industrial bakeries and supermarkets. In contrast to artisanal bakeries, these customers
had a professional procurement department, which exercised strong negotiation power on their suppliers, applied uncom-
promising price negotiations and issued large tenders. Consequently, price levels of industrial customers were significantly

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S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

lower than the prices paid by artisanal bakeries. In many countries, general managers were facing market prices in the indus-
trial market that were even below the internal transfer price. For example, many industrial bakeries negotiated the selling
price of the Crusty product down to 1.15 EUR, which was lower than the transfer price of 1.40 EUR, charged by the parent
company. As a reaction to the unattractive market prices in the industrial market, country general managers mainly concen-
trated their sales efforts on the artisanal market, because this segment was the most profitable for them. Thanks to these
sales efforts, the company had maintained market leadership in the artisanal market segment. However, owing to the
low price levels in the industrial market, country managers were reluctant to invest sales efforts in this market and missed
large-volume orders because of uncompetitive pricing. Consequently, the overall market share in the industrial market
remained very low.
In the following months, general managers from all over the world discussed these changing market conditions in several
meetings. In October, a corporate strategy review meeting was organized. Next, there was also a performance review meet-
ing in April of the following year.

1.4. The October strategy review meeting

Given the changing market environment, the company’s top management decided to organize a corporate strategy review
meeting in October. All country general managers attended this meeting. During the strategy review meeting, they discussed
in detail all the emerging market opportunities and threats and their consequences for the corporate strategy. The recently
hired VP Sales, who came from a large branded company, confirmed the company’s ambition to become the undisputed mar-
ket leader in all market segments, through sustainable profitable growth. Key strategic objectives were not only to defend
market leadership in the artisanal market, but also to significantly increase market share in the industrial market and
become an important player in this segment. To achieve this objective in the industrial market, country general managers
were asked to invest in intensified sales efforts focused on targeted prospects, build long-term relationships with large
accounts, increase the number of different products sold per customer, deliver excellent customer service, respond quickly
to individual customer demands, and market more strongly the company’s differentiated quality advantage.

1.5. The April performance review meeting

In April, all country general managers were again invited to a performance review meeting, during which they had to
report on the progress they had made regarding the achievement of the strategic objectives discussed in October of the pre-
vious year. During the meeting, the CEO noticed that most of the country general managers had not initiated any strategic
initiatives to build market share in the industrial market and execute the sales strategies. He was furious about this and sta-
ted that this lack of initiative was unacceptable. Some country general managers explained that expanding market share in
the industrial market segment conflicted with their divisional profitability objectives because the internal transfer prices
were too high and unfair, due to the high upstream profit taking. The CEO replied that the transfer price system had to stay
unchanged, because it was the backbone of the corporate profitability control system and the transfer prices were part of the
corporate tax policies, which could not be adapted because they had been accepted by the local tax authorities. He once more
argued that high upstream profit taking was appropriate and fair because the R&D efforts of the parent company were the
key driver of corporate profitability.
During this performance review meeting, there was a lot of agitation and discussion among the country general man-
agers. Several country general managers had a strong voice during this meeting, especially the Brazilian general manager
and the Spanish general manager.

1.5.1. Brazilian entrepreneurship

Fabio Ferreira, the Brazilian general manager, found the internal transfer price discussions to be a non-issue. He fully sup-
ported the corporate strategy and had worked out with his local management team a new breakthrough strategic initiative.
His objective for next year was to increase market share in the industrial sector by 15%. Besides this objective, he also aimed
to increase his EBIT by 10%. In order to meet these challenging performance targets, Fabio planned to source his bread impro-
vers with local and cheaper suppliers. At the same time, he decided to no longer buy some of the bakery mixes internally and
proposed to invest in a local production line of bakery mixes. The new sourcing policy would enable him to obtain the Crusty
product at a standard full cost of 1.05 EUR per kilogram. With costs of freight and duties of 0.10 EUR per kilogram, this would
mean a cost reduction of 0.45 EUR per kilogram for his division. The lower purchase price of the bread improvers and the
local production line of bakery mixes would lead to a significant reduction of the cost of goods sold of the Brazilian division
and a significant increase of its EBIT. During an informal meeting with the CEO, Fabio explained his ambitious plans and got
the CEO’s full support. The CEO praised him for his entrepreneurship and promised to finance his investment project.

1.5.2. The loyal Spanish division manager

Fernando Martinez, manager of the Spanish sales division, could also not understand why managers felt so badly about
the internal transfer pricing system. Fernando was a very loyal person. He had already been working for the company for

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20 years and was in fact also a minor shareholder. He strongly believed that good managers always act in the interest of the
company overall. His point of view was: ‘‘When you, as a division manager, have the opportunity to sell a large volume of
Crusty at a selling price of 1.15 EUR per kilogram, you have to go for it. You know that the company as a whole still makes a
profit.” When the CEO asked his advice about the transfer pricing discussion, Fernando proposed to stop discussing these
types of bureaucratic issues. He said: ‘‘In this company we definitely have to strengthen our culture. We must act as ONE
company. We need to create a stronger sense of ‘us’ and stop the ‘we versus them’ thinking. Many managers in our organi-
zation think too much in terms of ‘my margin versus your margin’ and should be urged to better work together on improving
‘OUR margin’, the total margin in the internal value chain.”
During the different discussions, the CFO observed that the transfer pricing system caused serious internal tensions and a
lack of strategic alignment in the organization. He proposed to call in a specialized consultant to investigate how the dys-
functions could be resolved.

