Benefits that would accrue to a decentralized organization operating a transfer pricing system
- Goal congruence- focuses on improving performance of the whole organisation as opposed to divisions
- Can prevent dysfunctional decision making so that decisions made by various managers are to the best interest of the company.
- Perfomance evaluation – the divional profits reported by various divisions can help gauge the perfomance of each divion.
Factors influencing the transfer price
The market price of the product where a competitive market exists. ii) The cost of producing the product iii) The overall goal of the company
The autonomy of each division in arriving at the crucial decision
Objectives of transfer pricing
- Ensure proper decision making.
- Provides a reliable basis for making decisions and ensures sub optimal decisions are not made.
- Allows for performance evaluation of divisional managers.
- Prices at which goods are transferred between divisions can influence divisional profits. -Ensure divisional autonomy.
- Transfer prices should not be imposed on divisional managers but such managers should participate in settling them.
Factors to be considered when selling international transfer prices
- Tax implications in the respective countries in cases of different taxation rates.
- Import duties
- These could be minimized by transferring products at low prices in high import duty countries.
- Dividend repatriation – some countries restrict repatriation and in such cases the transfer prices may be increased.
Ways in which an environmental costing system could lead to improved financial performance.
- Cost reduction
Organisations that have an effective environmental costing system are more likely to identify and take advantage of cost reduction and other improvement opportunities. Cost reductions will arise as a result of reduction in wastage and disposal costs. Organisations that are aware of environmental costs have benefited from additional revenues as a result of recycling waste.
- Increased revenues
An awareness of the extent of environmental costs might result in the production of products that meet the environmental needs or concerns of customers. This could result in an improved organisation image which could lead to increased sales. It might also be possible to sell these products at a premium price.
- Improved decision making
An awareness of environmental costs will also reduce the chances of employing incorrect pricing of products and services and taking the wrong options in terms of mix and development decisions. This, in turn, might lead to enhanced customer value while reducing the risk profile attaching to investments and other decisions which have long term consequences.
- Avoidance of costs of failure
A lack of awareness of environmental costs could result in environmental failures and significant additional costs, for example the associated costs of clean-up and financial penalties associated with environmental disasters. The well-publicized BP oil spill in the Gulf of Mexico has so far cost the oil company billions of dollars in penalties and fines.
Four types of environmental costs
- Environmental prevention costs: Design and operation processes, training and recycling products.
- Environmental appraisal costs: Inspection of products and processes, auditing environmental activities and performing contamination tests.
- Internal failure costs: Costs of disposing of toxic materials and recycling scraps.
- Environmental external failure: Cleaning up contaminated soil, restoring land and cleaning up spoilage.
Ethical issues arising in management accounting with regard to environmental reporting
- The company’s processes and procedures lead to environmental degradation and other problems should the management accountant go ahead to challenge the same? This may be difficult especially if the management accountant is an employee of the business.
- When presenting information about the environment for example costs, but for internal and external purpose, how much should the management accountant disclose? Could this disclosure be harmful to the organisation.
- The company is required to comply with environmental laws but the company is not, should the management accountant inform the authority or blow the whistle
Definition of environmental management accounting
This is defined as the identification, collection, estimation, analysis, internal reporting and use of material and energy flow information /environmental cost information and other cost information for both conventional and environmental decision making within an organization.
Benefits of environmental management accounting
- Ability to more accurately track and manage the use and flows of energy and materials including pollution or waste volumes
- Ability to more accurately identify, estimate, allocate, manage or reduce costs particularly environmental types of costs.
- More accurate and comprehensive information for the measurement and reporting of environment performance, thus improving company image with stakeholders such as customers, local communities, employees, government and finance providers.