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Int. Acc. MA LECT 8: CH 18 Decentralization and transfer pricing part 1:
Int. Acc. MA LECT 8: CH 18 Decentralization and transfer pricing part 1:
Describe the benefits and costs
of decentralisation
Decentralisation vs. centralisation
Total
decentralisation
:
Minimum constraints and maximum freedom for managers at the lowest levels of an organisation to make decisions.
Total
centralisation
: Maximum constraints and minimum freedom for managers at the lowest levels of an organisation to make decisions.
Benefits of decentralization
Creates greater responsiveness to local needs
Leads to gains from quicker decision making
Increases motivation of subunit managers
Aids management development and learning
Sharpens the focus of subunit managers
More knowledge at lower management levels required!
Describe the benefits and costs
of decentralisation(II)
Costs of decentralization
Focuses manager’s attention on the subunit rather than the organisation as a whole
Increases costs of gathering information
Leads to suboptimal decision making (incongruent or dysfunctional decision making due to loss of control)
Results in duplication of activities
Decentralisation in mncs
Decentralisation enables country managers
to make decisions that exploit their knowledge of local business and political conditions.
A drawback to decentralising multinational companies is the lack of control.
Multinational corporations (MNCs) are often decentralised because centralised control of a company with customers from different continents is practically impossible.
Decentralization example
“Heineken is a very decentralised organization, where many decisions happen at the market level” (Søren Hagh, managing director for Heineken Italia)
World market is divided into 4 different regions
President Asia Pacific
President Africa Middle East and Eastern Europe
President Europe
President Americas
Within each region Heineken appoints a managing director for each country
Three general methods for determining transfer prices and their effect on operating profit of individual subunits(I)
Transfer pricing
The transfer price creates revenues for the selling subunit and purchase costs for the buying subunit, affecting each subunit’s operating profit.
Intermediate products are the products transferred between subunits of an organisation
A transfer price is the price one subunit charges for a product or service supplied to another subunit of the same organisation.
Intermediate products can either be processed further by the receiving subunit or be resold to an external customer.
E.g. Starbucks coffee beans
Transfer pricing(II)
can create conflicts
If division managers are evaluated based only on their division’s results
Example
An assembly manager may decide to purchase materials from an outside supplier even though the same materials can be produced at a lower cost by another division within the company
The production manager refuses to sell the materials at a reduced price because she is evaluated based on her division’s profits!
Transfer price (III): when companies can use transfer pricing for tax purposes
Starbucks: Paid 0% effective tax rate in the UK from 2009-2011
One major reason: UK subsidiary paid 6% of its total sales for the use of ‘intellectual property’ to the former Amsterdam headquarter