Strategic Managerial Accounting Performance Measurement and Transfer Pricing
Table of contents Introduction 2 ROI and EVA® as Performance measures and their effects on managerial behaviour 2 Conclusion 4 Transfer pricing 5 Market-based Transfer Pricing 5 Full Cost Transfer Pricing 6 Cost-plus a mark-up transfer Pricing 6 Negotiated Transfer Pricing 7 References 8 Bibliography 8
Introduction “Managing for value has become the mantra of today’s executives as the reality of competitive environments force businesses to focus on improving profitability.” (H.D. Fletcher, D.B. Smith, Journal of Business Strategies, March 1st 2004)
Many will agree that in this increasingly globalized business world competitiveness is of top priority in every business. Short-term focus and restricted vision are the worst enemies, especially for large organizations operating in varying markets or even industries. The role of PMS is two-fold: On the one hand the aim is –like the name indicates- the evaluation of outcomes delivered by the organization’s employees respectively subdivisions. The second purpose may not be equally evident; nevertheless it is as important as the first: Through their specific choice of the employed PMS, top management communicates the areas of assignment, preferred courses and methods of action to its employees. From the employees’ perspective the stipulated PMS express top management’s expectations and instructions regarding what areas they should focus their efforts on and how to reach the predefined targets. The responsibility for the appropriate
ness of the chosen PMS therefore rests on top management while the divisions’ managers are responsible for their execution.
For the sake of answering the underlying question of this assignment the characteristics of ROI and EVA® are examined regarding their tendency to provoke short-termed decisions. The second part discusses the advantages of four different approaches to transfer pricing. As a perimeter to this work only divisionalised organizations shall be
Introduction “Managing for value has become the mantra of today’s executives as the reality of competitive environments force businesses to focus on improving profitability.” (H.D. Fletcher, D.B. Smith, Journal of Business Strategies, March 1st 2004)
Many will agree that in this increasingly globalized business world competitiveness is of top priority in every business. Short-term focus and restricted vision are the worst enemies, especially for large organizations operating in varying markets or even industries. The role of PMS is two-fold: On the one hand the aim is –like the name indicates- the evaluation of outcomes delivered by the organization’s employees respectively subdivisions. The second purpose may not be equally evident; nevertheless it is as important as the first: Through their specific choice of the employed PMS, top management communicates the areas of assignment, preferred courses and methods of action to its employees. From the employees’ perspective the stipulated PMS express top management’s expectations and instructions regarding what areas they should focus their efforts on and how to reach the predefined targets. The responsibility for the appropriate
ness of the chosen PMS therefore rests on top management while the divisions’ managers are responsible for their execution.
For the sake of answering the underlying question of this assignment the characteristics of ROI and EVA® are examined regarding their tendency to provoke short-termed decisions. The second part discusses the advantages of four different approaches to transfer pricing. As a perimeter to this work only divisionalised organizations shall be
References: 3. Dearden, J., 1969. The case against ROI control, Harvard Business Review, [Journal] 47 (3), p124-135. Available through: Business Source Premier [Accessed 5 June 2012] 4 4. Drury, C. (2009) Management Accounting for Business. 4th Ed, Hampshire: P. Bond 5 8. Magni, C. 2011. AVERAGE INTERNAL RATE OF RETURN AND INVESTMENT DECISIONS: A NEW PERSPECTIVE, Engineering Economist, [Journal] 55 (2), p150-180. Available through: Business Source Premier [Accessed 6 June 2012] 9 10. University of Sunderland, 2008. Strategic management Accounting Version 1.0, APC309, unpublished