The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.
| Decision | Guidelines |
|---|---|
| A management control system is a means of gathering and using information to aid and coordinate the planning and control decisions throughout the organization and to guide the behavior of managers and other employees. Effective management control systems (a) are closely aligned to the organization’s strategy, (b) support the organizational responsibilities of individual managers, and (c) motivate managers and other employees to give effort to achieve the organization’s goals. |
| The benefits of decentralization include (a) greater responsiveness to local needs, (b) gains from faster decision making, (c) greater management development and learning, and (d) sharpened focus of subunit managers. The costs of decentralization include (a) suboptimal decision making, (b) excessive focus on the subunit rather than the company as a whole, (c) increased costs of information gathering, and (d) duplication of activities. |
| A transfer price is the price one subunit charges for a product or service supplied to another subunit of the same organization. Transfer prices seek to (a) promote goal congruence, (b) motivate management effort, (c) help evaluate subunit performance, and (d) preserve subunit autonomy (if desired). |
| Transfer prices can be (a) market based, (b) cost based, or (c) hybrid. Different transfer-pricing methods produce different revenues and costs for individual subunits and, thus, different operating incomes for the subunits. |
| In perfectly competitive markets, there is no unused capacity, and division managers can buy and sell as much of a product or service as they want at the market price. In such settings, using the market price as the transfer price motivates division managers to transact internally and to take exactly the same actions as they would if they were transacting in the external market. |
| A transfer price based on the full cost plus a markup may lead to suboptimal decisions because it leads the buying division to regard the fixed costs and the markup of the selling division as a variable cost. The buying division may then purchase products from an external supplier and expect cost savings that will not occur. |
| When there is unused capacity, the transfer-price range lies between the minimum price at which the selling division is willing to sell (its variable cost per unit) and the maximum price the buying division is willing to pay (the lower of its contribution margin or the price at which the product is available from external suppliers). Methods for arriving at a price in this range include proration (such as splitting the difference equally or on the basis of relative variable costs), negotiation between divisions, and dual pricing. |
| The general guideline states that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer plus the opportunity cost per unit to the selling division. |
| A firm can use transfer pricing to lower its income tax payments by reporting more income in low-tax-rate countries and less income in hightax-rate countries. However, the tax regulations of different countries restrict the transfer prices that companies can use. |