1.6. Case requirements

Prepare a role play in which you assume the role of a business consultant. Given the changing strategy (see Fig. 1. Strate-
gic change agenda), you are required to create a presentation for Bakery Products International’s top management in which
you address the following:

Q1. Describe the dysfunctions of the existing responsibility center structure and transfer pricing system.
Q2. Which changes would you make to the responsibility center structure and transfer pricing system? In your presenta-
tion, clearly explain how these changes would solve the identified dysfunctions.
Q3. When the decision about the Brazilian investment project became officially known in the organization, the plant man-
ager of the Belgian manufacturing facility severely criticized the plan. He estimated that the local sourcing of the
Crusty product and the investment in the new production line of bakery mixes in Brazil would cause idle capacity
in the Belgian production facility and would result in a loss of revenue in the Belgian legal entity. In addition, the
CFO had some worries about the financing of the project. He suggested that the parent company should request a cap-
ital charge for the capital invested in the Brazilian bakery mix production facility. Do you believe the CEO should have
accepted the Brazilian investment project? Why (not)?
Q4. Do you agree with the vision of the Spanish division manager? Why (not)?

Fig. 1. Strategic change agenda.

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2. Teaching note

2.1. Motivation and contribution

This educational case is based on the actual experiences of two of the authors as business consultants. It teaches students
about the management control problems of responsibility center structures and transfer pricing methods. Students should
imagine themselves in a specific business situation to recognize dysfunctional behavior.
Although some educational cases already exist on responsibility centers and transfer pricing in the context of manage-
ment control (Table 1 provides an overview of other published educational cases), our case contributes to the literature since
we include changes in the competitive strategy. The Bultman Automobiles case (Hawkins, 1988) is most closely related to
ours. In that case, students are also required to identify dysfunctions of the management control structure and to propose a
new responsibility center structure and transfer pricing system. However, our inclusion of changes in the competitive strat-
egy (see the fourth learning objective in Table 2) differentiates our case from the Bultman Automobiles case. The focus on
competitive strategy is also a contribution to the other educational cases listed in Table 1, as well as cases included in text-
books, such as Management Control Systems: Performance Measurement, Evaluation and Incentives by Merchant and Van der
Stede (2017, Chapter 7) and Management Control Systems by Anthony and Govindarajan (2007, Chapters 4, 5, and 6).

Table 1
Overview of published cases on responsibility center structures and/or transfer pricing in the context of management control.

Authors Title Journal Case content

Bailey and Goliath Corporation: an instructional Journal of In this case, students take up the role of top management and divisional
Collins case in transfer pricing policy Accounting management and have to negotiate transfer prices. The case shows how
(2005) Education top managers’ transfer pricing policy impacts divisional managers’
sourcing decisions.
Campbell and Starbucks: social responsibility and Journal of In this case, students have to think about strategic, legal, ethical, and
Helleloid tax avoidance Accounting public relations implications of tax minimization strategies. Starbucks
(2016) Education portrays itself as being socially responsible and a good citizen while
using legal tax avoidance practices (e.g., transfer prices, etc.). The
question that arises is whether paying one’s fair share of taxes is an
important aspect of social responsibility. The case thus illustrates the
potential relation between tax strategies and other corporate strategies.
Cripe et al. Lenzini Steel: the impact of transfer Issues in The goal of this interdisciplinary case is to strengthen students’
(2015) pricing and taxes on international Accounting managerial/cost accounting, tax, and/or financial accounting skills. The
operations Education case requirements contain specific questions covering all these different
fields. The case demonstrates the implications of transfer pricing
decisions and shows that accounting decisions are not made in a
vacuum.
Feltham et al. The same difference? A transfer- Issues in In this case, students are asked to take up the role of a newly hired
(2003) pricing case Accounting controller and to solve transfer pricing issues within an auto dealership.
Education The case focuses on behavioral effects of transfer pricing systems.
Goldman et al. WhyteGlov Services: IRC Section 1060 Journal of Students are presented with a realistic situation involving the sale of a
(2016) asset acquisition Accounting technology company’s analytics division (which operates as a cost
Education center) and have to assess the competing incentives of the buyer and
seller. The case develops students’ critical thinking in interdisciplinary
areas (tax, financial accounting, finance, and managerial accounting).
Hawkins Bultman Automobiles, Inc. Harvard In this case, students have to solve the problem of high upstream profit
(1988) Business taking and dysfunctional behavior of managers by redesigning the
School Case responsibility center structure and transfer pricing system.
Hoffjan (2005) Calvados–A business game for your Issues in Calvados is a short business game intended to be implemented in a cost
cost accounting course Accounting accounting course. The game illustrates different managerial topics,
Education such as relevant costs for decision making, and the objectives, functions,
and determination of internal transfer prices. Students encounter the
difficulties of coordinating decentralized units and they learn that
transfer pricing affects performance evaluation and managerial rewards
for managers.
Myring and International transfer pricing and Issues in In this case, PrimeCo established a subsidiary to manufacture its
Bloom intellectual property: the PrimeCo Accounting product for a foreign market. Students are exposed to accounting issues,
(2007) case Education tax issues, and ethical issues related to international transfer pricing
and are asked to address these issues.
Rossing et al. International transfer pricing in Journal of In this case, students have to determine international transfer prices
(2017) multinational enterprises Accounting consistent with tax regulations. In addition, the case requires students
Education to classify the responsibility center by type and to determine what
performance measures to consider.
Thomasson and Structuring a tax efficient Journal of In this case, students perform a detailed tax-planning exercise involving
Wilkinson international operation Accounting a multinational corporation that is restructuring its tax operations.
(2012) Education Students encounter real-world tax issues, including transfer pricing,
and analyze complex business scenarios.

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Table 2
Case alignment chart: aligning the case requirements to the learning objectives and the cognitive process categories of Bloom’s Revised Taxonomy.

