Responsibility Acctg, Transfer Pricing GP AnalysisFull description
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Transfer Pricing
Transfer pricing nestle caseDeskripsi lengkap
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This is the notes for transfer pricing
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Jurna international yang mebahas tentang transfer pricing
Transfer Pricing topics on MAS (Management Advisory Services)
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transper pricing
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Wherever transfer pricing practices occur, tax haven countries are tagged along. Which parties are involved with and function as the upper hand. Read it to understand and comprehend.
Responsibility Accounting
Meaning and Definition of Responsibility Accounting One of the fundamental functions of management accounting is facilitating managerial control. Various devices are used by the management in performing this important function. Responsibility accounting is one of the most recent developments in this field. The concept of responsibility accounting is closely related to the systems of budgetary control and standard costing. Responsibility accounting is a system of control where responsibility is assigned for the control of costs. The persons are made responsible for the control of costs. Proper authority is given to the persons so that they are able to keep up their perf perfor orma manc nce. e. In case case the the perfo perform rman ance ce is not not acco accordi rding ng to the prede predete term rmine ined d standards then the persons who are assigned this duty will be personally responsible for it. In responsibility accounting the emphasis is on men rather than on systems.
Charles T. Hongreen . “Responsibility accounting is a system of accounting that recognies various decision centres throughout an organiation and traces costs to the individual managers who are primarily responsible for making decisions about the costs in !uestion". Louderback and Dominiak# “Responsibility accounting is the name given to that respect of the managerial process dealing with the reporting of information to facilitate control of operations and evaluation of performance." Institute of Cost and orks Accountants of India# “Responsibility $ccounting is a system system of manag manageme ement nt accoun accountin ting g under under which which accoun accountab tabili ility ty is establ establishe ished d accord according ing to the respon responsib sibili ility ty delega delegated ted to variou variouss levels levels of manag manageme ement nt and a management management information information and reporting reporting system system instituted instituted to give ade!uate feedback feedback in term termss of deleg delegat ated ed resp respon onsi sibi bili lity ty.. %nde %nderr this this syst system em divis divisio ions ns or un unit itss of an organi organiat ation ion under under a specif specified ied author authority ity in a person person are develop developed ed respons responsibil ibility ity centres and evaluated individually for their performance." &ence# &ence# respon responsibi sibilit lity y accoun accounting ting focuse focusess main main attent attention ion on respon responsib sibili ility ty centres. The managers of different activity centres are responsible for controlling the costs of their centres. Information about costs incurred for different activities is supplied to the persons incharge of various centre. The performance is constantly compared to the standards set and this process is very useful in e'ercising cost control. Responsibility accounting is different from cost accounting is different from cost accounting in the sense that the future lays emphasis on cost control whereas the latter lays emphasis on cost ascertainment.
!ssential "eatures of Responsibility Accounting $n analysis of the definitions given above reveals the following important features or fundamental aspects of responsibility accounting( )a*
Inputs and outputs or Costs and Revenues : The implementation and maintenance of responsibility accounting system is based upon information relating to inputs and outputs. The physical resources utilied in an organiation such !uantity of raw material used# labour hours consumed are termed as inputs. These inputs e'pressed in monetary terms are known as costs. +imilarly output e'pressed in monetary terms are called revenue.
)b*
Planned and Actual Information or Use of Budgeting: ,ffective responsibility accounting re!uires both planned and actual financial information. It is not only historical cost and revenue data but also planned future data which is essential for implementation of responsibility accounting system. It is through budgets that responsibility for implementing plans is communicated to each level of management.
)c*
Identification of Responsibility Centres : The responsibility centres represent the sphere of authority or decision points in an organisation. &owever# for effective control a large firm is divided into meaningful segments# departments or divisions# which are called responsibility centres. $ responsibility center is under the control of an individual who is responsible for control of activities of that sub unit of the organisation.
)d*
Relationship Between Organisation tructure and Responsibility Accounting ystem : Responsibility accounting system must be so designed as to suit the organiation structure of organiation. It must be founded upon e'isting authority responsibility relationship in organiation. In fact# responsibility accounting system should parallel the organisation structure and provide financial information to evaluate actual results of each individual responsible for a function.
)e*
Performance Reporting : Responsibility accounting is a control device. $ control system to be effective should be such that deviations from the plans must be reported at earliest so as to take corrective action for future. The deviations can be known only when performance is reported. Thus# responsibility accounting system is focused on performance reports also known as -responsibility reports# prepared for each responsibility unit.
