Lecture 5
Responsibility accounting and
Transfer pricing
Objectives
1. Discuss responsibility accounting
a. Cost centers
b. Profit centers
c. Investment centers and their performance measures (ROI, RI, EVA)
No general rule for all firms or industries
2. Discussing transfer pricing
a. Economics of transfer pricing
b. Common methods of transfer pricing
c. The role of transfer prices in international taxation
3. Discussion the assignment
A. Responsibility Accounting
+ Characteristics of responsibility centers are:
1. Knowledge of the centers’ managers is difficult to acquire, maintain or analyze at higher
levels
2. Decision rights are specified for each center
3. Performance measurement is obtained from internal accounting system
+ Types of responsibility centers
1. Cost center Lower costs
2. Profit center Maximized profits
3. Investment center Get the best returns from the investment
, Cost center Profit center Investment center
Knowledge + Central manager + Profit center + Investment center
knows optimal managers’ manager has
production quantity knowledge of knowledge of
and budget product mix, investment
+ Cost center manager demand, and opportunities and
knows optimal mix pricing is difficult to operating
transfer to central decisions
of inputs
management
Decision Cost center manager + Can choose input + Ratify and monitor
rights chooses quantity and mix, product mix decision of cost
Design
quality used in cost and selling prices and profit centers
center (labor, material, + Given fixed capital + Decide amount of
supplies) budget capital invested or
disposed
Measurement + Minimize total cost + Actual profits + Return on
for a fixed output + Actual profits Investment (ROI)
+ Maximize output for compared to + Residual Income
a fixed budget budget (RI)
+ Economic value
added (EVA)
+ Cost centers have + Setting appropriate + Disputes over how
an incentive to transfer prices on to measure income
produce more units goods and services and capital,
to spread fixed transferred within reflecting
costs over a large the firm problems with
number of units + How to allocate performance
+ Quality of products corporate Overhead measures
produced by cost costs to + Firm’s central
center must be responsibility management must
Problems monitored centers monitor product
+ Minimizing average + Profit centers that quality and market
costs doesn’t focus only on their niches of
necessarily own profits and investment centers
maximize often ignore how to reduce
their actions affect possibility for self-
other responsibility interested
centers investment centers
to damage firm’s
reputation
ROI – Return on investment
Accountingnet income for aninvestment
ROI=
Total assets invested ∈that investment center
Focusing on ROI can cause underinvestment
ROI diverts attention form opportunity costs
ROI increases ↑ with smaller investments and larger profit margins promoting “horizon problem”
- Các vấn đề chung trong hợp tác xã nông nghiệp có khả năng nảy sinh khi khoảng thời gian mà các
thành viên yêu cầu về lợi ích của khoản đầu tư ít hơn khoảng thời gian mà lợi ích được tạo ra
Responsibility accounting and
Transfer pricing
Objectives
1. Discuss responsibility accounting
a. Cost centers
b. Profit centers
c. Investment centers and their performance measures (ROI, RI, EVA)
No general rule for all firms or industries
2. Discussing transfer pricing
a. Economics of transfer pricing
b. Common methods of transfer pricing
c. The role of transfer prices in international taxation
3. Discussion the assignment
A. Responsibility Accounting
+ Characteristics of responsibility centers are:
1. Knowledge of the centers’ managers is difficult to acquire, maintain or analyze at higher
levels
2. Decision rights are specified for each center
3. Performance measurement is obtained from internal accounting system
+ Types of responsibility centers
1. Cost center Lower costs
2. Profit center Maximized profits
3. Investment center Get the best returns from the investment
, Cost center Profit center Investment center
Knowledge + Central manager + Profit center + Investment center
knows optimal managers’ manager has
production quantity knowledge of knowledge of
and budget product mix, investment
+ Cost center manager demand, and opportunities and
knows optimal mix pricing is difficult to operating
transfer to central decisions
of inputs
management
Decision Cost center manager + Can choose input + Ratify and monitor
rights chooses quantity and mix, product mix decision of cost
Design
quality used in cost and selling prices and profit centers
center (labor, material, + Given fixed capital + Decide amount of
supplies) budget capital invested or
disposed
Measurement + Minimize total cost + Actual profits + Return on
for a fixed output + Actual profits Investment (ROI)
+ Maximize output for compared to + Residual Income
a fixed budget budget (RI)
+ Economic value
added (EVA)
+ Cost centers have + Setting appropriate + Disputes over how
an incentive to transfer prices on to measure income
produce more units goods and services and capital,
to spread fixed transferred within reflecting
costs over a large the firm problems with
number of units + How to allocate performance
+ Quality of products corporate Overhead measures
produced by cost costs to + Firm’s central
center must be responsibility management must
Problems monitored centers monitor product
+ Minimizing average + Profit centers that quality and market
costs doesn’t focus only on their niches of
necessarily own profits and investment centers
maximize often ignore how to reduce
their actions affect possibility for self-
other responsibility interested
centers investment centers
to damage firm’s
reputation
ROI – Return on investment
Accountingnet income for aninvestment
ROI=
Total assets invested ∈that investment center
Focusing on ROI can cause underinvestment
ROI diverts attention form opportunity costs
ROI increases ↑ with smaller investments and larger profit margins promoting “horizon problem”
- Các vấn đề chung trong hợp tác xã nông nghiệp có khả năng nảy sinh khi khoảng thời gian mà các
thành viên yêu cầu về lợi ích của khoản đầu tư ít hơn khoảng thời gian mà lợi ích được tạo ra
