Research Paper on Managerial Accounting
Responsibility Accounting and Transfer Pricing
The report describes the important of responsibility accounting and transfers pricing in contemporary liquidity firms. There are two kinds of firms normally needed the financial worth to compete the market. The first kind of firm is centralized firm and the second kind of firm is decentralized firm. The centralized firm relies on the accounting actions in a diversified manner, and the decentralized organization needs the responsibility accounting and transfer pricing. For the successful intervention of responsibility accounting the responsibility centers concept introduced. The concept also considered the transfer pricing. The functional approach of the management accounting system needs dollar figure for the price distribution from one division transfer to another division transfer (Jost, Pfaffermayr, & Winner, 2014).
Transfer Pricing Overview
According to Mojgan, (2012), at the first point, it should be clear that decentralized firms in responsibility centers need a transfer pricing. It is all about the cost, profit, revenue and the investment centers as the tools for account monitoring. The performance of the responsibility centers is a basic approach for the identification of the tools. The standard cost and the divisional profit mentioned under the approach of transfer pricing. Further, the return on investment also has the direct linkage for the situation analysis. It is needed for the trends and the product transferred between the two divisions has direct implication (Mojgan, 2012).
The dollar figure of transaction allows the functional approach for the responsibility centers to have the idea about the transfer price and ways towards the price change extracted from Nkem & State, (2013). The maximization of the profit or decentralized organization measures through the variable for the transfer pricing. Any sub-unit under the decentralized organization has the direct linkage for the revenue and expenses. The optimal decision making is possible through the conceptual approach for the profitability of organization to have the idea for each division of a company. The most of the cases of the transfer pricing need the maximization of the profit for the desired figures on economies of scale (Nkem & State, 2013).
Source: (Nkem & State, 2013)
Responsibility Accounting Overview
According to Nkem & State, (2013), to make the initial understanding the basic approach about the responsibility accounting the responsibility centers built under the supervision of managerial accounting system to have the idea for the in-depth approach. Responsibility accounting is the complete accounting system that allows the collecting, summarizing and reporting the accounting data according to the responsibilities of individual managers. The accounting system means the feedback for the organizational units and its activities. The reporting is all about the accounting data to have the complete approach for measure the responsible tasks at the immediate data analysis. The system information allows the costs; expenses chain analysis at one end and the revenue and operational statistics at other (Nkem & State, 2013).
The area of responsibility measures through the responsibility accounting judge under this response to having the idea for the organizational unit and its effectiveness. The system thinking also linked with the responsibility accounting to have the primary control with the information analysis. The responsibility managers are normally tackling the issues raises at the department level and considered the role of responsibility centers regarding effective working conditions. The analysis of controllable and uncontrollable platforms discussed for the advance requirement analysis as per the accounting and reporting about the financial figures (Mojgan, 2012).
The Use or Purpose of Transfer Pricing (Decentralization)
There are two primary purposes of transfer pricing including the generating the separate profit figures for each single division as well as the coordinating with the production, sales, and the pricing decision to have the complete course of action. The goods and services where each segment needs an assessment required a thorough study to believe why such positives take a view about the production and profit. The each segment of the firm behaves on the transfer-pricing concept because it has to locate the organizational resources. The transfer pricing means to generate a substantial profit view to have the idea for the organizational resources (Nkem & State, 2013).
Advantages and Disadvantages of Decentralization
It is the only need of company or organization with decentralized functions to consider the decisions at front. The better decisions with two purposes; one is profitability, and the other is growth. Factors, where every decision analyzes with the eye of effectiveness, consider under the transfer pricing as well. The local condition cannot ignore therefore the advantage of transfer pricing to gain the importance of the local conditions. The local conditions are viable to have the idea about the perfect way of delivery. The value change mostly deals with the local decision making concept as easy as possible (Rowe, Birnberg, & Shields, 2008).
The top managers examined for the study approach to know about the local decision making for the local problems and issues. The manager motivation is to increase the control on the results and to have the idea for the managerial association. The international strategy considered the decision making to have the idea for the future struggle towards the actions. Empowering the employee is the main thematic view about the function required for the struggle where every aspect of the growth is so possible to believe. The relieving the burden of the business owner means the internal functions needs change and the cognition towards the value addition (Rowe, Birnberg, & Shields, 2008).
The lack o goal similarity existed at the workplace generally and at each managerial level specifically. The Top management is a direct party that takes the issues on real grounds. The lower management has least considered from the detailed information mechanism which has no linkage with the development. The risks of not generating a profit always considered the manager to back off the decision already being taken for the sake of development of the firm. The increases costs of every process under the supervision make things complex for the manager and have the organizational way out separately. The every division needs to be centralized to endorse the working to have the idea how to take the goods and services in the similar way rather a negative association (Seppälä, Kenney, & Ali-Yrkkö, 2014).