)f*
Participative !anagement : The function of responsibility accounting system becomes more effective if participative style of management is followed# wherein# the plans are laid according to mutual consent and decisions reached after consulting the subordinates. It provides motivation to workers by ensuring their participation and self imposed goals.
)g*
!anagement by "#ception: $n effective responsibility accounting system must provide for management by e'ception i.e# it should focus attention of management on significant deviations and not burden them with all kinds of routine matters# rather condensed reports re!uiring their attention must be sent to them particularly at higher levels of management.
)h*
$uman Aspect of Responsibility Accounting . To ensure success of responsibility accounting system it must look into human aspect also by considering needs of subordinates# developing mutual interests# providing information about control measures and ad/usting according to re!uirements.
)i*
%ransfer Pricing Policy : In a large(scale enterprise having decentralised divisions# there is common practice of transfering goods and services from one segment of organiation to other. In such situations# there is a need to determine the price at which the transfer should take place so that costs and revenues could be properly assigned. The significance of the transfer price can well be /udged from the fact that for the transfering division it will be source of revenue# whereas for division to which transfer is made it will be element of cost. &ence# there is need of having proper transfer policy for successful implementation of responsibility accounting system.
#teps in$ol$ed in Responsibility Accounting Responsibility accounting is used as a control device. The aim of responsibility is to help management in achieving organisational goals. The following steps are involved in responsibility accounting0 1.
The organisation is divided into various responsibility centres. ,ach responsibility centre is put under charge of responsibility manager. The managers are responsible for the performance of their departments.
2.
The targets of each responsibility centre are set in. The targets are set in consultation with manager of responsibility centre so that he may be able to give full information about his department. The goals of the responsibility centres are properly communicated to them.
3.
The actual performance of each responsibility centre is recorded and communicated to e'ecutive concerned and actual performance is compared with goals set and it helps in assessing the work of these centres.
4.
If the actual performance of a department is less than the standard set# then variances are conveyed to the top management.
5.
Timely action is taken to take necessary corrective measures so that work does not suffer in future. The directions of top(level management are communicated to concerned responsibility centre so that corrective measures are initiated at earliest.
#ignificance of Responsibility Accounting Responsibility is very important in every type of business. The following are some of the advantages of responsibility accounting.
%.
Assigning of Responsibility : ,ach and every individual in organisation is assigned some responsibility and they are accountable for their work. ,verybody knows what is e'pected of him. 6o body can shift responsibility to anybody else if something goes wrong. +o# under this system responsibility is assigned individually.
&.
Improves Performance: The persons incharge for different activities know that their performance will be reported to top management. They will try to improve their performance. On the other hand# it acts as a deterrent for low performance also because persons know that they are accountable for their work and they will have to e'plain for their low performance.
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$elpful in cost planning: %nder system of responsibility accounting full information is collected about costs and revenues. This data is helpful in planning of future costs and revenues# fi'ing of standards and preparing of budgets.
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&elegation and Control: This system enables the management to delegate authority while retaining overall control. The authority is delegated according to re!uirements of tasks assigned. On other hand responsibility of various persons is fi'ed which is helpful in controlling their work. The control remains with top management because performance of every cost centre is regularly reported to it. +o# management is able to delegate authority and at the same time to retain control.
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$elpful in &ecision'ma(ing: The information collected under this system is helpful to management in planning its future actions. The past performance of various cost centre also helps in fi'ing their future targets. +o this system enables management to take important decisions.
Limitation of Responsibility Accounting $ system of responsibility accounting provides a built in means of evaluating a managers performance. Timely reports of performance ensure prompt corrective action directed towards deviations from the budgeted performance. Inspite of these advantages# responsibility accounting suffers from following limitations. 1.
Individual interest may come into conflict with interest of organisation.
2.
It is difficult to establish a sound organisation structure with clearly defined authority and responsibility. This is so owing to inter dependent nature of many departments.
3.
It is e!ually difficult to match the responsibility centres and chart of accounts for collecting costs by such centres.
4.
The system does not take into consideration the relations of those who are involved in it.
5.
The system may not work well unless it has support of people who operate system. +ince the person who incurs costs is to be held responsible for each item of cost# he should willingly accept responsibility for deviations.
6.
The system re!uires continuous consideration of reactions of segmental managers.
Responsibility Centres In the *ords of Deakin and Maher “a responsibility centre is a specific unit of an organisation assigned to a manager who is held responsible for its operations and resources". Types of Responsibility Centres + The Responsibility centres are classified into five categories0 1.
7ost or ,'pense 7entre
2.
Profit 7entre
3.
Investment 7entre.
4.
Revenue 7entre
5.
7ontribution 7entre
1.
