Mangement Control System

7/31/2019 Mangement Control System

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MANGEMENTCONTROL SYSTEM

GROUP MEMBERSMukti Artist

Kunal JadhavPooja MohiteLazari Chavan


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Topics

Transfer pricing with example

Divisional goals of multi-divisional

company Linear programming model

Problem of growth


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Transfer Pricing

Transfer price is a price chargedby one profit center of anorganization for a product supplied

to another business unit of thesame organization

Importance of Transfer pricingsystem Companies with high volumes of

interdivisional sales

Vertically integrated companies


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Objectives of TransferPricing

Provide each segment with therelevant information

Induce goal congruent decisions

Help measure the economicperformance of the individual profit

centers

Should be simple to understand andeasy to administer


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Calculation of Transfer Price

The following details are given for Unit X & Unit Y of a company

Expected monthly sales to Bn. Unit Y 5000 units

V.C.(per unit) Rs. 5

Monthly F.C. Rs. 20,000

Investment Rs. 1,20,000

ROI 10% p.a.

PARTICULARS RS.

Variable cost per unit 5

Fixed cost per unit 4

Profit per unit 2TRANSFER PRICE 11

WORKING NOTE1.Fixed cost per unit = 20000/5000 = Rs. 42.Profit per unit = (10% of 120000)/(125000) =

Rs. 2


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What is a Division?

Example:Hewlett

Packard (HP)

Divisions Subsidiary

Computers Printers &

Imaging

Software

& ServicesAccessories

& Networking

Compaq


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Goals of Division

Example: Cristal Ltd.1.Molten Glass Division

OP= 120-65=55/tonTP=65+55=120/ton

2.Bottle Glass Division, Buying Price =105/ ton (from market)

Output forexternalcustomer

Selling priceMarginalCost

Fixed cost

40000 tons 120/ton 65/ton 720000 p.a.


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Goals of Division

Increase the revenue of the division Decrease the cost

To get resources at cheaper rate from foreign countries

Shifting the profits to reduce overall taxes paid by amultinational group

To gain as much possible information and knowledgefrom other divisions

Measurement of performance

Increase in ROI

Transfer price is established with an aim to optimize thegroup performance, although it may hurt the selling or

the buying company within the group

Product development, manufacturing and marketing

Divisional goals should be in congruence with strategic

and corporate goals


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Linear programming model

Based on Opportunity Cost approach

Also incorporates capacity constraints

Calculates an optimum companywide production

pattern, which helps calculate set of values thatattributes profit contribution of each of the scarceresources.

These values are called Shadow Prices, oneprocess of calculating them is called Obtainingthe Dual Solution to the linear program.

Transfer Prices = Variable costs of intermediateproduct + Shadow prices


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If these transfer prices are used, each business

unit will optimize its profit by producing inaccordance with the pattern developed throughlinear programming.

To make the model manageable followingassumptions must be incorporated in it:

a) Demand curve is known

b) It is static

c) Cost function is linear

d) Alt uses of production facilities & theirprofitability can be estimated in advance

EXAMPLE
http://var/www/apps/conversion/current/tmp/scratch28626/Linear%20Programming%20Graphical%20Method-Cost%20Minimization.htmhttp://var/www/apps/conversion/current/tmp/scratch28626/Linear%20Programming%20Graphical%20Method-Cost%20Minimization.htm


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Problems of Growth

Problem of increasedefficiency

- Decision making rights ofmanagement and employees

Example: A farmer growingtomatoes

- Initial start up- Entrepreneurial spirit- Communicating what's

expected

- Utilizing a piecemeal rate- Amendment of contract


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Problem of customerservice

- Difficult to measure

- Define theimmeasurable

Making of incentive

planClose the loop

Closing the loop with an evaluation of the results is crucial for the

long-term efficacy of management control systems

Contd


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THANKYOU

Mangement Control System

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