Divisionalisation and Transfer Pricing Flashcards Preview

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Flashcards in Divisionalisation and Transfer Pricing Deck (19)
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1

What are the four advantages of Divisionalisation?

- More responsive to local conditions
- Motivation (make own decisions)
- Training for junior managers
- Better performance evaluations

2

What are the three disadvantages of Divisionalisation?

- Hard to achieve goal congruence
- Duplication of tasks
- Lack of expertise

3

What are three responsibility centres?

- Cost centre
- Profit centre
- Investment centre

4

What does a cost centre do?

Just incurs costs

5

What does a profit centre do?

Just incurs profits

6

What does an investment centre do?

Incurs costs, profits and Invests. (Controls capital)

7

What is the formula for ROI?

(Controllable profit) ÷ (Capital Employed)

8

What is the formula for RI?

Controllable profit - Notional Cost of Capital

9

What is controllable profit?

Profit after depreciation but before interest and tax.

10

How do you calculate capital employed?

Total assets - Current liabilities

11

What is ROI good for?

Internal and external comparisons

12

What is notional cost of capital?

Return required for lenders of equity

13

What is difficult to do with RI?

Comparisons

14

What does RI encourage?

Investment

15

What are the five goals of transfer pricing?

- Goal congruence
- Performance evaluation
- Divisional autonomy
- Maintain financial records
- Optimise tax liability

16

What are the four ways you can set a transfer price?

- Cost plus
- Two part tariff
- Market price
- Dual price

17

What is the overall aim of setting a transfer price?

To encourage all divisions to act in the best interest of the company.

18

How do you calculate Two part tariff

Marginal cost supply department + fixed amount

19

How do you calculate market price

Market price deducts costs of selling externally