Read the summary and the most important questions on Chapter 5: Responsibility accounting & transfer pricing

• 1 Responsibility accounting

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• What is a responsibility center?

  Subunit with specific tasks within the organization.
  General characteristics:
  

  1. Knowledge of the centers' mangers is difficult to acquire, maintain or analyze at higher levels
  2. Decision rights are specified for each center
  3. Performance measurement is obtainted from internal accounting system.   
     

• Falsh/ true: cost centers have an incentive to produce more units to spread fixed costs over a large number of units.

  True

• Falsh/true: Quality of products produced by cost center must be monitored by central manager/

  True. If not incentive to reduce quality

• What does controllability principle mean?

  hold center managers responsible for only those costs and decisions for which they have authority.

• Disadvantages of controllability principle are:

  - No incentives to take actions that can affect consequences of uncontrollable events
  - Ignores the role of relative performance evaluation.

• 2 EVA

• Eva and bonus banks: Ultimate goal of EVA?

  align incentive system with EVA inprovement goals:
  

  • Creates shareholder value!
  • EVA and bonus plan calculations
  • bonus banks as motivation instruments 

• What is a weakness of EVA?

  Focus on short term accounting earnings

• 3 Transfer pricing

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• What is a transfer price?

  the internal price charged by one segment of a firm for a   product or service supplied by another segment of the same  firm

• What are the 2 main reasons for transfer pricing?

  1. international taxation
  2. performance measurement

• What does management control system mean? What are the 3 aspects?

  Guide employee behavior in interest of the firm.  
  
  Aspects:
  

  1. Motivation = desire to attain a goal
     
  2. Effort = effort directed to achieve a goal
  3. Goal congruence = actions taken in the best interest of firm?