Cost or "#pense Centre: “7ost centres are segments in which the managers are responsible for costs incurred but have no revenue responsibilities". &owever# when we can measure only the e'penses or costs incurred and not revenue earned from responsibility centre# it is known as cost or ,'pense 7entre. 8enerally# a company has production and service departments. The output of production departments can be measured whereas service departments incur only e'penses and their output is not measured. It may not be either feasible or necessary to measure output of some service departments. +uch centres are called e'pense cost centre. The performance of cost centre is measured in terms of !uantity of inputs used in producing a given output. $ comparison between actual input used and predetermined budgeted inputs is made to determine variances which represent efficiency of cost centre.
2.
Profit Centre: Responsibility centres may have both inputs and outputs. The inputs are taken as cost and outputs are revenues. The difference between the revenue earned and cost incurred will be profit. 9hen a responsibility centre gets revenue from output# it will be called profit centre. :or e'ample# if a business has a number of processes and output of one process is transferred to ne't process. 9hen transfer from one process to another is only on cost# then these processes will not be profit centres. On the other hand# if management decides to transfer the output from one process to other at a profit then the process will become profit centre. Internal transfers at profit do not increase company assets whereas sales to outsides will increase assets of company. The income statement of a profit centre is used as a control device. The profits of a responsibility centre will enable in evaluating the performance of manager of that centre.
3.
Investment Centre: “$n investment centre is a segment in which manager can control not only revenue and costs# but also investment". The manager of a responsibility centre is made responsible for properly utilising the assets in his centre and is e'pected to earn a fair return on the amount employed in assets in his centre. The 7I;$ Terminology defines investment centre as “a profit centre whose performance is measured by its return on capital employed." The manager of investment centre e'ercises control not only on production and marketing but also on decisions relating to working capital management# capital structure and capitalisation. &is performance is measured in terms of profit as related to the capital base. $s a result he has to take longer term view of operations under his direct control so that he can achieve steadily growing rate of return on investment. Revenue Centre: &ere the manager is responsible only for revenues. Revenue centres are those locations where revenue is generated. :or e'ample# the sales department of an organisation is a revenue centre because sales manager is responsible only for revenues. &is departments budget would lay emphasis on revenue.
4.
5.
Contribution Centre: It is a segment of activity for which both revenues and variable costs are accumulated. :i'ed costs# even those directly identified with
the centre are e'cluded because they do not reflect on current efficiency level. 7I;$ defines contribution centre as “ a profit centre whose e'penditure is reported on a marginal or direct cost basis." The manager of contribution centre aims at ma'imiing the contribution. &igher contribution is indicative of higher efficiency and vice versa.
Transfer ,rices “$ transfer price is a price used to measure the price of goods or services furnished by a profit centre to other responsibility centres within a company." In a large(scale enterprise having decentralised divisions# there is a common practice of transfering goods and services from one segment of organisation to another. In such situation# there is a need to determine the price at which the transfer should take place so that costs and revenues could be properly assigned. The significance of transfer price can well be /udged from the fact that for transfering division it will be source of revenue whereas for division to which transfer is made it will be element of cost. &ence# there is a need of having a proper transfer policy for successful implementation of responsibility accounting system. There are various transfer pricing method in use. These methods are based on either )a* cost or )b* market price. The following are important types of Intra(company transfer price.
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Cost Price: $ccording to this method# goods and services are transferred from one segment of company to another on basis of unit cost of production of transferring division. The cost could either be taken to be actual cost of production or standard cost of production. The advantage of this method of transfer pricing is that it is very simple and convenient to operate.
&.
Cost Plus a )ormal !ar('up: To overcome the shortcomings of simple cost price method# many companies add to the cost a margin of profit say# 15= of the cost# to determine the transfer price. Thus# in this method the buying division is charged the actual unit cost of production of transferring department# whatsoever it may be plus a mark up for the profit. The merit of this method is again simplicity and convenience# but this method is also not appropriate method for profit center analysis.
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Incremental Cost: Incremental cost can be computed in two ways depending upon circumstances. In case entire production is transferred to
another division within same company# incremental cost will be the total of variable cost of transferring centre plus any fi'ed costs that are directly attributable to that centre. The incremental cost so calculated suffers from same defects as that of cost price method. The second approach may be used when goods and services are sold to outside customers as well as transferred within same company. In such a case# incremental cost may be taken as opportunity cost in the form of loss of revenue which the transferring division would have charged from the outside customers. The second approach is similar to the market price basis and is more useful for profit centre analysis.
