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38 Cards in this Set
- Front
- Back
Management Control Systems |
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 behaviour of its managers and other employees |
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Management Control Systems Continueed |
many management control systems contain some or all of the balanced scorecard perspectives: - financial - customer - internal business process - learning and growth |
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Formal Systems |
include explicit rules, procedures, performance measures, and incentive plans that guide the behaviour of its managers and other employees |
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Informal Systems |
includes shared values, loyalties, and mutual commitments among members of the company, corporate culture, and unwritten norms about acceptable behaviour |
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Evaluating Management Control Systems |
- to be effective, management control systems should be closely aligned to the firm's strategies and goals - systems should be designed to fit the company's structure and decision-making responsibility of individual managers |
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Evaluating Management Control Systems Continueed |
- effective management control systems should also motivate managers and their employees - motivation is the desire to attain a selected goal (goal-congruence) combined with the resulting pursuit of that goal (effort) |
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Two Aspects of Motivation |
- 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 - effort is exertions toward reaching a goal, including both physical and mental actions |
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Organization Structure and Decentralization |
- decentralization is the freedom for managers at lower levels of the organization to make decisions - autonomy is the degree of freedom to make decisions. The greater the freedom, the greater the autonomy |
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Decentralization vs. Centraliztion |
- total decentralization means minimum constraints and maximum freedom for managers at the lowest levels of an organization to make decisions - total centralization means maximum constraints and minimum freedom for managers at the lowest levels of an organization to make decisions - companies' structures generally fall somewhere in between these two extremes, as each has benefits and costs. Structure chosen cost vs. benefit analysis |
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Benefits of Decentralization |
- creates greater responsiveness to subunit's customers, suppliers, and employees - leads to gains from faster decision making - increases motivation of subunit managers - assists management development and learning - sharpens the focus of subunit managers |
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Costs of Decentralization |
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 - also called incongruent decision making or dysfunctional decision making |
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Costs of Decentralization Continueed |
- focuses manger's attention on the subunit rather than the company as a whole - results in duplication of output - results in duplication of activities |
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Decentralization and Multinational Firms |
- multinational firms are often decentralized b/c centralized control of a company with subunits around the world is often physically and practically impossible - decentralization enables managers in different countries to make decisions that exploit their knowledge of local business ad political conditions and to deal with uncertainties in their individual environments - biggest drawback to international decentralization: loss or lack of control |
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Choices about Responsibility Centers |
regardless of the degree of decentralization, management control systems use one or a mix of the four types of responsibility centers: - cost center - revenue center - profit center - investment center |
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Transfer Price |
- the price one subunit (department or division) charges for a product or service supplied to another subunit of the same organization - creates revenues for the selling subunit and purchase costs for the buying subunit affecting each subunit's operating income |
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Transfer Pricing |
management control systems use transfer prices to coordinate the actions of subunits and to evaluate their performance |
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Intermediate Product |
the unfinished product or service transferred between subunits of an organization - production stages may be in separate subunits of the organization, that may be geographically apart - product may be processed further by the transferee or sold directly to an external customer |
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Three Transfer Pricing Methods |
1. Market-based transfer prices 2. cost-based transfer prices 3. hybrid transfer prices |
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Inter-Provincial Transfers and Taxes |
- provincial governments prefer transfer prices at market price as it is an arm's-length price - split of taxable income between provinces impacts both operating cash flow and net income - advance transfer price arrangement (APA), can be negotiated with tax authorities in advance (avoids costly and time-consuming disputes with tax authorities) |
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Market-Based Transfer Prices |
top management chooses to use the price of similar product or service that is publicly available. Sources of price include trade associations, competitors, and so on |
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Market-Based Transfer Prices optimal decision making conditions |
1. the market for the intermediate product is perfectly competitive 2. inter-dependencies of subunits are minimal 3. 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 |
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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 - allows a firm to achieve goal congruence, motivating management effort, subunit performance evaluations, and subunit autonomy |
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Market-Based Transfer Prices Continueed |
- perhaps should not be used if the market is currently in a state of "distress pricing" - useful when market prices are unavailable, inappropriate, or too costly to obtain |
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Distress Prices |
- temporary price declines due to excess supply - in the short term, supplier division should meet the distress price as long as it exceeds incremental costs - in the long term. supplier division should stop producing |
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Top Management Choice |
chooses a transfer price based on the costs of producing the intermediate product examples: - variable production costs - variable and fixed production costs - full costs and life-cycle costs - one of the above, plus some markup |
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Full-Cost Bases |
- many companies use transfer prices based on full costs that contain an allocation of fixed overhead - can lead to suboptimal decisions in decentralized companies - full-cost based on ABC cost drivers can provide more refined allocation bases |
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Variable Cost Bases |
can lead to divisions recording large losses and income due to transfer pricing |
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Hybrid Transfer Pricing |
takes into account both cost and market information |
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Types of hybrid transfer prices |
- prorating the difference between maximum and minimum transfer prices - dual pricing - negotiated pricing |
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Proprating |
the difference between the maximum and minimum cost-based transfer prices |
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Dual-Pricing |
using two separate transfer-pricing methods to price each transfer from one subunit to another - ie. selling division receives full cost pricing, and the buying division pays market pricing - difference in pricing is absorbed by corporate office rather than operating units - promotes goal congruence - not widely used in practice |
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Negotiated Transfer Prices |
- 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 - may or may not bear any resemblance to cost or market data - often used when market prices are volatile - represent the outcome of a bargaining process between the selling and buying subunits |
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Minimum Transfer Price Guideline |
the minimum transfer price in many situations should be: minimum transfer price = incremental costs per unit incurred up to the point of transfer + opportunity costs per unit to the supplying division |
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Incremental Cost |
the additional cost of producing and transferring the product or service |
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Opportunity Cost |
the maximum contribution margin forgone by the selling subunit if the product or service is transferred internally |
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Multinational Transfer Pricing and Tax Considerations |
- transfer prices across borders have tax implications (ie. income tax) - establishing an arm's-length price for value-added services such as marketing and intangible is difficult - income Tax Act of Canada (section 247) limits transfer pricing to 5 methods |
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Setting Transfer Prices: 5 Methods |
Traditional transaction methods: 1. comparable uncontrolled price (CUP) - internal market-based price 2. resale price method (RPM) - the calculated arm's-length resale price 3. Cost-plus method (CPM) Transactional profit methods: 4. Profit split method (PSM) 5. Transactional net margin method (TNMM) |
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Tax Minimization Strategies |
- establish a legitimate subsidiary in a tax haven (have no tax treaties with Canada) - establish a legitimate subsidiary in an international financial cnetre with low tax rates (have tax treaties with Canada) - Request an advance pricing arrangement with all involved tax authorities |