Chapter 4 - Performance Controls

Question 1

Performance (profit) related pay

Answer 1

Advantages

• Tangible measure
• Aligns goals - managers/shareholders
• Transparent / easy to understand

Disadvantages

• Manipulated e.g. depreciation
• Short term behaviour
• Should also consider non-financials

Question 2

Outsourcing

Answer 2

Advantages

• Focus on core competancies
• Access to specialists
• Cost certainty
• Can scale up/down
• Lower cost

Disadvantages

• Confidcentiality
• Difficult to control quality
• Transaction costs / SLAs
• Lose in house skills
• Motivation/Redundancies

Question 3

Goals of Transfer Pricing

Answer 3

• Goal congruence
• Autonomy
• Appraise performance
• Minimise tax liability

Question 4

Approaches to Transfer pricing

Answer 4

Market Price

• Goal congruence
• What if no external market
• Lower admin/distribution costs

Cost based

• Standard - cost certainty, don’t pass on inefficiencies
• Full - ensures all costs covered
• Marginal - demotivting to seller

Duel

• Seller gets market price, buyer pays V.C., headoffice reconiciles

2-part

• Use V.C., seller gets lump sum to help pay fixed costs