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hared Profit Relative to the Cost: $ccording to this method no price is charged for the intra company transfers. Rather out of the total sales revenue of the company the aggregate cost of various divisions is deducted to find out the profit for the company as a whole and then the profit is shared by various profit centres relative to the cost basis of each centre# as below0 hare of Profit of Particular Profit centre * Profit of the company - Cost of Particular Profit Centre+%otal Cost
Thus# in this method profit is shared according to the cost of each division.
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!ar(et Price: In this method# the prices charged for intra(company transfers are determined on basis of market price and not on the cost basis. There are three ways of computing market price. :irstly# the prevailing market price# after making ad/ustment for discounts and other selling costs may be taken as transfer price if there is an active market for goods and services transferred between divisions of the same company. +econdly where active market does not e'ist or where market price is not available# cost plus a normal profit may be taken as reasonable market price.
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tandard Price: Transfer prices can also be fi'ed on predetermined standard price basis. The standard price may be determined on the basis of cost of production and prevailing market conditions. Thus# division working at less than desired efficiency will show lesser profit as compared to efficient divisions. &owever# difficulties may arise in fi'ing standard price agreeable to different divisions.
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)egotiated Price: The intra(company transfer price can also be determined on the basis of negotiations between buying and transferring division. The price arrived at after negotiation will be mutually agreed price. +uch a pricing method will be advantageous to both the divisions as well as company as a whole.
0.
&ual or %wo,way Price: $ccording to this method# the transferring division is allowed or give credit at one price# whereas the buying division is charged at a different price. It enables better evaluation of profit centres and avoids conflict among them on account of transfer prices. &owever# the total profits of the various segments would differ from the actual profit of the company as a whole.
#election of Transfer ,ricing Method The following general criteria should be kept in mind while determining the transfer price. )a*
the transfer price should be ob/ectively determined.
)b*
the transfer price should compensate the transferring division and charge the buying division commensurate with value of the goods>services e'changed.
)c*
It should contribute to congruence between goals of divisions and goals of organisation.
)d* )e*
It should provide for profit centre evaluation. It should ma'imise the efforts towards achievement of organisational goals.
+ignificance of ;easurement of ?ivisional ;anagers Performance ;easuring divisional managers performance is important in the following ways0 1.
It directs top managements supervision and assistance where it is most needed and where it will be most productive.
2.
It provides the ob/ective factual foundation for sound e'ecutive compensation.
3.
It gives /ob(satisfaction directly by letting the e'ecutives know how they are doing.
4.
It directs the activity of e'ecutives towards high scores on the aspects of performance on which they are measured and /udged.
5.
It indicates to the e'ecutive concerned the manner in which he ought to do his work( accomplishment of goals and ob/ectives and also# along with it the way in which these goals and ob/ectives are achieved.
6.
It shapes the future e'ecutive team by indicating whom to promote whom to retain and whom to remove.
Re!uirements for ?ivisional Performance ;easurement To measure in !uantitative terms the performance of divisional manager# the following re!uirements are essential0 ( 1.
$ clear(cut system of transfer pricing should be prescribed so that one department does not become overburden on the other.
2.
There should be foolproof# clear and uniform system of accounting to measure the profits.
3.
Realistic standards of profit and profitability should be evolved to compare against actuals.
4.
The profit centre vi# the division should be clearly identified.
5.
There should be system of rewards to provide incentives for the e'ecutives to attain higher levels of performance.
9hen an individual /oins an organisation he has a certain amount of enthusiasm to prove his abilities and he sincerely wishes these abilities to be recognied. :rom time to time he e'pects to be rewarded in one form or the other which may not necessarily be money. $s a human being# he wishes to become part of the organisation and get feeling of belonging. &e is willing to adapt himself to the organisation and become part of its management process. This adaptation and involvement of individuals at various levels in decision(making# build up of the workforce etc. create a sense of satisfaction and achievement which normal monetary gains do not provide. To motivate an individual there is a clear need for satisfying his human wants which have number of aspects such as economic# social# moral# political# psychological etc. $mong these# generally the economic aspect predominates. &owever# over a period of time that spectrum keeps on changing and some aspects become more important than others. The top management in the organiation has to recognie changes and adopt ways and means to act in manner that would motivate these working individuals to become a part of the organiation and derive satisfaction from various activities besides merely getting money for doing work. The relative strength of various factors as well as their limitations must be fully recognied. To arrive at optimal behaviour of a number of individuals within an organiation# the top management has to work continuously and keep the problem of recogniing changes in various needs of individuals within focus. The ultimate point achieved is a compromise among the personal aspirations of all individuals within an organiation.
