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CHAPTER 22 MANAGEMENT CONTROL SYSTEMS, TRANSFER PRICING, AND MULTINATIONAL CONSIDERATIONS LEARNING OBJECTIVES 1. Describe a management control system and its three key properties 2. Describe the benefits and costs of decentralization 3. Explain transfer prices and four criteria used to evaluate them 4. Calculate transfer prices using three different methods 5. Illustrate how market-based transfer prices promote goal congruence in perfectly competitive markets 6. Avoid making suboptimal decisions when transfer prices are based on full cost plus a markup 7. Understand the range over which two divisions negotiate the transfer price when there is unused capacity 8. Construct a general guideline for determining a minimum transfer price 9. Incorporate income tax considerations in multinational transfer pricing CHAPTER OVERVIEW Chapter 22 examines management control systems of organizations with emphasis on the role of a subsystem, that of the accounting information system. In Chapter 6 the concept of management control systems was introduced through the budgeting process. The three key properties of a management control system are described in this chapter but studied in three different chapters: (1) alignment with strategy— Chapter 13, (2) fitness with organizational structure—Chapter 22, and (3) performance of managers and employees—Chapter 23. The goal of a management control system is improving the collective decisions within an organization in an economically feasible manner. Throughout the text the importance of providing relevant and reliable information to decision makers via the accounting information system has been emphasized. Again that purpose is illustrated using transfer pricing in a decentralized organization as a way that accountants provide information to improve managers’ decisions. This chapter progresses from a notation of a key property of the management control system—“designed to fit the company’s structure and the decision-making responsibility of individual managers”—to a closer look at organizational structure—centralized or decentralized—to a detailed study of the role of transfer prices for a decentralized organization. Included are multinational aspects and the impact of governmental levies, especially income taxes. CHAPTER OUTLINE I. Management control systems A. Overview of management control systems 1. Characteristics of an effective system a. Achieves its stated goal of guiding and improving decisions for benefit of company b. Is cost effective
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c. Performs as designed d. Influences behavior of people who use it 2. Role accounting information plays in system B. Specifics of management control systems Learning Objective 1: Describe a management control system and its three key properties 1. 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 employees a.
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