The coordination most of the time is the need to repair the negative mindset at organizations. The different parts of the organization have the coordination means the feedback mechanism proper centralized with no or least way of failure. The insufficient information when available at the top management there is least information sharing and advantages can observe. The organizational approach is important, but it is necessary for the big organization at first. The managers are consistent with the policies flow from upper level to lower level (Vidal & Goetschalckx, 2001).
Transfer Pricing Mechanics
The transfer pricing mechanics is again an introspective approach for the internal record keeping manual. The transfer price means the internal record keeping aspect used under the transfer pricing to have the idea with the good exchanged and value addition made. The transfer price multiple with the quantity of goods exchanged means a through productivity for the expense which is best for the purchasing center and best for the revenue of selling center. The purchasing center linked with the functional way to have the mechanics with the ideal approach of the accounting function. The responsibility accounting means the linkage developed concerning the each association to have the idea for the organizations (Vidal & Goetschalckx, 2001).
The approach uses to evaluate the division about the performance to have the profits that positively generated as per the functional way and association. The coordination of activities to allow the organizational goal and its association with every possible decision the pricing for the final product also measures through the requirement analysis to gain the decisions as per the division autonomy. The classical problem has the division with the decentralized organization more and the other division at least grounds. The final productivity allows the functional concept to view the functions as per the gigantic case forward (Rowe, Birnberg, & Shields, 2008).
Accounting For Transfer Pricing
The intra-company practices are many as per the identification of the tools because the prices used as the excess of costs as well as the elimination entries for the external reporting of the process. The consolidated financial statements allow the three major function as per the accounting measure. The first about the intra-company receivable and payables with the intracompany sales and costs of goods sold. The third one is about the Intra-company profits in inventories. These associations made the approach more important for the contemporary accounting system to view about the mechanism as per the buying and selling externally (Rowe, Birnberg, & Shields, 2008).
The transfer pricing methods can help in getting the accounting material to for the complete and new approach to manage the accounting functions. The Intra company association have the activity assessment to know about the transfer pricing to view about the discretion for the method to choose. The market-based transfer pricing to made things according to the struggle and business association. The accounting method legalized the decentralized system of business to have the perfect value approach. It is, therefore, the needs of contemporary functions for the allocation of resources as per the profitability timelines (Vidal & Goetschalckx, 2001).
Methods of Transfer Pricing
The main role of transfer price is to calculate the nature especially arm’s length nature of the prices and profits it is a general rule that enables to reach goal congruence. One of the prime management objects is the setting and transfer of prices that encourages accessing the goal. Transfer price can be defined as the sum of additional cost over the transferred goods and cost of opportunity per unit for an organization that comes due to transfer (Seppälä, Kenney, & Ali-Yrkkö, 2014).
The first component defines the outlay cost of the production of goods to be transferred. While on the other hand, the second component is the evaluation of cost at each product or service provided by the organization during the process of product transfer. For the transaction carried out between two companies or Intra Company transactions, there are some rules and policies that define cumulative of costs and prices. These policies and rules should be mentioned by sources that provide rules for internal transactions (Fowzia, 2011). Broadly understanding explores three possibilities for the determination of the price of transfer, and there are three methods that can be used for transfer prices as given below
- Market pricing
- Negotiated pricing
- Cost-based transfer pricing
1. Market-based Transfer Pricing
Market-based transfer pricing can be defined as a price that is in between two of a buyer and the other one that is the seller of the goods. In case of high competitive environment of external market for the transfer of goods and products the best method that works efficiently is the transfer prices that can be elaborated by such factors.
2. Negotiated Transfer Pricing
Negotiated transfer pricing is the major management that never involves the specified transfer of the prices but they are based on the negotiation between divisional managers over some agreeable costs of items. These pricing are scaled according to term and agreement of both companies. One of the major advantages of negotiated transfer pricing is the emulation of the market in which manager works for both buying and selling of products (Fowzia, 2011).
3. Cost-based Transfer Pricing
In a case when there is no establishment or well organized market prices they possibility of companies is to work on the transfer of pricing according to their production and specific cost for the supply of different products. The most well known methods for the transfer of pricing based on the applications in the common markets are full cost, variable costs that vary with addition of other charges including lump sum charges, variable costs including the opportunity cost of things produced, and dual transfer of the prices, and the last one is full cost of pricing. The most well known and popular transfer price can be produced by clarity and convenience is known as the full cost of transfer pricing (Seppälä, Kenney, & Ali-Yrkkö, 2014).