Cognitive process categories of Bloom’s Revised Taxonomy

Learning objective Remember Understand Apply Analyze Evaluate Create
LO1. Recognize the different responsibility center MC
structures and transfer pricing methods.
LO2. Discuss the roles of the transfer pricing Q1
system in responsibility center structures Q2
(motivational, not just tax-driven) and their
potential conflicts.
LO3. Identify the dysfunctions of the existing Q1
responsibility center structure.a Q3
LO4. Design a responsibility center structure that Q2 Q2
aligns the goals of headquarter and division Q3
managers consistent with changes in the Q4
competitive strategy.
a
Although ‘‘identify” is often classified on the ‘‘understand” level in Bloom’s Revised Taxonomy, we believe LO3 is actually on the ‘‘analyze” level. To be
able to identify dysfunctions of the existing responsibility center structure in the case, students should analyze the management control setting, relate to
the situation, examine the described management behaviors, etc. These cognitive processes are all on the ‘‘analyze” level of Bloom’s Revised Taxonomy.

2.2. Educational objectives

After successful completion of this case, students should be able to:

LO1. Recognize the different responsibility center structures and transfer pricing methods.
LO2. Discuss the roles of the transfer pricing system in responsibility center structures (motivational, not just tax-driven)
and their potential conflicts.
LO3. Identify the dysfunctions of the existing responsibility center structure.
LO4. Design a responsibility center structure that aligns the goals of headquarter and division managers consistent with
changes in the competitive strategy.

Table 2 represents the case alignment chart. It matches the case requirements to the learning objectives (LOs) and to the
cognitive process categories of Bloom’s Revised Taxonomy: remember, understand, apply, analyze, evaluate, and create
(Anderson et al., 2001). Although the first learning objective (LO1) is not specifically tested in the case requirements, we
included four multiple choice (MC) knowledge questions in the pretest and posttest questionnaires to objectively assess
whether the educational case improved students’ knowledge of responsibility center structures and transfer pricing methods
(see Section 2.3).

2.3. Evidence regarding case efficacy

The case was tested four times in a management control course with graduate students from a large university in Western
Europe, either pursuing a master’s degree in business economics (compulsory course) or choosing the course as an elective.
The assignment counted for 15 percent of the overall course grade, which consists of several group assignments (formative
assessment), a written exam (summative assessment), and a peer assessment. Students of the third and fourth test year also
completed a pretest and posttest questionnaire.

2.3.1. Student assessment

Two independent instructors evaluated the students. The final case grade for this group assignment was calculated as the
average of both instructors’ grade. To receive a grade of 10/10, students’ solutions should identify and solve the management
control problem, they should explain why a capital charge is needed for the Brazilian investment project, and they should
identify the Spanish division manager as a (minor) shareholder. Table 3 summarizes the average performance over the dif-
ferent test years. In the first academic year (2016–2017), we tested the case with 146 graduate students and the average case
grade was 6.97/10. After the first year, based on our experience and feedback from students, we made some small changes to
the numbers and other specific information in the case description.2 In the second academic year (2017–2018), we tested the
case with 102 graduate students and the average case grade was 7.73/10. Some students had voluntarily prepared a role play for
the presentations in the first and second year. As those presentations appeared to be more enjoyable for both students and
instructors, we explicitly asked students to prepare a role play in the third and fourth year. In the third academic year

2
In response to students’ requests, we specified the costs of freight and duties and, accordingly, increased the transfer price from 1.20 EUR to 1.40 EUR.
Students confirmed that these changes were helpful to focus on the key learning points. The new numbers did not affect the content of the case.

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S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

Table 3
Assessment results.

Max. grade Requirement LO 2016-2017a 2017-2018a 2018-2019a 2019-2020b

n = 146 n = 102 n = 97 n = 71
M S.D. M S.D. M S.D. M S.D.
3 Q1 LO2 2.51 0.63
LO3
4 Q2 LO2 2.37 0.72
LO4
2 Q3 LO3 1.23 0.68
LO4
1 Q4 LO4 0.77 0.42
10 Case grade 6.97 1.43 7.73 1.64 7.32 1.07 6.87 1.73
20 Course grade 14.55 1.86 14.20 2.01 14.28 1.92 14.07 1.92
a
Assessment results are based on an overall case grade, without using a grading rubric.
b
Assessment results are based on separate grades for each case requirement using a grading rubric.

Table 4
Assessment of LO1.

Max. score Multiple choice question PRE POST p-valuea

n = 60 n = 52 n = 47b
M S.D. M S.D.
1 Which managers are not responsible for the costs of their department? 0.85 0.36 0.96 0.19 0.18
a) Cost center managers.
b) Revenue center managers.
c) Profit center managers.
d) Investment center managers.
1 1. EBITDA is a typical performance measure for investment center managers. 0.63 0.49 0.85 0.36 0.05*
2. Investment centers typically pay a capital charge to the parent company for the
capital invested in their unit.
a) Only statement 1 is true.
b) Only statement 2 is true.
c) Both statements are true.
d) Both statements are false.
1 A transfer price is 0.85 0.36 0.83 0.38 0.77
a) the selling price that the selling responsibility center charges to the buying
responsibility center for internal supplies of goods and services.
b) the cost that a responsibility center incurs for internal supplies of goods and services.
c) the cost that a responsibility center incurs for external supplies of goods and services.
d) the financial value of external supplies of goods and services.
1 Cost-based transfer prices may be based on 0.45 0.50 0.48 0.51 0.32
1. actual full cost.
2. standard full cost.
3. standard variable cost.
Which of the above statements are true?
a) 1 and 2 only.
b) 2 and 3 only.
c) 1 and 3 only.
d) All of them.
4 Overall score on multiple choice questions. 2.78 1.06 3.12 0.88 0.05**
a
*, ** indicate significance at the 10 percent and 5 percent level, respectively.
b
47 students completed both the pretest and the posttest questionnaire. Hence, significance levels are based on paired samples t-tests.

