Management Control System
means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization and to guide the behavior of its managers and other employees.
Formal Management Control System
includes explicit rules, procedures, performance measures, and incentive plans that guide the behavior of its managers and other employees.
The formal control system is composed of several systems such as:
1. The management accounting system for information about the firm's costs, revenues, and income.
2. The human resources system for information about the recruiting and training of employees, absenteeism, and accidents.
3. The quality system for informati
Informal Management Control System
includes the shared values, loyalties, and mutual commitments among members of the organization, the company's culture, and the unwritten norms about acceptable behavior for managers and other employees.
the firm's strategies and goals
(Also be designed to support the organizational responsibilities of individual managers)
To be effective, MCS's should be closely aligned to...
Motivation
the desire to attain a selected goal (goal-congruence aspect) combined with the resulting pursuit of that goal (effort aspect).
1. Goal congruence
2. Effort
2 Aspects of Motivation
Goal Congruence
exists when individuals and groups work toward achieving the organization's goals.
Effort
the extent to which managers strive or endeavor in order to achieve a goal. Effort goes beyond physical exertion to include mental actions as well.
Decentralization
is an organizational structure that gives managers at lower levels the freedom to make decisions.
Autonomy
the degree of freedom to make decisions. The greater the freedom, the greater the autonomy.
Subunit
refers to any part of an organization. It may be a large division or a small group.
1. Creates greater responsiveness to the needs of a subunit's customers, suppliers, and employees.
2. Leads to gains from faster decision making by subunit managers.
3. Assists management development and learning.
4. Sharpens the focus of subunit managers
Benefits of Decentralization
Incongruent decision making (dysfunctional decision making)
Leads to suboptimal decision making, which arises when a decision's benefit to one subunit is more than offset by the costs or loss of benefits to the organization as a whole.
1. Incongruent decision making
2. Leads to unhealthy competition.
3. Results in duplication of output.
4. Results in duplication of activities.
Costs of Decentralization
decentralized level
Decisions related to product mix and advertising and made most frequently at the
decentralized level
Decisions related to the type and source of long-term financing are made least frequently at the
optimize across subunits by offsetting the income in one subunit with losses in others.
Centralizing its income tax strategies allows an organization to
decentralized because centralized control of a company with subunits around the world is often physically and practically impossible.
Multinational firms are often
knowledge of local business and political conditions and to deal with uncertainties in their individual environments
Decentralization enables managers in different countries to make decisions that exploit their
loss or lack of control and the resulting risks
The biggest drawback to international decentralization is
measure and monitor the performance of divisions.
Multinational corporations that implement decentralized decision making usually design their management control systems to
Responsibility center
segment or subunit of the organization whose manager is accountable for a specified set of activities.
1. Cost
2. Revenue
3. Profit
4. Investment
4 Types of Responsibility Centers
Transfer Price
is the price one subunit (department or division) charges for a product or service supplied to another subunit of the same organization.
Individual subunits
In a decentralized organization, much of the decision-making power resides in
Revenues; purchase costs
The transfer price creates ________________ for the selling subunit and_______________ for the buying subunit affecting each subunit's operating income.
evaluate the subunits performances and to motivate their managers
Operating income can be used to
Intermediate Product
product or service transferred between subunits of an organization.
1. Promote goal congruence so that division managers acting in their own interest will take actions that are aligned with the objectives of top management.
2. Induce managers to exert a high level of effort.
3. Help top managers evaluate the performance o
Transfer Prices should meet 4 criteria:
1. Market-based transfer prices.
2. Cost-based transfer prices.
3. Hybrid transfer prices.
3 Transfer Pricing Methods
Market Based Transfer Prices
Top managers may choose to use the price of a similar product or service that is publicly available. Sources of prices include trade associations, competitors, and so on.
Or, they may select the external price a subunit charges outside customers.
1. The market for the intermediate product is perfectly competitive.
2. The interdependencies of subunits are minimal.
3. There are no additional costs or benefits to the company as a whole from buying or selling in the external market instead of transact
Transferring products or services at market prices generally leads to optimal decisions when three conditions are satisfied.
Perfectly competitive market
there is a homogeneous product with buying prices equal to selling prices and no individual buyer or seller can affect those prices by their own actions.
distress pricing
Market based pricing should not be used if the market if currently in a state of
Cost-based Transfer Pricing
Top managers choose a transfer price based on the costs of producing the intermediate product.
Useful when market prices are unavailable, inappropriate, or too costly to obtain, such as when markets are not perfectly competitive, when the product is specialized or when the internal product is different from the products available externally in term
When is cost-based transfer pricing used?
1. They represent relevant costs for long-run decisions.
2. They facilitate external pricing based on variable and fixed costs.
3. They are the least costly to administer.
Full cost based
1. How are the subunit's indirect costs allocated to products?
2. Have the correct activities, cost pools, and cost-allocation bases been identified?
3. Should the chosen fixed-cost rates be actual or budgeted?
Full cost based issues:
Hybrid transfer pricing
Top management may set the prices by specifying a transfer price that is an average of the cost of producing and transporting the product internally and the market price for comparable products.
1. Prorating the difference between maximum and minimum transfer prices.
2. Negotiated pricing. (Most common hybrid type.)
3. Dual pricing.
Types of Hybrid Transfer Prices
Negotiated Transfer Prices
subunits of a firm are free to negotiate the transfer price between themselves and then to decide whether to buy and sell internally or deal with external parties
Negotiated Transfer Prices
Used when market prices are volatile
Negotiated Transfer Prices
Represents the outcome of a bargaining process between the selling and buying subunits
Dual Pricing
uses two separate transfer-pricing methods to price each transfer from one subunit to another.
Incremental Cost per unit incurred up to the point of transfer + Opportunity Cost per unit to the selling subunit
Minimum Transfer Price=
Incremental Cost
the additional cost of producing and transferring the product or service.
Opportunity Cost
the maximum contribution margin forgone by the selling subunit if the product or service is transferred internally.
payroll taxes, customs duties, tariffs, sales taxes, value-added taxes, environment-related taxes, and other government levies.
Transfer prices affect not just income taxes, but..