Control systems and transfer pricing
7 important questions on Control systems and transfer pricing
Management control system
An effective Management control system is closely aligned to the company's strategy, fits the company's structure, and motivate managers and employees to give effort to achieve the company's goal.
Levels of management control gathering and reporting
(stock price, net income, return on investment, contribution, cash flow)
2. Customer/market level
(Customer satisfaction, cost of competitor's products, customer response time)
3. Individual facility level
(Material and labour costs, other costs in various departments of the organization)
4. Individual activity level
(costs related to stock and goods worked on, amount of sales transactions, number of
shipments)
4 Types of Responsibilities Centres
2. Revenue centre (revenues only)
3. Profit centre (revenues and costs)
4. Investment centre (investments, revenues, costs)
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3 General methods for determining Transfer prices
(price is based on market price)
*Market prices serve to evaluate the economic performance and profitability of each
division individually
2. Cost based transfer prices
(price is based on the costs of producing the product / service in question)
3. Negotiated transfer prices
(price is negotiated between the subunits, with both the freedom to sell / buy outside of the
organization)
Guidelines for ideal Transfer pricing
* Incremental costs = the additional costs that are directly associated with the production and
transfer of the products or services.
* Opportunity costs = the max. contribution lost by the supplying division if the products /
services are transferred internally.
Market scenario's for Transfer pricing (p573)
division has no idle capacity. Market based transfer prices are ideal in such scenarios.
2. An intermediate market exists, and the supplying division has idle capacity. In markets that are not perfectly competitive, capacity utilization can be increased only by cutting prices. Idle capacity exists because cutting prices is often not worthwhile, as it decreases operating profit. With idle capacity, opportunity costs are zero. Min. Transfer price = Incremental costs.
3. No market exists for the intermediate product
Transfer prices and Tax
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