Page 218 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 10: Responsibility Accounting and Transfer Pricing

™ z In situations where idle capacity exists, variable cost would generally be the better basis Notes
for transfer pricing and would lead to the optimum decision for the firm as a whole.
There is a large amount of documented sources on the transfer pricing policies used by companies all
over the world. These studies have documented various aspects of transfer pricing policies such as:

z z Its role as an overall component of reporting and control system in companies.
z z The effect of transfer pricing on intra-corporate conflicts.
z z Variations in transfer pricing policies across the world, and environmental constraints on
use of transfer prices.

Self Assessment

Fill in the blanks:

16. ……………… are the amounts charged by one segment of an organization for a product or
service that it supplies to another segment of the same organization.
17. The ……………… is the outcome of a bargaining process between the selling and the
buying divisions.

10.6 Summary

z z Responsibility accounting is a concept of accounting performance measurement systems.

z z The basic idea under responsibility accounting is that large diversified organizations are
difficult, if not impossible to manage as a single segment.
z z Thus, they must be decentralized or separated into manageable parts.
z z These parts or segments are referred to as responsibility centers that include: cost centers,
profit centers and investment centers.
z z This approach allows responsibility to be assigned to the segment managers that have the
greatest amount of influence over the key elements to be managed.

z z There are many advantages and disadvantages of responsibility accounting.
z z The benefits exceed the limitations, thus rendering responsibility accounting a big space
to settle in.

z z Transfer prices are the amounts charged by one segment of an organization for a product
or service that it supplies to another segment of the same organization.

10.7 Keywords

Cost Center: A cost center is part of an organization that does not produce direct profit and adds
to the cost of running a company.
Investment Center: A unit within an organisation whose manager not only has profit responsibility
but also some influence on capital expenditures.
Profit Center: A segment of a business for which costs, revenues, and profits are separately
calculated.
Revenue Center: Unit within an organization that is responsible for generating revenues.
Transfer Prices: Transfer prices are the amounts charged by one segment of an organization for a
product or service that it supplies to another segment of the same organization.

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