UNIT- IV

MANAGEMENT CONTROL SYSTEM

&
PROCESS
RESPONSIBILITY CENTRES
Is an organization unit headed by a single person
(sometimes by a committee) answerable to higher
authority and obliged to perform certain tasks.
Exists to accomplish one or more purposes- termed as its
objectives.


Types
Revenue Cost Profit Investment
Broad Considerations for
Identifying Responsibility Centres
It is a clearly defined segment of the organisation.
A manager should be responsible for attaining results in
relation to operation with in the responsibility centre.
It should be possible to measure the inputs required by
the responsibility centre (men, machine, material, etc.).
If the responsibility centre is a profit centre, the value of
its output should be measured in terms of rupees.
The method of operation should be distinct for each
responsibility centre.

REVENUE CENTRE
In a revenue centre, output(i.e., revenue) is measured in
monetary terms, but no formal attempt made to relate
input(i.e., cost or expense) to output.
A part of the organization responsible for generating
sales revenue.
Revenue centres are marketing/sales units that do have
authority to set selling prices and are not charged for the
cost of the goods they market.
EXPENSE CENTRE
Are responsibility centres whose inputs are measured in
monetary terms but outputs are not. Here , the
managers are held responsible for the cost or expense
incurred but not for revenues.


Expense Centres


Inputs Outputs

Costs in rupees No. of units


WORK
Types of Expense Centres
Types
Engineered
Expense centre
Discretionary
Expense Centre

Engineered Expense centre

Are those for which the right or proper amount can
be estimated with reasonable reliability.
Are usually found in manufacturing operations.
Characteristics:
The input can be measured in monetary terms.
Their output can be measured in physical terms.
The optimum dollar amount of input required to produce one
unit of output can be determined.
Managers of these centres may be responsible for
activities such as training and employee development
that are not related to current production; their
performance reviews should include an appraisal of how
well they carry these responsibilities.

Discretionary Expense Centre
The term discretionary does not imply that managements
judgment as to optimum
Include administrative and support units (e.g., accounting,
legal, human resource, industrial relations, etc.)
The output of these centres cant be measured in monetary
terms.

Types of Profitability measures
Contribution Margin
Direct Profit
Controllable Profit
Income before taxes
Net Income
TRANSFER PRICING?
Refers to the PRICING OF CONTRIBUTIONS (assets, tangible,
intangible and funds) within an organisation.
The choice of transfer price will affect the allocation of the
total profit among the parts of the company.

OBJECTIVES
Main objective is to determine the OPTIMUM LEVEL OF
EACH DIVISION and OF THE FIRM AS A WHOLE
AND
in evaluating DIVISIONAL PERFORMANCE and
DETERMINING DIVISIONAL REWARDS.
To provide each division with relevant information required
to make optimal decisions for the organisation as a whole.
To promote GOAL CONGRUENCE- that is, actions by
divisional managers to optimise divisional performance
should automatically optimise the companys performance.
To facilitate measuring divisional performance.
Criteria to be used to evaluate methods for
calculating Transfer Price
Goal Congruence
Rationality
Autonomy
Performance evaluation
TRANSFER PRICING- METHODS
TRANSFER PRICING-
METHODS
Market
Based Pricing
Cost-based
Pricing
Negotiated
Prices

Market Based Pricing Method

As per this method , the goods & services are transferred
between profit centres at a price prevailing for those goods
& services in the market.
Advantages:
Business units can operate as independent profit centres with the
managers of these units being responsible for their own
performance as well as that of the business unit.
Tax and customs authorities favor the market price method because
it is more transparent and they can crosscheck the price details
provided by the company by comparing them with market prices on
that date.


Cost-Based Pricing Method

As per this method the transfer price is calculated on the
basis of cost of a good or service.
Cost data is available in the cost accounting records of the
company.
Method is generally acceptable by tax and custom
authorities since it provides some indication that the
transfer price approximates the real cost of item.


Approaches to
Cost-Based Pricing Method
Actual costs approach
Standard costs approach
Variable costs approach
Marginal costs approach

Marginal cost

Marginal cost or incremental cost is the additional cost
required to produce a unit.
Decision making based on incremental cost determines
the benefits of the decision for the organisation as a
whole.
What will be the transfer price, where one division of a
company who is to transfer a product to the other
division, is working at a level less than its full capacity?
i.e. at a level below 100% .

Negotiated Prices

Negotiated pricing is possible when there are alternative
sources of supply and demand.
When a selling division has a choice of customers, or buying
division has a choice of suppliers, prices can be negotiated.
Q. Division Z is a profit centre, which produces four products- A, B, C, and D. Each product is
sold in the external market also. Data for the period is as follows:
Particulars A B C D
Market Price per unit Rs.150 Rs.146 Rs.140 Rs.130
Variable cost of production per unit Rs.130 Rs.100 Rs.90 Rs.85
Labour hours required per unit 3 4 2 3

Product D can be transferred to division Y, but the maximum quantity that might be required for
transfer of units is 2,500 units of D.
The maximum sales in the external market are:
A 2,800 units
B 2,500 units
C 2,300 units
D 1,600 units
Division Y can purchase the same product at a slightly cheaper price of Rs.125 per unit instead
of receiving transfers of product D from division Z.
What should be the transfer price for each unit for 2,500 units of D, if the total labour hours
available in division Z are:
(1) 20,000 hours
(2) 30,000 hours