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Responsibility centers Reporting segments (Transfer pricing (Models…
Responsibility centers
Reporting segments
Responsibility centers
How to define
Primary effect to the whole company
Level of autonomy and responsibilities of their manager
Factors to evaluate manager's performance
Types
Cost
Revenue
Profit
Investment
Contribution and segment reporting
Contribution reporting:
Sales
Less variable costs
Contribution margin
Less fixed costs
Net operating income
Segment reporting:
Sales
Less variable costs
Contribution margin
Less traceable fixed costs
Segment margin
Less allocated fixed costs
Net operating income
Common costs allocation method in segment reporting
Stand-alone method
Incremental method: Primary user and incremental user
Transfer pricing
Definition
An intermediate product is transferred between two segments of a company.
Set a price for internal exchange of products
Requirements
Fair performance measurement of responsibility centers involve
Business units behave independently
Keep managers motivate to pursue their interest and reach the company's goals
Models
Market price
How to set the price: Based on the current market price
Motivation: Business unit is autonomous and competitive
Tax risk: Low
Negotiated price
How to set the price: Seller and Buyer negotiate
Motivation: Buyer and seller are less autonomous
Tax risk: Moderate
Apply when the market price is unavailable
Variable cost
How to set the price: Based on the variable costs
Motivation: Seller doesn't control the costs
Tax risk: High
Apply when the seller have excess capacity
Company wants to encourage internal purchases
Full cost
How to set the price: Based on the full cost
Motivation: Seller doesn't control the costs
Tax risk: Moderate
Apply when both market price and negotiated price are unavailable.
Cost models
Standard cost
Seller is responsible to control costs
Avoid inefficiency from seller to buyer
Fairer performance evaluation
Actual cost