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B dependency on historical data eva is based on

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(b)Dependency on historical data. EVA is based on historical accounts, whichmay be oflimited use as a guide to the future. In practice, the influences ofaccounting policies on the starting profit figure may not be completelynegated by the adjustments made to it in the EVA model.(c)Number of adjustments needed to measure EVA. Making the necessaryadjustments can be problematic as sometimes alarge number of adjustmentsare required.(d)Comparison of like with like. Investment centres, which are larger in size,may have larger EVA figures for this reason.Allowance for relative sizemustbe made when comparing the relative performance of investment centres.425
5.Transfer Pricing5.1Transfer pricing is used whendivisions of an organisation need to charge otherdivisions of the same organisation for goods and servicesthey provide to them. Forexample, subsidiary A might make a component that is used as part of a product madeby subsidiary B of the same company, but that can also be sold to the external market,including makers of rival products to subsidiary B's product. There will therefore betwo sources of revenue for A.(a)External sales revenue from sales made to other organisations.(b)Internal sales revenue from sales made to other responsibility centres withinthe same organisation, valued at the transfer price.5.2Transfer pricingTransfer prices are a way ofpromoting divisional autonomy, ideally withoutprejudicing themeasurement of divisional performanceor discouraging overallcorporate profit maximisation.Transfer pricesshould be set at a level whichensures that profitsfor theorganisation as a whole aremaximised.5.3Criteria of a good transfer pricing policyThere are four specific criteria that a good transfer pricing policy should have:(a)Provide motivation for divisional managers(b)Maintain divisional autonomy and independence(c)Allow divisional performance to be assessed objectively(d)Ensure the divisional managers make decisions that are in the best interests ofthe divisions and also of the company as a whole (i.e. goal congruence, whichis most important among all).5.4General rulesThelimitswithin which transfer prices should fall are as follows.(a)Theminimum. The sum of the supplying division’smarginal cost andopportunity costof the itemtransferred.(b)Themaximum. Thelowest market priceat which thereceiving divisioncouldpurchasethe goods or servicesexternally,lessanyinternal cost426
savings in packaging and delivery.5.5The minimum results from the fact that the supplying division will not agree totransfer if the transfer price is less than the marginal cost + opportunity cost of theitem transferred (because if it were the division would incur a loss).5.6The maximum results from the fact that the receiving division will buy the item at thecheapest price possible.

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Term
Spring
Professor
N/A
Tags
Economics, Generally Accepted Accounting Principles

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