Responsibility Accounting & Transfer Pricing

Decentralization,ResponsibilityCenters,andTransferPricingCentralizationandDecentralizationSpectrumHighdegreeofdelegationofduties,power,andauthoritytolowerlevelsoftheorganizationDecentralizedCentralizedNeithercentralizationnordecentralizationisnecessarilyadesirableorganizationalgoal!DecentralizationinOrganizationsBenefitsofDecentralizationTopmanagementfreedtoconcentrateonstrategy.Lower-levelmanagersgainexperienceindecision-making.Decision-makingauthorityleadstojobsatisfaction.Lower-leveldecisionoftenbasedonbetterinformation.Improvesabilitytoevaluatemanagers.DecentralizationinOrganizationsDisadvantagesofDecentralizationLower-levelmanagersmaymakedecisionswithoutseeingthe“bigpicture.”Maybealackofcoordinationamongautonomousmanagers.Lower-levelmanager’sobjectivesmaynotbethoseoftheorganization.Maybedifficulttospreadinnovativeideasintheorganization.DecentralizationandSegmentsAsegmentisanypartoractivityofanorganizationaboutwhichamanagerseekscost,revenue,orprofitdata.Asegmentcanbe...QuickMartAnIndividualStoreASalesTerritoryAServiceCenterCost,Profit,andInvestmentsCentersCostCenterAsegmentwhosemanagerhascontrolovercosts,butnotoverrevenuesorinvestmentfunds.Cost,Profit,andInvestmentsCentersProfitCenterAsegmentwhosemanagerhascontroloverbothcostsandrevenues,butnocontroloverinvestmentfunds.RevenuesSalesInterestOtherCostsMfg.costsCommissionsSalariesOtherCost,Profit,andInvestmentsCentersInvestmentCenterAsegmentwhosemanagerhascontrolovercosts,revenues,andinvestmentsinoperatingassets.CorporateHeadquartersCost,Profit,andInvestmentsCentersResponsibilityCenterCostCenterProfitCenterInvestmentCenterCost,profit,andinvestmentcentersareallknownasresponsibilitycenters.ReturnonInvestment(ROI)FormulaROI=NetoperatingincomeAverageoperatingassetsCash,accountsreceivable,inventory,plantandequipment,andotherproductiveassets.Incomebeforeinterestandtaxes(EBIT)ReturnonInvestment(ROI)FormulaRegalCompanyreportsthefollowing:Netoperatingincome$30,000Averageoperatingassets$200,000Sales$500,000$30,000$200,000=15%ROI=ControllingtheRateofReturnThreewaystoimproveROI...IncreaseSalesReduceExpensesReduceAssetsControllingtheRateofReturnRegal’smanagerwasabletoincreasesalesto$600,000whichincreasednetoperatingincometo$42,000.Therewasnochangeintheaverageoperatingassetsofthesegment.Let’scalculatethenewROI.ReturnonInvestment(ROI)FormulaNetoperatingincomeSalesSalesaaaaaaaaaAverageoperatingassets×ROI=$42,000$600,000×$600,000$200,00021%Wecanmodifyouroriginalformulaslightly:ROI=ROI=WeincreasedROIfrom15%to21%MarginTurnover×CriticismsofROIIntheabsenceofthebalancedscorecard,managementmaynotknowhowtoincreaseROI.Managersofteninheritmanycommittedcostsoverwhichtheyhavenocontrol.ManagersevaluatedonROImayrejectprofitableinvestmentopportunities.TheBalancedScorecardManagementtranslatesitsstrategyintoperformancemeasuresthatemployeesunderstandandaccept.PerformancemeasuresFinancialCustomersLearningandgrowthInternalbusinessprocessesCriticismsofROIAsdivisionmanageratWinston,Inc.,yourcompensationpackageincludesasalaryplusbonusbasedonyourdivision’sROI--thehigheryourROI,thebiggeryourbonus.ThecompanyrequiresanROIof15%onallnewinvestments--yourdivisionhasbeenproducinganROIof30%.YouhaveanopportunitytoinvestinanewprojectthatwillproduceanROIof25%.Asdivisionmanagerwouldyouinvestinthisproject?CriticismsofROIAsdivisionmanager,Iwouldn’tinvestinthatprojectbecauseitwouldlowermypay!CriticismsofROIGee...Ithoughtweweresupposedtodowhatwasbestforthecompany!ResidualIncome-AnotherMeasureofPerformanceNetoperatingincomeabovesomeminimumreturnonoperatingassetsResidualIncomeAdivisionofZepher,Inc.hasaverageoperatingassetsof$100,000andisrequiredtoearnareturnof20%ontheseassets.Inthecurrentperiodthedivisionearns$30,000.Let’scalculateresidualincome.ResidualIncomeOperatingassets100,000$Requiredrateofreturn×20%Requiredreturn20,000$Actualreturn30,000$Requiredreturn(20,000)Residualincome10,000$MotivationandResidualIncomeResidualincomeencouragesmanagerstomakeprofitableinvestmentsthatwouldberejectedbymanagersusingROI.CompanyA'sreturnoninvestment(ROI)is:A)36%.B)20%.C)15%.D)4%.ThefollowinginformationisavailableonCompanyA:Sales$900,000Netoperatingincome36,000Stockholders'equity100,000Averageoperatingassets180,000Minimumrequiredrateofreturn15%ThefollowingdataareavailablefortheSouthDivisionofRedrideProducts,Inc.andthesingleproductitmakes:Unitsellingprice$20Variablecostperunit$12Annualfixedcosts$280,000Averageoperatingassets$1,500,000HowmanyunitsmustSouthselleachyeartohaveanROIof16%?A)240,000.B)1,300,000.C)65,000.D)52,000.Allotherthingsequal,acompany'sreturnoninvestment(ROI)wouldgenerallyincreasewhen:A)salesdecrease.B)averageoperatingassetsincrease.C)operatingexpensesincrease.D)operatingexpensesdecrease.TRANSFERPRICINGAtransferpriceisthepricechargedwhenonesegment(forexample,adivision)providesgoodsorservicestoanothersegmentofthesamecompany.TRANSFERPRICING–SomePoints•Transferpricesarenecessarytocalculatecostsinacost,profit,orinvestmentcenter.•Thepurchasingdivisionwillnaturallywantalowtransferpriceandsellingdivisionwillwa