Responsibility Accounting Transfer Pricing.ppt

Decentralization, Responsibility Centers, and Transfer Pricing Decentralization in Organizations Decentralization in Organizations Decentralization and Segments A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. A segment can be . . . Cost, Profit, and Investments Centers Cost Center A segment whose manager has control over costs, but not over revenues or investment funds. Cost, Profit, and Investments Centers Profit Center A segment whose manager has control over both costs and revenues, but no control over investment funds. Cost, Profit, and Investments Centers Investment Center A segment whose manager has control over costs, revenues, and investments in operating assets. Cost, Profit, and Investments Centers Return on Investment (ROI) Formula Return on Investment (ROI) Formula Regal Company reports the following: Net operating income $ 30,000 Average operating assets $ 200,000 Sales $ 500,000 Controlling the Rate of Return Three ways to improve ROI . . . Controlling the Rate of Return Regal’s manager was able to increase sales to $600,000 which increased net operating income to $42,000. There was no change in the average operating assets of the segment. Return on Investment (ROI) Formula Criticisms of ROI Criticisms of ROI As division manager at Winston, Inc., your compensation package includes a salary plus bonus based on your division’s ROI -- the higher your ROI, the bigger your bonus. The company requires an ROI of 15% on all new investments -- your division has been producing an ROI of 30%. You have an opportunity to invest in a new project that will produce an ROI of 25%. Criticisms of ROI Criticisms of ROI Residual Income - Another Measure of Performance Residual Income A division of Zepher, Inc. has average operating assets of $100,000 and is required to earn a return of 20% on these assets. In the current perio