22-1 A management control system is a means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization and to guide the behavior of its managers and employees. The goal of the system is to improve the collective decisions within an organization.

22-2 To be effective, management control systems should be (1) closely aligned to an organization's strategies and goals, (2) designed to support the organizational responsibilities of individual managers, and (3) able to motivate managers and employees to put in effort to attain selected goals desired by top management.

22-3 Motivation combines goal congruence and effort. Motivation is the desire to attain a selected goal specified by top management (the goal-congruence aspect) combined with the resulting pursuit of that goal (the effort aspect).

22-4  The chapter cites four benefits of decentralization:

1. Creates greater responsiveness to local needs

2. Leads to gains from faster decision making

3. Assists management development and learning

4. Sharpens the focus of subunit managers

The chapter cites four costs of decentralization:

1. Leads to suboptimal decision making

2. Focuses managers’ attention on the subunit rather than the company as a whole

3. Increases costs of gathering information

4. Results in duplication of activities

22-5  No. Organizations typically compare the benefits and costs of decentralization on a function-by-function basis. For example, companies with highly decentralized operating divisions frequently have centralized income tax strategies.

22-6 No. A transfer price is the price one subunit of an organization charges for a product or service supplied to another subunit of the same organization. The two segments can be cost centers, profit centers, or investment centers. For example, the allocation of service department costs to production departments that are set up as either cost centers or investment centers is an example of transfer pricing.

22-7 The three general methods for determining transfer prices are

1. market-based transfer prices,

2. cost-based transfer prices, and

3. hybrid transfer prices. 

22-8 Transfer prices should have the following properties. They should

1. promote goal congruence,

2. be useful for evaluating subunit performance,

3. motivate management effort, and

4. preserve a high level of subunit autonomy in decision making.

22-9 No, the chapter illustration demonstrates how division operating incomes differ dramatically under the variable-cost, full-cost, and market-price methods of transfer pricing.

22-10 Transferring products or services at market prices generally leads to optimal decisions when (1) the market for the intermediate product market is perfectly competitive, 

(2) interdependencies of subunits are minimal, and (3) there are no additional costs or benefits to the company as a whole from buying or selling in the external market instead of transacting internally.

22-11 One potential limitation of full-cost-based transfer prices is that they can lead to suboptimal decisions for the company as a whole. An example of a conflict between divisional action and overall company profitability resulting from an inappropriate transfer-pricing policy is buying products or services outside the company when it is beneficial to overall company profitability to source them internally. This situation often arises where full-cost-based transfer prices are used. This situation can make the fixed costs of the supplying division appear to be variable costs of the purchasing division. Another limitation is that the supplying division may not have sufficient incentives to control costs if the full-cost-based transfer price uses actual costs rather than standard costs.

The purchasing division sources externally if market prices are lower than full costs. From the viewpoint of the company as a whole, the purchasing division should source from outside only if market prices are less than variable costs of production, not full costs of production.

22-12 Reasons why a dual-pricing approach to transfer pricing is not widely used in practice include the following:

1. In this approach, the manager of the supplying division uses a cost-based method to record revenues and does not have sufficient incentives to control costs.

2. This approach does not provide clear signals to division managers about the level of decentralization top management wants.

3. This approach tends to insulate managers from the frictions of the marketplace because costs, not market prices, affect the revenues of the supplying division.

4. It leads to problems in computing the taxable income of subunits located in different tax jurisdictions.

22-13 Disagree. Cost and price information are often useful starting points in the negotiation process. Costs, particularly variable costs of the selling division, serve as a “floor” below which the selling division would be unwilling to sell. Prices that the buying division would pay to purchase products from the outside market serves as a “ceiling” above which the buying division would be unwilling to buy. The price negotiated by the two divisions will, in general, have no specific relationship to either costs or prices. But the negotiated price will generally fall between the variable costs-based floor and the market price-based ceiling.

22-14 Yes. The general transfer-pricing guideline specifies that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer plus the opportunity cost per unit to the supplying division. When the supplying division has idle capacity, its opportunity cost per unit is zero; when the supplying division has no idle capacity, its opportunity cost per unit is positive. Hence, the minimum transfer price will vary depending on whether the supplying division has idle capacity or not.

22-15 Alternative transfer-pricing methods can result in sizable differences in the reported operating income of divisions in different income tax jurisdictions. If these jurisdictions have different tax rates or deductions, the net income of the company as a whole is significantly affected by the choice of the transfer-pricing method.

22-16   Evaluating management control systems, balanced scorecard.

Adventure Parks Inc. (API) operates 10 theme parks throughout the United States. The company’s slogan is “Name Your Adventure,” and its mission is to offer an exciting theme park experience to visitors of all ages. API’s corporate strategy supports this mission by stressing the importance of sparkling clean surroundings, efficient crowd management, and, above all, cheerful employees. Of course, improved shareholder value drives this strategy.

Required:

1. Assume that API uses a balanced scorecard approach (see Chapter 12) to formulating its management control system. List three measures that API might use to evaluate each of the four balanced scorecard perspectives: financial perspective, customer perspective, internal-business-process perspective, and learning-and-growth perspective.

2. How would the management controls related to financial and customer perspectives at API differ between the following three managers: a souvenir shop manager, a park general manager, and the corporation’s CEO?