Responsibility Accounting and Transfer Pricing

Topics: Management, Price, Cost Pages: 6 (1013 words) Published: March 8, 2011
Managerial Accounting and Controls Reporting
Responsibility Accounting and Transfer Pricing in Decentralized Operations 1. When are decentralized operations appropriate?
2. How does responsibility accounting relate to decentralization? 3. What are the differences among the four types of responsibility centers? 4. What is suboptimization and what are its effects?
5. How and why are transfer prices for products used in organizations? 6. What are the differences among the various definitions of product cost? 7. How and why are transfer prices for services used in organizations?



Authority in Organizational Structure

FactorPure Centralization Pure Decentralization

Age of firmYoung---------->Mature
Size of firmSmall---------->Large
Stage of product developmentStable---------->Growth Growth rate of firmSlow---------->Rapid
Expected impact of incorrect decisions on profitsHigh---------->Low Top management’s confidence in subordinatesLow---------->High Historical degree of control in firmTight----------> Moderate Use of technologyLow---------->High

Rate of change in the firm’s marketSlow---------->Rapid Advantages of Decentralization
Helps top management recognize and develop managerial talent •Allows managerial performance to be comparatively evaluated •Often leads to greater job satisfaction
Makes the accomplishment of organizational goals and objectives easier Reduction in decision-making time
Minimization of difficulties resulting from attempts to communicate problems and instructions through an organizational chain of command Quicker perceptions of environmental changes
Allows the use of management by exception

Disadvantages of Decentralization
May result in a lack of goal congruence or suboptimization •Requires more effective communication abilities
May create personnel difficulties upon introduction
Employees asked to do too much too soon
Some managers have difficulty relinquishing control
Can be extremely expensive
Training lower-level managers
Potential cost of poor decisions
Duplication of activities
Developing and operating sophisticated planning and reporting system •Requires accepting inappropriate decisions as it is a training ground

Responsibility Accounting Systems
Responsibility accounting refers to an accounting system that provides information to top management about the performance of organizational subunits. One purpose of a responsibility accounting system is to “secure control at the point where costs are incurred instead of assigning them all to products and processes remote from the point of incurrences.”

Control Procedures
Control procedures are implemented for the following three reasons: Managers attempt to cause actual operating results to conform to planned results (effectiveness) Managers attempt to cause, at a minimum, the standard output to be produced from the actual input costs incurred (efficiency) Managers need to ensure, to the extent possible, a reasonable utilization of plant and equipment

Responsibility Report
Assists each successively higher level of management in evaluating performance of subordinate managers and their respective organizational units Contains monetary and nonmonetary information
Separates costs into those controlled by unit managers and those not controlled by unit managers

Basic Steps in a Control Process
Nonmonetary Information for Responsibility Reports
Departmental/divisional throughput
Number of defects (by product, product line, supplier)
Number of orders backlogged (by date, quantity, cost, and selling price) •Number of customer complaints (by type and product); method of complaint resolution •Percentage of orders delivered on time

Manufacturing (or service) cycle efficiency
Percentage of...
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