Cost Accounting (14th Edition)

796 CHAPTER 22 MANAGEMENT CONTROL SYSTEMS, TRANSFER PRICING, AND MULTINATIONAL CONSIDERATIONS
The general guideline that was introduced in the chapter (p. 790) as a first step in setting
a transfer price can be used to highlight the alternatives:
1
2
3
4
5
6
7
A B C D E F G
Case
Incremental Cost per
Unit Incurred to
Point of Transfer +
Opportunity Cost
per Unit to the
Supplying Division =
Transfer
Price
External
Market
Price
a $190 + $0 = $190.00 $200
b $190 + $14.50 a = $204.50
c $190 + $0 = $190.00
a Opportunity cost
per unit
$200
$185
Total opportunity Number of
= ÷
costs
crankshafts
= $29,000 ÷ 2,000 = $14.50
Comparing transfer price to external-market price, the tractor division will maximize
annual operating income of Pillercat Corporation as a whole by purchasing
from the machining division in case a and by purchasing from the external supplier
in cases b and c.
2. Pillercat Corporation is a highly decentralized company. If no forced transfer were
made, the tractor division would use an external supplier, a decision that would be in
the best interest of the company as a whole in cases b and c of requirement 1 but not
in case a.
Suppose in case a, the machining division refuses to meet the price of $200. This
decision means that the company will be $20,000 worse off in the short run. Should
top management interfere and force a transfer at $200? This interference would
undercut the philosophy of decentralization. Many top managers would not interfere
because they would view the $20,000 as an inevitable cost of a suboptimal decision
that can occur under decentralization. But how high must this cost be before the
temptation to interfere would be irresistible? $30,000? $40,000?
Any top management interference with lower-level decision making weakens
decentralization. Of course, Pillercat’s management may occasionally interfere to
prevent costly mistakes. But recurring interference and constraints would hurt
Pillercat’s attempts to operate as a decentralized company.
Decision Points
The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a
key question related to a learning objective. The guidelines are the answer to that question.
Decision
1. What is a management control
system and how should
it be designed?
Guidelines
A management control system is a means of gathering and using information to
aid and coordinate the planning and control decisions throughout the organization
and to guide the behavior of managers and other employees. Effective
management control systems (a) are closely aligned to the organization’s strategy,
(b) support the organizational responsibilities of individual managers, and
(c) motivate managers and other employees to give effort to achieve the organization’s
goals.