(2018–2019), we tested the case with 97 graduate students and the average case grade was 7.32/10. In the last test year (2019–
2020), we developed a grading rubric (see Section 2.5) to assess students’ solutions to the individual case questions. The overall
case grade was then calculated as the sum of the grades on the individual case questions. The assessment based on this grading
rubric provides evidence of case efficacy for three learning objectives (i.e., LO2, LO3, and LO4). In particular, the mean grades on
each individual case question are significantly higher than the midpoint (all p < 0.01), which is the threshold of failing or passing
on the respective case question. In this last year, the case was tested with 71 graduate students and the average case grade was
6.87/10.
Since the first learning objective is not explicitly tested in the case requirements, we assessed this learning objective
based on four multiple choice knowledge questions (see Table 4). Students of the fourth test group (2019–2020) answered
these questions at the end of the first lecture, during which we provided theoretical background on responsibility center
structures, and once again after the debriefing of the educational case. Students performed3 significantly better on these

3
Students’ scores on these knowledge questions were not included in their overall case grade or course grade.

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S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

Table 5
Description of the samples.

2018–2019 2019–2020
Sample sizea

Gender 64.9% Female 51.0% Female

35.1% Male 49.0% Male

Discipline 68.5% Business Economics 80.4% Business Economics

17.8% Business Engineering 9.8% Business Engineering
4.1% Complementary Studies in 3.9% Complementary Studies in
Business Economics Business Economics
9.6% Exchange student 3.9% Exchange student
2.0% Other

Work experience 7.9% Yes 5.9% Yes

92.1% No 94.1% No

Nationality 77.6% Belgian 76.5% Belgian

5.3% Spanish 3.9% Spanish
3.9% Chinese 3.9% Chinese
3.9% German 3.9% Dutch
2.6% Afghan 2.0% German
2.6% Italian 2.0% Finnish
1.3% French 2.0% Ukrainian
1.3% Greek 2.0% Turkish
1.3% Vietnamese 2.0% Luxembourgish
2.0% Cameroon
a
In 2018–2019 (2019–2020), two (six) students did not complete the pretest or posttest questionnaire.

knowledge questions after the case than before (p = 0.05), suggesting that they are more able to recognize the different respon-
sibility center structures and transfer pricing methods after the case than before. Although the case requirements do not explic-
itly test the first learning objective, this additional direct assessment provides evidence of case efficacy for this learning
objective. Together with students’ grades on the individual case questions (see Table 3), this demonstrates case efficacy for
all learning objectives. Overall, students complete four cognitive process categories of Bloom’s Revised Taxonomy when solving
this educational case: understand, analyze, evaluate, and create.

2.3.2. Student perceptions

This section summarizes survey data from the third and fourth group of students. Students completed two question-
naires, i.e., a pretest and posttest questionnaire.4 Table 5 provides descriptive information on both samples. In total, 97 stu-
dents took our management control course in February 2019. 91 students completed the first questionnaire and 76 students
completed the second questionnaire. In February 2020, 71 students took our management control course. 60 students com-
pleted the first questionnaire and 52 students completed the second questionnaire. Most of our students were Belgian, but
we also had students from other European, Asian, and African countries. Regarding the first questionnaire (PRE), at the end
of the first lecture, during which we provided theoretical background on responsibility center structures, we measured students’
perceived knowledge based on our formulated learning objectives using a rubric (see Table 6). We pretested this rubric with five
academic colleagues and four graduate students who were following the teacher’s program and had taken our management
control course the previous year. Regarding the second questionnaire (POST), after the debriefing session, we again measured
students’ perceived knowledge with the same rubric in order to provide additional evidence of case efficacy. We believe that
combining direct assessment of learning objectives with indirect assessment (student perceptions) provides more comprehen-
sive evidence of case efficacy. In addition, we also measured students’ perceptions regarding clarity of instructions (Q1-2), real-
ism (Q3), controlled (Q4a-b) and autonomous (Q4c-d) motivation, learning experience and enjoyment (Q5-12), expectations
(Q13), usefulness (Q14-15), and recommendation (Q16-17) on seven-point Likert scales.
In Table 7 we report students’ assessment of their perceived knowledge for the four different learning objectives before
(PRE) and after (POST) the case. Using paired samples t-tests, we find that their perceived knowledge increases are significant
(2018–2019: all t  8.54, all p < 0.01; 2019–2020: all t  7.26, all p < 0.01), indicating that students’ perceived knowledge on
responsibility center structures and transfer pricing methods significantly improved.

4
The original questionnaires may be obtained from the corresponding author upon request.

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S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

Table 6
Pretest-posttest rubric on the four learning objectives.

1 2 3 4 5 6 7
LO1. I do not know I am I believe I am I believe I am able I believe I am able I am I feel comfortable to I am
what the somewhere able to see to list and to to explain the somewhere teach others about not
different in between differences in define the different in between the different able to
responsibility 1 and 3. responsibility different responsibility 5 and 7. responsibility center assess
center center responsibility center structures structures and this.
structures and structures and center structures and transfer pricing transfer pricing
transfer transfer pricing and transfer methods with methods.
pricing methods. pricing methods. examples.
methods are.
LO2. I do not know I am I know that I believe I am able I believe I am able I am I feel comfortable to I am
that transfer somewhere transfer pricing to define the to explain the somewhere teach others about not
pricing in between systems have multiple roles multiple roles in between the multiple roles able to
systems have 1 and 3. multiple roles (motivational and (motivational and 5 and 7. (motivational and assess
multiple roles (motivational tax-driven) of tax-driven) of tax-driven) of this.
in and tax-driven) transfer pricing transfer pricing transfer pricing
responsibility in responsibility systems in systems in systems in
center center responsibility responsibility responsibility center
structures. structures. center structures. center structures structures and their
and their potential potential conflicts.
conflicts.
LO3. I do not know I am I know that I believe I am able I believe I am able I am I feel comfortable to I am
that somewhere responsibility to define the to identify somewhere teach others how to not
responsibility in between center dysfunctions of dysfunctions of an in between identify able to
center 1 and 3. structures can responsibility existing 5 and 7. dysfunctions of assess
structures can be center structures. responsibility responsibility center this.
be dysfunctional. center structure. structures.
dysfunctional.
LO4. I do not know I am I know that a I believe I am able I believe I am able I am I feel comfortable to I am
that a somewhere responsibility to explain why a to identify when a somewhere design a not
responsibility in between center structure responsibility responsibility in between responsibility center able to
center 1 and 3. should be center structure center structure is 5 and 7. structure aligned assess
structure aligned with the should be aligned not aligned with the with the this.
should be competitive with the competitive competitive strategy
aligned with strategy. competitive strategy. completely by
the strategy. myself.
competitive
strategy.

