Explain the difference between market-based transfer prices and cost-based transfer prices.
Transfer cost based on the current market price of the goods is known as market-based transfer cost. The cost of manufacturing things serves as the setting for cost-based transfer pricing.
For internally exchanged products, market-based transfer prices are routinely used as price markers for decentralised control of internal production processes. Their use aims to create an internal market that would foster production motivation and efficiency, suggesting a beneficial effect of performance value-based transfer pricing.
The transfer price is determined by the market cost for comparable goods and services under a market-based process. If the upstream division needs to make a profit on internal sales, the exchange cost is calculated based on a markup based on production costs using a cost-based process.
Consider the following key performance indicators, and classify each indicator according to the balanced scorecard perspective it addresses. Choose from the financial perspective, customer perspective, internal business perspective, and the learning and growth perspective.
a. Number of customer complaints
b. Number of information system upgrades completed
c. Residual income
d. New product development time
e. Employee turnover rate
f. Percentage of products with online help manuals
g. Customer retention
h. Percentage of compensation based on performance
i. Percentage of orders filled each week
j. Gross margin growth
k. Number of new patents
l. Employee satisfaction ratings
m. Manufacturing cycle time (average length of production process)
n. Earnings growth
o. Average machine setup time
p. Number of new customers
q. Employee promotion rate
r. Cash flow from operations
s. Customer satisfaction ratings
t. Machine downtime u. Finished products per day per employee
v. Percentage of employees with access to upgraded system
w. Wait time per order prior to start of production
Grandpa Jim’s Cookie Company sells homemade cookies made with organic ingredients. His sales are strictly Web based. The business is taking off more than Grandpa Jim ever expected, with orders coming from across the country from both consumers and corporate event planners. Grandpa decides to decentralize and hires a full-time baker who will manage production and product costs and a Web site designer/sales manager who will focus on increasing sales through the Web site. Grandpa Jim can no longer handle the business on his own, so he hires a business manager to work with the other employees to ensure the company is best utilizing its assets to produce profit. Grandpa will then have time to focus on new product development. Now that Grandpa Jim’s Cookie Company has decentralized, identify the type of responsibility center that each manager is managing
One subunit of Racer Sports Company had the following financial results last month:
Subunit X Actual Results Flexible Budget Flexible Budget % Variance
Variance (F or U) (F or U)
Revenue $ 476,000 $ 451,000
Expenses 261,000 251,000
Margin 215,000 200,000
Fixed Expenses 40,000 26,000
Segment Margin $ 175,000 $ 174,000
1. Complete the performance evaluation report for this subunit (round to two decimal places).
2. Based on the data presented and your knowledge of the company, what type of responsibility center is this subunit?
3. Which items should be investigated if part of management’s decision criteria is to investigate all variances equal to or exceeding $8,000 and exceeding 10% (both criteria must be met)?
4. Should only unfavorable variances be investigated? Explain.
5. Is it possible that the variances are due to a higher-than-expected sales volume? Explain.
6. Will management place equal weight on each of the variances exceeding $8,000? Explain.
7. Which balanced scorecard perspective is being addressed through this performance report? In your opinion, is this performance report a lead or a lag indicator? Explain.
8. List one key performance indicator for the three other balanced scorecard perspectives. Make sure to indicate which perspective is being addressed by the indicators you list.
Decentralization divides company operations into various reporting units. Most decentralized subunits can be described as one of four different types of responsibility centers.
1. Explain why companies decentralize. Describe some typical methods of decentralization.
2. List the four most common types of responsibility centers, and describe their responsibilities.
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