questions

• What is the purpose of decentralization
• Through performance enhancement at a profit center level, to achieve better results for the whole organization
• Give autonomy to local center managers in decision-making
• Motivate center managers to improve performance
• Why may profit center managers start looking out for their own interest?
• Profit center managers may start looking out for their own interest and make decisions that amplify their own profits, but may not be beneficial to the organisation as a whole/
• In such a situation, head office may interfere in the decision-making, but this hurts the local autonomy.
• Explain transfer pricining?
• Interdependence between various departments or profit/investment centers ito exchanging goods or services
• Profit centers want to earn an income on the transfer to maintain their performance
• The price at which goods are sold internally is the transfer price
• The price causes sales income for the selling center and purchase cost for the buying center.
• The two costs will cancel eachother out at central level.
• Thus , profit is generated at the individual profit centers but no effect is made on the overall profits of the company as a whole.
• What are 4 rules to remember when it comes to transfer pricing?
• Both divisions must have some benefit from the transaction or else they will not participate in it.
• The transfer price can be imposed by head office, decided by commercial negotiation , decided amongst the managers themselves
• For the selling division, the preference should be to sell internally and for the buying division the preference should be to buy internally.
• However, if there is a commercial reason (availability of better prices ) then managers should have the option to buy from/sell to an external party
• What are the objectives of transfer pricing ?
• Goal congruence
• Performance measurement
• Maintaining divisional autonomy
• Minimising global tax liability
• Recording movement of goods and services
• Fair allocation of profits between divisions
• What basis is used for setting transfer prices?
• Market based prices
• Cost based prices
• Negotiated prices
• What are makert baed prices ?
• Market prices of the product-packaging, distribution and warranty costs (costs saved due to internal transfer)
• What are cost based prices?
• Actual or budgeted (preferred) total cost/ marginal cost + markup
• Name the intermediate markets for product or service
• Perfect
• Imperfect
• Non-existent
• What transfer price should be used in the perfect market?
• All the produce can be sold in the market for the existing market price.