Table 7
Paired samples t-tests on the four learning objectives PRE and POST.

Learning 2018–2019 2019–2020

objective
PRE POST t-value PRE POST t-value
n = 91 n = 76 (p-valuea) n = 60 n = 52 (p-valuea)
M S.D. M S.D. n = 72b M S.D. M S.D. n = 47c
LO1 3.63 1.05 5.25 0.98 12.70 3.62 0.87 5.00 0.82 10.49
(<0.01***) (<0.01***)
LO2 3.55 0.97 4.88 1.13 8.54 3.43 1.02 4.58 0.94 7.26
(<0.01***) (<0.01***)
LO3 3.60 1.04 5.04 0.89 9.96 3.75 1.04 4.96 0.97 7.54
(<0.01***) (<0.01***)
LO4 3.86 1.02 5.08 0.86 9.84 4.02 0.87 5.12 0.89 7.52
(<0.01***) (<0.01***)
a
*** indicates significance at the 1 percent level.
b
72 students participated in both the pretest and the posttest questionnaire. Hence, significance levels are based on paired samples t-tests.
c
47 students participated in both the pretest and the posttest questionnaire. Hence, significance levels are based on paired samples t-tests.

Table 8 shows the descriptive statistics for each survey item. A seven-point Likert scale (1 = ‘‘strongly disagree” to
7 = ‘‘strongly agree”) was used to assess the answers. Students could also indicate that they were not able to assess the ques-
tion. The results demonstrate that students found the case description and the instructions to be clear. They experienced the
case as a realistic business situation. Overall, students had a beneficial learning experience in which they enjoyed working on
the case, appreciated that the case had more than one possible solution, practiced their presentation skills, had some fun

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S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

Table 8
Descriptive statistics for each survey item.

Item 2018–2019 2019–2020

n M S.D. Min. Max. n M S.D. Min. Max.
1. Overall, the Bakery Products International case description was 76 5.78 0.87 3.00 7.00 51 5.98 0.71 4.00 7.00
clear.
2. The instructions were clear. 76 5.74 1.06 2.00 7.00 51 5.90 0.90 2.00 7.00
3. The Bakery Products International case provided a realistic busi- 75 5.88 0.72 4.00 7.00 51 5.88 0.97 3.00 7.00
ness situation.
4. Why did you put efforts into solving the Bakery Products Interna-
tional case?
a) because I want to obtain high grades. 75 5.88 0.82 4.00 7.00 50 5.96 1.07 1.00 7.00
b) because otherwise I would feel bad about myself. 75 5.03 1.43 1.00 7.00 49 5.35 1.35 1.00 7.00
c) because I understand why it is important. 75 5.65 0.76 4.00 7.00 50 5.60 0.93 3.00 7.00
d) because I liked it. 75 5.09 1.16 2.00 7.00 49 5.18 1.07 3.00 7.00
5. Overall, the Bakery Products International case was a beneficial 76 5.64 0.83 3.00 7.00 51 5.92 0.80 4.00 7.00
learning experience.
6. I enjoyed working on the Bakery Products International case. 76 5.49 0.89 4.00 7.00 51 5.39 1.13 2.00 7.00
7. The Bakery Products International case was a challenging case. 76 5.39 0.83 4.00 7.00 51 5.51 0.97 3.00 7.00
8. I appreciated that the Bakery Products International case had 75 5.83 0.96 2.00 7.00 51 6.12 0.86 4.00 7.00
more than one possible solution.
9. Working in groups was beneficial for solving the Bakery Products 75 6.09 1.00 2.00 7.00 51 6.18 1.14 1.00 7.00
International case.
10. Solving the Bakery Products International case enabled me to 72 5.04 1.38 1.00 7.00 49 4.82 1.35 2.00 7.00
practice my presentation skills.
11. I had fun acting in the role play. 74 4.96 1.13 2.00 7.00 51 4.76 1.29 2.00 7.00
12. I appreciated the debriefing session of the Bakery Products Inter- 75 5.61 1.00 2.00 7.00 49 5.69 0.98 3.00 7.00
national case.
13. The Bakery Products International case fulfilled my expectations. 76 5.29 0.76 4.00 7.00 51 5.35 0.96 2.00 7.00
14. The Bakery Products International case was more useful, com- 75 5.72 1.21 2.00 7.00 51 5.78 1.24 3.00 7.00
pared to self-study of part 1 (The management control structure)
in the textbook.
15. The Bakery Products International case was more useful, com- 76 5.63 1.23 1.00 7.00 51 5.51 1.16 3.00 7.00
pared to traditional lectures.
16. I recommend using the Bakery Products International case again 76 6.03 1.06 1.00 7.00 51 6.22 0.95 4.00 7.00
in this course, next year.
17. I recommend that instructors at other universities use the Bakery 74 5.58 1.10 1.00 7.00 51 6.10 0.88 4.00 7.00
Products International case in their management control classes.

acting in the role play, and appreciated the debriefing session. They experienced the case as a challenging case for which
working in groups was beneficial. Overall, the case fulfilled students’ expectations. Students assessed the case as more useful
than self-study or traditional lectures and they recommend us as well as instructors at other universities to use the case
again in the future. Regarding students’ motivation, we conclude that they are driven by both controlled and autonomous
motivation.5 They reported that they put efforts into solving the case because they wanted to obtain high grades, because
otherwise they would feel bad about themselves, because they understood why it is important, and because they liked it. In
addition, some students spontaneously indicated in the overall course evaluation form that this case was of added value to
the course and that it was very useful to work on a practical case.

