1. Copyright © 2003 Pearson Education Canada Inc. Slide 23-223 Chapter 23 Management Control Systems, Transfer Pricing, and Multinational Considerations

2. Copyright © 2003 Pearson Education Canada Inc. Slide 23-224 Management Control Systems Management control system (MCS) is a means of gathering and using information to aid and coordinate the process of making planning and control decisions throughout the organization and to guide behaviour Align the MCS with the organization’s strategies and goals MCS must be designed to fit the organization’s structure and the decision-making responsibility of individual managers MCS must motivate managers and employees to attain the selected goals of the organization Goal congruence occurs when individuals and groups work toward the goals that top management desires Pages 845 - 846

3. Copyright © 2003 Pearson Education Canada Inc. Slide 23-225 Decentralization Decentralization is the freedom of managers at lower levels of the organization to make decisions Benefits of Decentralization 1.Creates greater responsiveness to local needs 2.Leads to quicker decision-making 3.Increases motivation 4.Aids management development and learning 5.Sharpens the focus of managers Costs of Decentralization 1.Leads to sub-optimal decision-making 2.Results in duplication of activities 3.Decreases loyalty toward the total organization 4.Increases costs of gathering information Pages 846 - 848

4. Copyright © 2003 Pearson Education Canada Inc. Slide 23-226 Responsibility Centres Cost centre manager is accountable for costs only Revenue centre manager is accountable for revenues only Profit centre manager is accountable for revenues and costs Investment centre manager is accountable for investments, revenues and costs Page 849

5. Copyright © 2003 Pearson Education Canada Inc. Slide 23-227 Transfer Pricing A transfer price is the price one subunit (segment, department, division) of an organization charges for a product or service supplied to another subunit of the same organization Transfer price is revenue for the selling subunit and a cost for the buying subunit Transfer pricing can create problems if the managers of both units are motivated to maximize their operating incomes Methods of determining transfer prices: Market-based transfer prices Cost-based transfer prices Negotiated transfer prices Pages 849 - 851

6. Copyright © 2003 Pearson Education Canada Inc. Slide 23-228 Methods of Setting the Transfer Price Market-Based Transfer Price base the transfer price on the market price if the market is perfectly competitive may use “distress” prices or “long-run average” market prices Cost-Based Transfer Prices useful when market prices are unavailable based on full costs or some other variation of cost some firms allow for prorating the difference between the maximum and minimum transfer prices or the use of dual transfer prices Remember that all transfer prices are negotiated to some extent Pages 854 - 859

7. Copyright © 2003 Pearson Education Canada Inc. Slide 23-229 General Guideline for Transfer Pricing Additional incremental Opportunity costs or outlay costs per unitper unit to the incurred up to the pointsupplying division of transfer Pages 859 - 860 =+ If supplying division has no idle capacity, this formula yields the market price If supplying division has enough excess capacity to fill the order, the formula yields a number equal to incremental (variable) costs Also consider the competitive nature of the market Market Price Maximum Minimum Variable Cost Transfer Price Range Minimum Transfer Price

8. Copyright © 2003 Pearson Education Canada Inc. Slide 23-230 Multinational Transfer Pricing Transfers between subunits of an organization in different countries must consider tax implications Tax factors include income taxes payroll taxes customs duties tariffs sales and value-added taxes environment-related taxes other government levies Pages 860 - 862

9. Copyright © 2003 Pearson Education Canada Inc. Slide 23-231 Multinational Transfer Pricing and Taxes Canada Customs and Revenue Agency (Revenue Canada) approach to tax issues concerning international transfer prices Expected to report taxable income on the basis of having charged a fair price for goods and services provided to non-resident affiliates and having paid no more than a fair price for goods and services received from non-resident affiliates Keeping two sets of books (one for management use and one for tax reporting) may be interpreted as a sign of manipulation of taxable income Many companies are seeking advance approval from CCRA for multinational transfer prices Page 861