Kế toán, kiểm toán - Chapter 13: Investment centers and transfer pricing
Using the differential approach is desirable for two reasons:
Only rarely will enough information be available to prepare detailed income statements for both alternatives.
Mingling irrelevant costs with relevant costs may cause confusion and distract attention away from the information that is really critical.
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Investment Centers and Transfer PricingChapter 13Decision Makingis pushed down.Delegation of Decision Making(Decentralization)Decentralization often occurs as organizations continue to grow.DecentralizationAdvantagesAllows organization to respond morequickly to events.Frees top managementfrom day-to-dayoperating activities.Uses specializedknowledge andskills of managers.DecentralizationChallengeGoal Congruence:Managers of the subunits make decisions that achievetop-management goals.Measuring Performancein Investment Centers Investment Center managers make decisions that affect both profit and invested capital.Corporate HeadquartersInvestmentCenterEvaluationReturn on investment, residual income, oreconomic value addedReturn on Investment (ROI)ROI = IncomeInvested CapitalROI = IncomeSales Revenue×Sales RevenueInvested CapitalSalesMarginCapitalTurnoverEconomic Value AddedEconomic value added tells us how much shareholder wealth is being created.Economic Value Added Investment center’s after-tax operating income– Investment charge = Economic Value Added Weightedaveragecost of capitalInvestmentcenter’stotal assetsInvestmentcenter’scurrent liabilities–()After-taxcost ofdebtMarketvalueof debtCost ofequity capitalMarketvalueof equity(())Marketvalueof debtMarketvalueof equityImproving R0IThree ways to improve ROI Increase Sales Prices Decrease Expenses Lower Invested Capital Residual Income Investment center profit– Investment charge = Residual income Investment capital× Imputed interest rate= Investment chargeInvestment center’sminimum requiredrate of returnResidual IncomeResidual income encourages managers to make profitable investments that wouldbe rejected by managers using ROI.Issues: Measuring Investment Capital Three issues must be considered before we can properly measure the investment capital: What assets should be included?Total assets.Total productive assets.Total assets less current liabilities.Only the assets controllable by the manager being evaluated.Measuring Investment Capital The Second Issue Should we measure the investment at the beginning or end-of-period amount, or should we use an average of beginning and end-of- period amounts? Should the assets be shown at historical or current cost?Measuring InvestmentCenter Income Division managers should be evaluated on profit margin they control.Exclude these costs:Costs traceable to the division but not controlled by the division manager.Common costs incurred elsewhere and allocated to the division.The key issue is controllability.Inflation: Historical Cost versusCurrent-Value Accounting Use of current-value accounting impacts the amount of: Invested capital. Income.
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