2.4. Implementation guidance

2.4.1. Applications of the case

The case illustrates a basic management control problem: aligning the goal of principals (headquarters) and agents (di-
vision managers) consistent with the corporate strategy. It is advisable to provide students with background on responsibil-
ity center structures (see Appendix A), which can be found in most management accounting/control textbooks.6 As prior
knowledge of basic cost accounting and finance concepts is preferable, the case may be used in an advanced management
accounting or management control course at graduate level. Due to the inclusion of competitive strategy, the case may also
be appropriate to use in a strategy course or even in a tax course after the coverage of transfer pricing, to demonstrate
beyond-tax influences of transfer pricing systems. Alternatively, the case may also be used for executive teaching or to prepare

5
We measured autonomous and controlled motivation in line with self-determination theory, which posits that autonomous (controlled) learning
motivation is enhanced when feelings of basic psychological needs are satisfied (thwarted) (see Section 2.4.3).
6
Examples include Management Control Systems (Anthony & Govindarajan, 2007), Horngren’s Cost Accounting: A Managerial Emphasis (Datar & Rajan, 2018),
Management and Cost Accounting (Drury, 2018), Management Control Systems: Performance Measurement, Evaluation and Incentives (Merchant & Van der Stede,
2017), Cost Management: Strategies for Business Decisions (Wouters et al., 2012), and Accounting for Decision Making and Control (Zimmerman, 2017).

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S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

Fig. 2. Implementation overview.

students for exams organized by professional management accounting bodies (such as the Institute of Management Accoun-
tants (IMA) in the US or the Chartered Institute of Management Accountants (CIMA) in the UK) to obtain CMA certification.7
We implemented the case in a MSc course entitled Management Control at a large university in Western Europe. In Fig. 2
we present an overview of our implementation method. The upper side of the figure includes all class moments, while the
lower side refers to the research design of our educational case. This master’s program has a modular structure, such that
courses are bundled in four modular blocks of six weeks each instead of the traditional semester system. In the educational
literature, this modular structure is often referred to as an intensive teaching format (Davies, 2006). In each modular block,
students take two or three courses for approximately 12 ECTS in total. This modular structure allows students to process the
content in a more focused and in-depth manner (Scott, 2003). At the end of each modular block, students take exams of the
courses followed in that modular block. During a modular block they also get interim tests and (group) assignments.8 Man-
agement Control is part of the third modular block, and we used the case as an evaluated group assignment. Alternatively, the
case may also be implemented in-class, in that students can first work in groups while the instructor coaches them, after which
the different solutions can be discussed by the instructor in a plenary session. A third implementation possibility is to use the
case as an individual written or oral exam at the end of the course.9 However, our case efficacy evidence only applies to using
the case as an evaluated group assignment.

2.4.2. Procedure
During the first lecture of our block, we provided students with background on responsibility center structures. At the end
of this lecture, students watched a video in which a business consultant explains the case and asks for their help. Students
also received the case on paper. A few days later, students presented their solution to the instructors in self-selected groups
of five to six students. Students were encouraged to team up with students of other disciplines (i.e., MSc Business Economics,
MSc Business Engineering, MSc Complementary Studies in Business Economics, exchange students, other).10 During this 15-
minute presentation, a business meeting environment was simulated: the presentation took place in a board room and students
were specifically requested to prepare a role play. Students could assume the role of business consultants and the instructors
played the role of the client’s top management. Alternatively, students could perform both roles, such that the instructors acted
as an audience.11 To stimulate students to identify with their chosen characters, they may be asked to prepare name tags with
professional titles. In our experience, this role-play approach fosters students’ creativity and enables instructors to assess and
enjoy their presentation skills in addition to their solution of the case. Importantly, we provided guidance to students during the
role play by constructively reflecting on their mistakes. Students also received general group feedback immediately after pre-
senting their case solution.
During the following lecture, students were debriefed, and a small Oscar-like ceremony was organized during which two
groups received an award for best presenter and best solution. During the debriefing, we did not only focus on mistakes but
also emphasized positive aspects of their performance. Students had the opportunity to assess their team members through
a peer assessment form and they were offered an optional individual feedback opportunity at the end of the course to receive
feedback on all aspects of the course. In the last course week, students took a written (individual) exam for our management
control course (summative assessment) consisting of multiple choice questions and an essay question. We formulated some
multiple choice questions on responsibility center structures and transfer pricing methods that students should be able to
answer after solving this educational case. In addition, students’ could incorporate the insights they obtained from this edu-
cational case in their answer to the essay question.

7
For more information on CMA (certified management accountant) certification, we refer to www.imanet.org.
8
To streamline students’ workload throughout the modular block, course deadlines and activities are discussed and approved by all teachers from the
particular modular block. Hence, although students received the case requirements and had to present their solutions within the same week, they could focus
on this case and did not have (many) other course activities.
9
When the case is used as a written exam, instructors should delete the role-play element in the case requirements.
10
Untabulated one-way ANOVA results show that students’ overall case grades (F = 0.79, p = 0.54) and course grades (F = 0.36, p = 0.84) are not significantly
different across disciplines.
11
This option was spontaneously suggested by students from the third test year.

