-byAnuj S.


Management Control Systems
y Management Control

Systems are a means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization and to guide the behavior of its managers and other employees

Management Control Systems y Many management control systems contain some or all of the balanced scorecard perspectives: Financial 2. Customer 3. Internal Business Process 4. . Learning and Growth 1.

procedures. loyalties. and incentive plans that guide the behavior of its managers and other employees y Informal systems include shared values. and mutual commitments among members of the company. performance measures. corporate culture. and unwritten norms about acceptable behavior .Management Control Systems y Consist of Formal and Informal control systems: y Formal systems include explicit rules.

Evaluating Management Control Systems y To be effective. management control systems should be closely aligned to the firm s strategies and goals y Systems should be designed to fit the company s structure and decision-making responsibility of individual managers y Effective management control systems should also motivate managers and their employees y Motivation is the desire to attain a selected goal (goalcongruence) combined with the resulting pursuit of that goal (effort) .

Two Aspects of Motivation y Goal Congruence exists when individuals and groups work toward achieving the organization s goals managers working in their own best interest take actions that align with the overall goals of top management y Effort is exertions toward reaching a goal. including both physical and mental actions .

Organization Structure and Decentralization y Decentralization is the freedom for managers at lower levels of the organization to make decisions y Autonomy is the degree of freedom to make decisions. the greater the autonomy . The greater the freedom.

Structure chosen cost vs. benefit analysis . as each has benefits and costs.Decentralization vs. Centralization y Total decentralization means minimum constraints and maximum freedom for managers at the lowest levels of an organization to make decisions y Total centralization means maximum constraints and minimum freedom for managers at the lowest levels of an organization to make decisions y Companies structures generally fall somewhere in between these two extremes.

Benefits of Decentralization y Creates greater responsiveness to local needs y Leads to gains from faster decision making y Increases motivation of subunit managers y Assists management development and learning y Sharpens the focus of subunit managers .

y Also called Incongruent Decision Making or Dysfunctional Decision Making .Costs of Decentralization y Leads to Suboptimal Decision Making. which arises when a decision s benefit to one subunit is more than offset by the costs or loss of benefits to the organization as a whole.

Costs of Decentralization y Focuses manger s attention on the subunit rather than the company as a whole y Increases costs of gathering information y Results in duplication of activities .

Decentralization and Multinational Firms y Multinational firms companies that operate in multiple countries are often decentralized because centralized control of a company with subunits around the world is often physically and practically impossible y Decentralization enables managers in different countries to make decisions that exploit their knowledge of local business and political conditions and to deal with uncertainties in their individual environments y Biggest Drawback to International Decentralization: Loss or lack of control .

Choices About Responsibility Centers y Regardless of the degree of decentralization. management control systems uses one or a mix of the four types of responsibility centers: y Cost Center y Revenue Center y Profit Center y Investment Center .

Transfer Pricing y Transfer Price the price one subunit (department or division) charges for a product or service supplied to another subunit of the same organization y Management control systems use transfer prices to coordinate the actions of subunits and to evaluate their performance .

Transfer Pricing y The transfer price creates revenues for the selling subunit and purchase costs for the buying subunit affecting each subunit s operating income y Intermediate Product the product or service transferred between subunits of an organization .

3. 2. Market-based Transfer Prices Cost-based Transfer Prices Negotiated Transfer Prices .Three Transfer Pricing Methods 1.

Market-Based Transfer Prices y Top management chooses to use the price of similar product or service that is publicly available. Sources of prices include trade associations. etc. competitors. .

There are no additional costs or benefits to the company as a whole from buying or selling in the external market instead of transacting internally 1.Market-Based Transfer Prices y Lead to optimal decision-making when three conditions are satisfied: The market for the intermediate product is perfectly competitive 2. Interdependencies of subunits are minimal 3. .

subunit performance evaluations. and subunit autonomy y Perhaps should not be used if the market is currently in a state of distress pricing . motivating management effort.Market-Based Transfer Prices y A perfectly competitive market exists when there is a homogeneous product with buying prices equal to selling prices and no individual buyer or seller can affect those prices by their own actions y Allows a firm to achieve goal congruence.

inappropriate. or too costly to obtain . Examples include: y Variable Production Costs y Variable and Fixed Production Costs y Full Costs (including life-cycle costs) y One of the above.Cost-Based Transfer Prices y Top management chooses a transfer price based on the costs of producing the intermediate product. plus some markup y Useful when market prices are unavailable.

Cost-Based Transfer Pricing Alternatives y Prorating the difference between the maximum and minimum cost-based transfer prices y Dual-Pricing using two separate transfer-pricing methods to price each transfer from one subunit to another. and the buying division pays market pricing . Example: selling division receives full cost pricing.

Negotiated Transfer Prices y Occasionally. subunits of a firm are free to negotiate the transfer price between themselves and then to decide whether to buy and sell internally or deal with external parties y May or may not bear any resemblance to cost or market data y Often used when market prices are volatile y Represent the outcome of a bargaining process between the selling and buying subunits .

Comparison of Transfer-Pricing Methods .

Minimum Transfer Price y The minimum transfer price in many situations should be: Minimum Transfer Price = Incremental cost per unit incurred up to the point of transfer + Opportunity Cost per unit to the selling subunit y Incremental cost is the additional cost of producing and transferring the product or service y Opportunity cost is the maximum contribution margin forgone by the selling subunit if the product or service is transferred internally .

customs duties. environment-related taxes and other government levies . value-added taxes. sales taxes.Multinational Transfer Pricing and Tax Considerations y Transfer prices often have tax implications y Tax factors include income taxes. payroll taxes. tariffs.

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