Bài giảng Kế toán, kiểm toán - Chapter five: Responsibility accounting and transfer pricing

Responsibility Accounting and Transfer PricingChapter FiveCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin5-2Responsibility Accounting Characteristics of responsibility centers are:Knowledge of the centers’ managers is difficult to acquire, maintain, or analyze at higher levelsDecision rights are specified for each centerPerformance measurement is obtained from internal accounting system(Recall organizational architecture concepts in Chap. 4.)Types of responsibility centers: cost, profit, investment.See Table 5-1.Cost Center - DesignKnowledge: Central manager knows optimal production quantity and budget Cost center manager knows optimal mix of inputsDecision rights: Cost center manager chooses quantity and quality of inputs used in cost center (labor, material, supplies)Measurement:Minimize total cost for a fixed outputMaximize output for a fixed budget5-3Cost Center - ProblemsMinimizing average costs does not necessarily maximize profits. Cost centers have an incentive to produce more units to spread fixed costs over a large number of units.Quality of products produced by cost center must be monitored.5-4Profit Center - DesignKnowledge:Profit center managers’ knowledge of product mix, demand, and pricing is difficult to transfer to central managementDecision rights:Can chose input mix, product mix, and selling pricesGiven fixed capital budgetMeasurement:Actual profitsActual profits compared to budget5-5Profit Center - ProblemsSetting appropriate transfer prices on goods and services transferred within the firmHow to allocate corporate overhead costs to responsibility centersProfit centers that focus only on their own profits often ignore how their actions affect other responsibility centers5-6Investment CentersKnowledge:Investment center manager has knowledge of investment opportunities and operating decisionsDecision rights:Ratify and monitor decisions of cost and profit centers Decide amount of capital invested or disposedMeasurement:Return on Investment (ROI)Residual Income (RI)Economic Value Added (EVA)5-7Return on Investment Return on Investment (ROI) = Accounting net income for an investment center  Total assets invested in that investment center DuPont formula separates ROI into two components: ROI = Sales turnover Return on sales ROI = (Sales  Total Investment)  (Net Income  Sales) ROI increases with smaller investments and larger profit margins. Focusing on ROI can cause underinvestment. See Self Study Problem 1, part a.5-8Residual Income Residual income (RI) = Accounting net income of investment center  (Required rate of return  Capital invested in that center)RI is determined with financial accounting measurements of net income and capitalEach investment center could be assigned a different required rate of return depending on its riskRI can be increased by increasing income or decreasing investment See Self Study Problem 1, part b.5-9Economic Value Added EVA is the same as residual income with some adjustments to accounting the reported accounting numbers. Economic value added (EVA) = Adjusted accounting net income of investment center  (Weighted average cost of capital  Capital invested in that center)Examples of EVA adjustments to accounting:Research and development (R&D) is amortized over 5 years for EVA, but expensed immediately for financial accounting.Unamortized R&D is included in capital for EVA, but treated is treated as an expired cost (zero value) for financial accounting.5-10Economic Value AddedEVA can be increased by three basic methods:Increase the efficiency of existing operations, and thus the spread between the investment return and the firm’s weighted average cost of capitalIncrease the amount of capital invested in projects with positive spreads between investment return and the firm’s weighted average cost of capitalWithdraw capital from operations where the investment return is less than the firm’s weighted average cost of capital5-11Investment Center - ProblemsDisputes over how to measure income and capital.Difficult to compare investment centers of different sizes.Firm’s central management must monitor product quality and market niches of investment centers to reduce possibility for self-interested investment center to damage firm’s reputation.5-12Controllability PrincipleControllability Principle:Hold center managers responsible for only those costs and decisions for which they have authorityDrawbacks of controllability principle:If managers suffer no consequences from events outside their direct control, they have no incentive to take actions that can affect the consequences of uncontrollable events (such as storms, corporate income taxes, etc.)5-13What Might Cause Overinvestment?Discuss the implications of using ROI, RI, and/or EVA individually or in combinations as a way to preclude “overinvestment”.5-14How Could You Deter Underinvestment if You are Limited to the Use of ROI?Provide a solution which is Practical – from a cost/effectiveness point of view, andEffective – from a goal congruence point of viewBe specific!5-15Transfer Pricing - DefinedTransfer Price defined: the internal price (or cost allocation) charged by one segment of a firm for a product or service supplied to another segment of the same firmExamples of transfer prices:Internal charge paid by final assembly division for components produced by other divisionsService fees to operating departments for telecommunications, maintenance, and services by support services departmentsCost allocations for central administrative services (general overhead allocation)5-16Transfer Pricing and Firm ValueTransfer prices have multiple effects on firm value:Performance measurement: Reallocate total company profits among business segmentsInfluence decision making by purchasing, production, marketing, and investment managersRewards and punishments:Compensation for divisional managersPartitioning decision rights:Disputes over determining transfer prices5-17Ideal Transfer PricingIdeal transfer price would be:Opportunity cost, or the value forgone by not using the transferred product in its next best alternative useOpportunity cost is eitherVariable production cost if the firm has excess capacityRevenue available if the product is sold outside if the firm does not have excess capacity5-18Transfer Pricing MethodsExternal market priceIf external markets are comparableVariable cost of productionExclude fixed costs which are unavoidableFull-cost of production Average fixed and variable costNegotiated pricesDepends on bargaining power of divisionsSee Self-Study Problem 2.5-19Transfer Pricing ImplementationDisputes over transfer pricing occur frequently because transfer prices influence performance evaluation of managersInternal accounting data are often used to set transfer prices, even when external market prices are available Classifying costs as fixed or variable can influence transfer prices determined by internal accounting dataTo reduce transfer pricing disputes, firms may reorganize by combining interdependent segments or spinning off some segments as separate firms5-20Transfer Pricing for International TaxationWhen products or services of a multinational firm are transferred between segments located in countries with different tax rates, the firm attempts to set a transfer price that minimizes total income tax liability. Segment in higher tax country: Reduce taxable income in that country by charging high prices on imports and low prices on exports.Segment in lower tax country: Increase taxable income in that country by charging low prices on imports and high prices on exports.Government tax regulators try to reduce transfer pricing manipulation.5-21