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S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

2.4.3. Need-supportive teaching style

Our case discussion approach aims at creating a setting in which students feel most motivated and engaged to deeply
understand the case problem and engage in an intensive and creative dialogue about possible solutions to the problem.
The goal of our role-play approach is to maximize autonomous learning motivation of our students. Drawing on self-
determination theory (SDT; Deci & Ryan, 2000; Ryan & Deci, 2017) students are autonomously motivated, when they put
effort in their work ‘‘because they want to” and not ‘‘because they have to” (for instance, due to pressure from the teacher).
Autonomous motivation involves the regulation of behavior with the experience of volition, psychological freedom, and
reflective self-endorsement.
SDT also posits that autonomous learning motivation requires a context that supports students’ basic psychological
needs: the need for autonomy, the need for relatedness and the need for competence. The need for autonomy refers to
the need to feel strong-willed and fully endorsing one’s actions (Deci, 1975; Deci & Ryan, 2004). The need for relatedness
denotes caring for and feeling cared for by others (Ryan, 1995). The third basic psychological need, the need for compe-
tence, implies that people want to experience opportunities to exercise and express their capacities and hence feel a sense
of confidence (Vansteenkiste et al., 2008). To maximize autonomous learning motivation, we use a need-supportive teach-
ing style. When learning tasks are delivered within a need-supportive environment, students will internalize task value
and take more personal responsibility for their behavior (Vansteenkiste et al., 2018). Importantly, in the context of edu-
cation, it has been demonstrated that higher autonomous motivation positively affects academic performance (Kusurkar
et al., 2013).
Although most educational cases naturally draw on real-life examples and often require students to assume the role
of a business consultant, our specific teaching approach fostered students’ psychological need satisfaction as follows: 1)
they were allowed to experiment with different solutions and could choose which role they played during the role play
(need for autonomy); 2) they could work in groups (need for relatedness); and 3) they received feedback, not only on
improvement areas but also on positive aspects of their performance (need for competence). We also explicitly chose to
clarify our expectations by providing students with specific questions to solve the case and to guide them during their
presentations by constructively reflecting on their mistakes. This structured teaching style further fosters students’ com-
petence need satisfaction (Aelterman et al., 2019). In addition, the role play was used to bring students’ intrinsic moti-
vation to the fore. Finally, we wish to highlight that students’ enthusiasm resulted in a pleasant teaching experience for
the instructors.

2.5. Recommended solutions and grading rubric

The solutions to the case requirements as well as the grading rubric to evaluate students’ solutions can be obtained from
the corresponding author upon request.

2.6. What happened in reality?

In reality the company’s growth continued. Rather than keeping production at headquarters in Belgium, management
decided to decentralize by allowing subsidiaries to produce themselves. Hence, the initiative of the Brazilian manager turned
out to be an impetus for more decentralized production.

3. Conclusion

This educational case draws on two of the authors’ real-life experiences. It shows that an organization’s responsibility
center structure and its transfer pricing system need to be aligned with the competitive strategy. As a contribution to prior
educational cases on responsibility center structures and transfer pricing systems, our case shows that changes in the market
place may require strategy changes, which drive changes in the transfer pricing system in order to maintain organizational
alignment and minimize dysfunctional behavior. As such, the case also illustrates that transfer pricing is not just about tax
optimization, but also has important motivational consequences.
This educational case was developed in a management control course at graduate level as an evaluated group assignment.
The case can also be used as an in-class assignment or as an individual oral/written exam in courses on management
accounting/control, strategy or even tax. Alternatively, it can be used for executive teaching or to prepare students for exams
organized by professional management accounting bodies. Students immerse themselves in the case dilemma by assuming
the role of a business consultant in evaluating and redesigning the responsibility center structure of Bakery Products Inter-
national. Students first analyze the existing responsibility center structure and identify the dysfunctions. In a next step, they
decide on the changes they would make, and they present their solution in a realistic role-play setting to the ‘‘organization’s
top management” (the instructors). After solving the case, students are able to recognize the different responsibility center
structures and the transfer pricing methods, to discuss the roles of the transfer pricing system in responsibility center struc-
tures (motivational, not just tax-driven) and their potential conflicts, to identify the dysfunctions of existing responsibility

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S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

center structures, and to design a responsibility center structure that aligns the goals of headquarter and division managers
consistent with changes in the competitive strategy. Finally, we hope that our psychological need-supportive implementa-
tion approach and the enthusiasm this ignited in us will inspire other instructors to consider need-supportive teaching styles
when using educational cases in their classrooms.

Acknowledgments

We would like to thank participants at the BAFA Accounting Education Special Interest Group Conference (Ghent, 2019)
for useful comments and suggestions. We are also grateful for the helpful comments on earlier drafts of this educational case
provided by Caroline McGroary and Evelien Opdecam. We thank the editor Natalie Churyk, the associate editor and two
anonymous reviewers for their many helpful and constructive comments during the entire review process.

Appendix A. Background information on responsibility center structures and transfer pricing methods

