22and24_Overheads - Objectives for today n Overview of a...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 ACC 302 (Far el ) 1 Objectives for today n Overview of a common coordination problem in firms The setting and the problems it creates Transfer prices as a possible solution to the problem n Establishing a transfer pricing policy What does top management and division management want to achieve with the policy? Constraint in choosing a policy n Methods that can be used to compute transfer prices Each method s requirements and limitations Underlying principle that should guide choice of method n Takeaways ACC 302 (Far el ) 2 The setting n A decentralized organization in which the work flows of the divisions within it are interdependent In other words, within the same firm, the outputs produced by one division are the inputs another division needs for production n Managers performance evaluations are based on divisional performance We ll assume that operating profit is the measure (i.e., the division is a profit center), but could be other financial performance measures ACC 302 (Far el ) 3 The setting (continued) Why do we care about this setting? n Internal transfers of goods and services are a big part of firm operations n A study of 400 large US companies in 1990s reported that 15% of the firms have in excess of 10% of their sales in internal transfers
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 ACC 302 (Far el ) 4 The setting (continued) Example Redhawk Lumber Co. has two divisions Raw Lumber (Raw) Division, which can either: sell its product to another division (Finished Lumber), where it can be processed further into a different product sell its raw lumber product to outside customers Finished Lumber (Finished) Division, which can sell its product to outside customers ACC 302 (Far el ) 5 The setting (continued) Redhawk Lumber Company Raw Lumber ( Raw ) Division Finished Lumber ( Finished ) Division outside customers who want to buy boards outside customers who want to buy paneling Transfer price : price charged by one segment of a firm for a product / service supplied to another segment within the same firm ACC 302 (Far el ) 6 The problems in this setting What problems arise? Measuring performance is problematic The organization as a whole needs to place a value on the interdependent work flows, so management can determine whether more value is being created by transferring within the firm or selling outside the firm But because this is an internal market: transactions are not at arms-length (i.e., between independent parties) so the prices placed on those work flows may be are distorted
Background image of page 2
3 ACC 302 (Far el ) 7 The problems in this setting (continued) What problems arise? Measuring performance is problematic -
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 12

22and24_Overheads - Objectives for today n Overview of a...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online