Professional Documents
Culture Documents
CN22HO
CN22HO
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
Cost Accounting
L.DuCharme
Lead to rewards
Monetary
2009 Foster School of Business Cost Accounting L.DuCharme
Nonmonetary
5
Total centralization
2009 Foster School of Business Cost Accounting L.DuCharme
Benefits of Decentralization
Creates greater responsiveness to local needs
Leads to gains from quicker decision making
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
2009 Foster School of Business Cost Accounting L.DuCharme
Responsibility Centers
Cost center Revenue center
Profit center
2009 Foster School of Business Cost Accounting L.DuCharme
Investment center
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.
2009 Foster School of Business 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
2009 Foster School of Business Cost Accounting L.DuCharme
12
Transfer-Pricing Methods
Market-based transfer prices
13
14
Cost Accounting
L.DuCharme
15
16
When transfer prices are based on full cost plus a markup, suboptimal decisions can result.
2009 Foster School of Business Cost Accounting L.DuCharme
17
18
Cost Accounting
L.DuCharme
19
20
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
Cost Accounting
L.DuCharme
25
Comparison of Methods
Useful for Evaluating Subunit Performance
Cost Accounting
26
Comparison of Methods
Motivates Management Effort
Yes, if based on budgeted costs; less incentive if based on actual cost Yes
L.DuCharme
Cost Accounting
27
Comparison of Methods
Preserves Subunit Autonomy
Cost Accounting
L.DuCharme
28
Comparison of Methods
Other Factors
Useful for determining full-cost; easy to implement Bargaining takes time and may need to be reviewed
L.DuCharme
Cost Accounting
29
30