It is generally accepted that the purpose of management control is to influence the behavior of organizational members
and to motivate them to contribute to the achievement of organizational goals and strategies (e.g., Anthony & Govindarajan,
2007; Malmi & Brown, 2008; Merchant & Van der Stede, 2017; Zimmerman, 2017). An important control mechanism used in
influencing managerial behavior is the management control structure. This structure includes a clear description of the orga-
nizational units (departments, divisions) and the roles and responsibilities of managers taking leadership in these units. An
organizational unit with specified roles and responsibilities is referred to as a responsibility center. In essence, organizational
structures are hierarchies of responsibility centers.
In decentralized organizations, managers receive delegated financial responsibilities. When classifying responsibility
centers in relation to the assigned financial responsibilities, we distinguish cost centers, revenue centers, profit centers
and investment centers. In cost centers, managers are evaluated based on their cost performance (e.g., actual costs com-
pared to budgeted or standard costs). Revenue centers are departments where the outputs are measured in financial terms,
but not the inputs. Revenue center managers are responsible for generating revenues. Profit center managers are held
responsible for divisional profits, i.e., the difference between revenues and costs. Performance is typically measured by
Earnings Before Interest and Taxes (EBIT). In this measure it is assumed that the decentral manager is responsible for
all revenues and costs, excluding interest and taxes, because the manager has no delegated responsibility for the financing
of his assets and managing taxes is also assumed to be a corporate responsibility. Sometimes, a significant part of the divi-
sional costs are depreciation of assets, of which decisions are made at the corporate level. In this case, profits at the local
level are measured by Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Investment centers not
only bear profit and loss (P&L) responsibility, but also take on responsibility for investment (capital employed) in their
division. Financial performance is measured by Return on Investment (ROI = divisional EBIT / capital invested in the divi-
sion). When the division manager decides to increase investments in local assets, it is his responsibility to also increase
EBIT, and make sure that the ROI is kept at a certain required level. When investment responsibility is delegated to local
managers, companies also may use a measure called the Residual Income (RI = EBIT - capital charge). In this case, man-
agers of local entities have to pay a capital charge for the financing of their assets. This capital charge is calculated by
multiplying the capital invested in the division by a capital cost rate, charged by the corporation. When the internal cost
of capital rate used to calculate the capital charge is set equal to the Weighted Average Cost of Capital (WACC) of the cor-
poration and the measure is calculated after taxes, the RI measure is called Economic Value Added (EVAÒ). EVA is calcu-
lated as company profits after taxes and before interest, minus financial compensation for funding of the capital employed
by the division. In this way, EVA estimates the divisional profits that are left over after subtracting the full cost of financ-
ing (cost of debt as well as cost of equity) the assets employed by the division. As such, EVA measures the degree to which
the division has created shareholder value.
The responsibility center structure needs to be designed in such a way that the chosen structure will motivate managers
to maximize their contributions to the achievement of organizational goals and strategies. In doing so, top-level executives
and controllers have to understand the impact of financial responsibility delegation on managerial behavior. Holding man-
agers only responsible for costs motivates them in the first place for efficiency improvement and cost reduction but does not
stimulate them to contribute to revenue growth. Profit center managers will do everything to increase revenues, keep their
costs (input) in line with their revenues (output) and increase costs only when they expect that the additional costs will lead
to additional revenues. Furthermore, they will tend to build market share only in profitable markets and will focus on a pro-
duct and customer mix that leads to the highest profitability. Investment centers motivate managers to generate profits in
relation to capital employed. Consequently, managers will be willing to invest in additional production capacity only when
the investment is expected to show a positive effect on ROI, RI, or EVAÒ.
In delegating responsibilities to managers, one always should bear in mind the controllability principle. When managers
are held responsible for specified outputs, they should be able to influence these outputs. For example, when managers
are responsible for the bottom-line profit of their business unit, they should have sufficient authority to make decisions

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S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

about sales and costs. Along the same line, managers of investment centers should have sufficient opportunities to influence
capital employed and manage fixed assets and working capital related to their business.
Once the organizational structure has been defined along with roles and responsibilities for each separate division, orga-
nizations have to decide on the transfer pricing system that will be used to determine the financial value of the internal sup-
plies of goods and services between responsibility centers. Companies may use a cost-based or a cost plus transfer pricing
system.
Cost-based transfer prices may be used to value goods and services that are delivered by cost centers. Companies may use
the (predetermined) standard or actual (variable or full) cost to calculate transfer prices. Cost plus transfer prices may be used
to value goods and services that are delivered by profit centers. The following methods may be used: (1) transfer price equal
to the variable cost + profit margin, or (2) transfer price equal to the full cost + profit margin. The idea is to reward internal
providers with ‘‘acceptable” profit margins. This method is fairly simple and works well if all transferred costs can be
invoiced to customers at the end of the value chain. Cost plus transfer pricing provides a guarantee for the cost center man-
ager that all costs will be covered and sufficient margins will be made. This method, however, has some disadvantages, as
illustrated in the present case of Bakery Products International.
Like all other management controls, transfer pricing systems need to be selected in such a way that they will motivate
managers for maximizing their contributions to organizational goals and strategies. Some examples:

– When the profit mark-up used to calculate internal transfer prices between profit centers is too high and suppliers
upstream in the supply chain take too much profit, profitability of internal downstream customers is negatively affected,
which may stimulate them to search for alternative delivery sources or even review local product and market strategies
and potentially loosen alignment with corporate strategy.
– In cost center structures, only standard cost-based transfer prices will motivate internal providers of goods and services
for cost reductions. When cost center managers run processes inefficiently, they only get paid a transfer price equal to the
standard cost (or non-avoidable cost) and they stay responsible for the variance. Actual cost-based systems will make life
easy for internal providers; they have the possibility to also transfer all avoidable costs (e.g., waste and costs related to
inefficient processes) to the internal customers and do not have an incentive for cost management.

It should be noted that transfer prices are not always determined with the objective to influence managerial behavior.
Multinational companies with divisions operating in countries with different tax jurisdictions may also use transfer prices
to minimize corporate taxes and to maximize corporate profits. They may channel their profits to countries with favorable
legislations for profit taxation and they may divert profits away from countries with less favorable tax systems. In view of
management control, however, these practices may also lead to dysfunctional behaviors. In order to avoid conflicts, compa-
nies can make a clear distinction between the external statutory reporting and the internal management reporting. They
make sure that the statutory reporting is compliant with the tax rules and regulations of the countries in which their divi-
sions operate.
Table 9 provides an overview of the most important concepts, definitions, and performance measures.

Table 9
Concepts, definitions, and performance measures.

Concept Definition Performance measure

Cost center In cost centers, managers are evaluated based on their cost performance Cost per unit
(e.g., actual costs compared to budgeted or standard costs).
Investment center Investment centers not only bear profit and loss (P&L) responsibility, but ROI, RI, EVAÒ
also take on responsibility for capital employed in their division.
Profit center Profit center managers are held responsible for divisional profits, i.e., the EBIT(DA)
difference between revenues and costs.
Responsibility center An organizational unit with specified roles and responsibilities.
Revenue center Revenue centers are departments where the outputs are measured in Sales
financial terms, but not the inputs.
Transfer price The financial value of the internal supplies of goods and services between
responsibility centers.

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S. Hoozée et al. Journal of Accounting Education 53 (2020) 100692

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