Characteristics of Responsibility Accounting
Responsibility accounting can be defined as the system of accounting that gathers and collects all the reports related to the accounting data and the summaries related to the responsibilities of individual managers. There are types of reports, for instance, some reports can be only handled by the managers of the company, as managers evaluate the information related to the company. This information is based on the statistical areas of different units. Report items are of two types either controllable or uncontrollable. For the implementation of the responsibility accounting systems organization should have well organized terms of business, but these responsibilities can be carried out by each manager on the individual basis (Vidal & Goetschalckx, 2001).
The Concept of Control in Responsibility Accounting
The system of responsibility accounting is a source that provides the evaluated and verified information that enables to evaluate performance of each individual manager on the basis of revenues and other expenses of products items, such products that were controlled by the manager or that are under the primary control of the managers or other authorities that have some influence on the production of goods. In some systems, responsibility accounting is the process that gathers information about the all the data gathered including the summaries of the analysis, accounting reports related to the different responsibilities applied over the mangers of the organization. Such information provided by the manager are often based on the evaluation of both the revenues and the other one is expensive goods and also about the controlling process of the manger that is primary control and the influence generated on the reports by authority. Responsibility accounting involves the center of responsibility based on the budgets that are often annual and the monthly controlled budgets (Rowe, Birnberg, & Shields, 2008).
Absolute control can be defined as a theoretical process that is carried out by the manager of the organization over certain items especially for which manager is responsible. Absolute control has a limited application in a market as we can say that absolute control is a type of responsibility control that is very often applied in the real world of market and business. According to analysis, the most frequent factors are of two types including the external and also the internal factor as these factors are often worked as based on the compromised items. The manger is responsible for all those items over those he have a capability of relative control over the items and things (Rowe, Birnberg, & Shields, 2008).
Relative controlling of an item is another form of controlling responsibly accounting and can be defined as the significant control of manager over certain things and also the degree of control of the manager over other factors that are the cost of items and effect associated with the cost of items. In a particular case when a manager has significant control over the things and cost of the individual item such type of control is known as the relative control of manager over the cost that is controllable. It can be defined as the control of manager over the things and factors that may cause any kind of impact on the budget of item. It is based on the evaluation of encouraging issues that often does not reflect the efforts made by the manager and decisions taken by the manager. Both relative and absolute controls are of different category (Nkem & State, 2013).
Importance of responsibility centers
Responsibility center plays the vital role in the responsible centers the main feature of these factors is the variation in the details of a number of the different levels of the management. As the detail amounts vary by some factors the issues detected under the responsibility accounting can be related and even these factors are interrelated to one another. By using these responsibility factors it provides the report of immediately about the working process under the controlled situations. Briefly saying, responsibility centers are the units that make managers work responsibly. Responsibility centers provide different long terms interest for the activities of responsibility for containing activities (Nkem & State, 2013).
In the end one, conclude by evaluating the control for the market price different and the pricing for the company approach. It is need of market to have the proper way of association to make things realistic in approach for the competitive and stable firm. The managerial accounting aspects highlighted in terms of association with the responsibility accounting and transfer pricing to view about the process struggle as per the need identification. The process about the business function knows to the fact about the material bounding and view as per the need assessment.
- Fowzia, R. (2011). Use of Responsibility Accounting and Measure the Satisfaction Levels of Service Organizations in Bangladesh. International Review of Business Research Papers , 7 (5), 53-67.
- Jost, S. P., Pfaffermayr, M., & Winner, H. (2014). Transfer pricing as a tax compliance risk. Journal Of Accounting and Business Research , 44, 260-279.
- Mojgan, S. (2012). Examining the Role of Responsibility Accounting in organizational Structure. American Academic & Scholarly Research Journal , 4 (5), 1-6.
- Nkem, N. J., & State, B. (2013). THE EFFECTIVENESS OF RESPONSIBILITY IN EVALUATING SEGMENT PERFORMANCE OF MANUFACTURING FIRMS. KASU Journal of Accounting Research and Practice , 2 (2).
- Rowe, C., Birnberg, J. G., & Shields, M. D. (2008). EVects of organizational process change on responsibility accounting and managers’ revelations of private knowledge. Accounting, Organizations and Society , 33, 164–198.
- Seppälä, T., Kenney, M., & Ali-Yrkkö, J. (2014). Global supply chains and transfer pricing Insights from a case study. Supply Chain Management: An International Journal , 19 (4), 445–454.
- Vidal, C. J., & Goetschalckx, M. (2001). A Global Supply Chain Model With Transfer Pricing and Transportation Cost Allocation. European Journal of Operational Research , 129 (1), 134-158.