Bài giảng Managerial Accounting - Chapter 13: Investment Centers and Transfer Pricing

Investment Centers and Transfer PricingChapter 13Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Decision-Makingis pushed down.Delegation of Decision Making(Decentralization)Decentralization often occurs as organizations continue to grow.13-*DecentralizationAdvantagesAllows organization to respond morequickly to events.Frees top managementfrom day-to-dayoperating activities.Uses specializedknowledge andskills of managers.13-*DecentralizationChallengeGoal Congruence:Managers of the subunits make decisions that achievetop-management goals.13-*Return on Investment (ROI)ROI = IncomeInvested CapitalROI = IncomeSales Revenue×Sales RevenueInvested CapitalSalesMarginCapitalTurnover13-*Return on Investment (ROI)Holly Company reports the following: Income $ 30,000 Sales Revenue $ 500,000 Invested Capital $ 200,000Let’s calculate ROI.13-*ROI = IncomeSales Revenue×Sales RevenueInvested CapitalReturn on Investment (ROI)ROI = $30,000$500,000×$500,000$200,000ROI = 6% × 2.5 = 15% 13-*Economic Value AddedEconomic value added tells us how much shareholder wealth is being created.13-*Economic Value Added Investment center’s after-tax operating income– Investment charge = Economic Value Added Weighted-averagecost of capitalInvestmentcenter’stotal assetsInvestmentcenter’scurrent liabilities–()After-taxcost ofdebtMarketvalueof debtCost ofequity capitalMarketvalueof equity(())Marketvalueof debtMarketvalueof equity13-*Improving R0IThree ways to improve ROIIncreaseSalesPricesDecrease Expenses Lower Invested Capital 13-*Residual IncomeAs a manager at Flower Co., would you invest the $100,000 if you were evaluated using residual income?Would your decision be different if you were evaluated using ROI? 13-*Residual IncomeResidual income encourages managers to make profitable investments that wouldbe rejected by managers using ROI.13-*Gross or Net Book Value($100,000 – $0) ÷ 10 = $10,000 per year$100,000 – $10,000 = $90,000 net book value13-*Gross or Net Book Value$15,000 ÷ $100,000 = 15%$15,000 ÷ $90,000 = 16.67%Since older assets, with lower net bookvalues, result in higher ROI, managers arediscouraged from investing in new assets. 13-*Measuring InvestmentCenter Income Division managers should be evaluated on profit margin they control.Exclude these costs:Costs traceable to the division but not controlled by the division manager.Common costs incurred elsewhere and allocated to the division.The key issue is controllability.13-*Transfer Pricing The transfer price affects the profit measure for both the selling division and the buying division.A higher transferprice for batteriesmeans . . . greaterprofits for thebattery division.Auto DivisionBattery Divisionlower profitsfor theauto division.13-*Goal CongruenceThe ideal transfer price allowseach division manager to makedecisions that maximize thecompany’s profit, whileattempting to maximize his/herown division’s profit.13-*General-Transfer-Pricing RuleTransferpriceAdditional outlaycost per unitincurred becausegoods aretransferredOpportunity costper unit to theorganizationbecause ofthe transfer=+13-*Centrally EstablishedTransfer PricesAs a general rule, a market price-based transfer pricing policy contains the following guidelines . . . The transfer price is usually set at a discount from the cost to acquire the item on the open market. The selling division may elect to transfer or to continue to sell to the outside.13-*Negotiating the Transfer PriceA system where transfer prices are arrived at through negotiation between managers of buying and selling divisions.Much managementtime is used in thenegotiation process.Negotiated price may notbe in the best interest ofoverall company operations. 13-*Cost-Based Transfer PricesSome companies use the following measures of cost to establish transfer prices . . .Variable costFull absorption costBeware of treating unit fixed costs as variable. 13-*Behavioral Issues:Risk Aversion and IncentivesThe design of a managerial performanceevaluation system using financial performancemeasures involves a trade-off between:Incentives for the manager to act inthe organization’sinterests.Risks imposed on themanager becausefinancial performance measures are onlypartially controlledby the manager.And13-*Goal Congruence andInternal Control Systems A well-designed internal control system includes a set of procedures to prevent these major lapses in responsible behavior:Fraud.Corruption.Financial Misrepresentation.Unauthorized Action.13-*