Management Control Systems

MANAGEMENT CONTROL SYSTEMS & TRANSFER PRICING Management Control Systems (MCS) Gathering & Using Information: aid in planning & control decisions. Guide behaviour of managers & employees Formal explicit rules, procedures, performance measures & incentive plans that guide the behaviour of managers & employees Comprises of several systems (ex. management accounting system, HR system, Quality Systems) Informal shared values, loyalty, mutual commitments, culture of the organization unwritten norms of acceptable behaviour Financial Quantifiable numbers Revenue, cost, profit, etc. Non-financial not financial in nature. Balanced Scorecard - 4 different perspectives Financial: Revenue, expenses, net income, cash flow, & asset value Customer: Their satisfaction, retention, market share, & brand strength. Learning & Growth (Development of Employees): Employee satisfaction, turnover, skills, & education. Internal Process: Inventory, Orders, resource allocation, cycle time, Quality control MCS is designed around this concept To be EFFECTIVE Aligned with the organization's strategies & goals Supports the responsibilities of individual managers. GOAL CONGRUENCE: Efforts = Achievements, ALIGNED GOALS SUB-OPTIMIZATION: Oppositely, managers are being driven to just support their respective goals but sometimes their individual goals from within their areas of responsibilities may not be the same with the goals of the organization; goal conflicts - different! Motivates managers & other employees: goal congruence → effort aspect Fills with an Organization Structure Design Centralized centralized organizational structure Decision-making authority is concentrated at the top management Lead to a more consistent & unified decisions across the organization Cons: slow decision making, reduce flexibility Ex: Philippine National Government Decentralized decentralized organizational structure Decision-making authority is distributed throughout the organization Often delegated to subunit managers Leads to increased adaptability & flexibility = fast decision making Cons: Inconsistency Ex: Barangay Local Government More About DECENTRALIZATION Benefits: Better responsiveness Faster decision making More motivated subunit managers Fosters Management development Sharper Management Focus Ex: KFC in each country, the menu reflects their culture. This meets customer needs & satisfaction. Risks: Suboptimal decisions that could lead to internal competition & lack of coordination (inefficiency) Lack of expertise of managers Inconsistent goals (2) Higher cost of gathering information Duplication of activities (redundant costs) Responsibility Centers: Revenue center: R Cost center: C Profit center: R+C Investment center: R+C+I Transfer Pricing * The price that one subunit (department or division) charges for a product or service supplied to another subunit from the same organization. * Creates revenues for the selling subunit & purchase costs for the buying subunit affecting each subunit's operating income. Three methods: 1. Market-based transfer price 2. Cost-based transfer price 3. Hybrid (Negotiated) transfer price **Example 1: Market-based transfer price** * Logistics cost per barrel of Crude Oil: * Variable cost: $1 * Fixed cost: $3 * Refining cost per barrel of gasoline: * Variable cost: $6 * Fixed cost: $6 **HORIZON PETROLEUM** Crude Oil (from Mexico) Supply Chain Department | v Crude Oil (from Refinery) | v Gasoline (To Texas) 100 barrels of Crude Oil | v Logistics Cost | v Variable cost: $100 | v Fixed cost: $300 | v Total: $400 50 barrels of Gasoline | v Processing Cost | v Variable cost: $300 | v Fixed cost: $300 | v Total: $600 **Total Full Cost:** $7,600 **Selling Price:** $8,500 **Net Operating Income:** $900 **Horizon's Net Operating Income:** $1,200 ($900 + $300) * Top management may use the price of similar products or services available in the market. Allows the firm to achieve goal congruence