Difficulty in Measurement of Di$isional Manager1s ,erformance It is undesirable to fi' targets for performance in respect of divisional managers in !uantitative terms only. :or instance# the cordial personnel relationship within division may contribute a great deal to the organisations productivity and hence profitability. Thus# the problems in measurement of e'ecutive performance are twofold vi# the difficulty of e'pressing in !uantifiable terms certain ob/ectives like !uality control# safety# industrial peace etc. The second one is to keep in view the long(term ob/ective while measuring performance in the short run. ;ost of the ob/ectives ultimately will have their bearing on the profitability of the division. &ence# profitability is used as a measure of divisional performance.
"inancial Methods for !$aluation of Di$isional ,erformance The following are the financial measures for divisional performance evaluation.
%. Return on In$estment+ It is most popular measure of performance. %nder this method# for each divisional manager a target rate of return on capital placed at his disposal is determined beforehand and later# this is compared with actual rate of return. It is !uite possible that target for one division may be different from that of others# taking into account the special circumstances of each case. :or e'ample# if a new venture has been created for purpose it would obviously be not proper to e'pect same rate of return in initial years as is being earned by other well(established divisions. The rate of return is connected with firms cost of capital but it is not that rate of return must be e!ual to cost of capital even for firm as whole. There is such a thing as opportunity cost and firm should able to earn from use of funds at least that much as they would have earned by using funds in some other manner. &owever# from practical point of view# ROI is an imperfect measure because of different capital base and income computation and hence should be used with caution and in con/unction with other performance measures.
&. Residual Income 2RI3 It is operating income minus an imputed charge for invested capital. Imputed charge is the minimum targeted return on investment in a division which is generally the cost of capital of the company. $ny amount over and above targeted charge represents the residual income of division. 8enerally# higher the residual income better performance of the division. The ob/ective of ma'imising residual income assumes that as long as the division earns a rate on investment in e'cess of the imputed charge for invested capital the division should
e'pand. +ome firms prefer the residual income approach because in a given period ma'imisation of an absolute amount is favoured.
Performance ;easures of a 7ost 7entre One or more of the following measures can be used for evaluating performance of a cost centre0
2%3
%arget Cost: $ target cost is determined for each product or process. $ctual cost is compared with the target cost. If it is lower# the performance is better than targeted. If it is higher# an investigation is re!uired regarding the reasons for increase in cost.
2&3
Prime Cost to ales : :or each product percentage of prime cost to sales can be pre(determined and compared with the actual percentage. $ higher percentage of prime cost is indicative of inefficiency in the use of direct material# direct labour or factory overheads which should be ascertained by further analysis.
2'3
Overhead to ales: In the same way percentage of factory overheads to sales and office overheads to sales for each product should be predetermined and compared with the actual to ascertain the degree of efficiency or in efficiency in performance.
2(3
Cost of Production to ales : The percentage of cost of production to sales gives the aggregative picture of performance of a cost centre. $ lower percentage indicates economy in cost.
Performance ;easures of a Profit 7entre :inancial performance of a profit centre# which is responsible both for production and sale# can be evaluated with the help of one or more of the following measures0
2%3
ales to -ross Assets: &igher the net sales to gross assets# better is the utiliation of installed facilities and vice(versa.
2&3
ales to )et Assets: In case some of the assets have become substantially worn out with significantly reduced earning capacity# better measure would be net sales to net assets.
2'3
Operating Profit to ales: Operating profit is profit before interest and ta' e'cluding all non(operating gains and losses. &igher operating profit to net sales is indicative of better performance and vice versa.
2(3
Operating Profit to )et Assets: $ higher ratio indicates more efficient utiliation of net assets committed to the profit centre.
Performance ;easures of an Investment 7entre
2%3
Return on Investment .ROI/: The ratio is net income to net assets of the investment centre. &igher the ratio# better it is.
2&3
-ross !argin to Capital "mployed 0 In this ratio before depreciation# interest and ta' to capital employed is taken for measuring financial performance. 7apital employed includes both e!uity capital and borrowed capital.
2'3
Profit Before Interest and %a# .PBI%/ to Capital employed : &igher P
2(3
)et Profit to )et 0orth : 6et profit is calculated after deducting all e'penses including interest and ta'. 6et worth is sum total of shareholders funds invested in the investment centre. It comprises of e!uity capital# plus all accumulated surpluses# minus accumulated losses. The ratio gives profit earning on shareholders funds. &igher the ratio better off are the shareholders.
2)3
%arget Profit : The head office may determine target profit# or target ,
In addition to financial measures of performance# comparison also use non(financial measure of performance. Important non(financial measures are 1.