Responsibility Centres, Transfer Pricing, and Strategic Control

Vocabulary flashcards covering corporate responsibility centers, transfer pricing methodologies, the Balanced Scorecard strategic tool, and variance analysis budgeting techniques.

Responsibility Centers

The part, segment or subunit of an organization whose manager is held responsible (in charge) for a set of activities.

Revenue Center

A responsibility center whose target is to attract and retain customers to maximize revenue, such as a sales department.

Cost Center

A responsibility center focused on cost minimization and efficiency, categorized as either standard (engineered) or discretionary (managed).

Profit Center

A responsibility center whose manager is accountable for revenues and costs with the target of profit maximization, such as a product line or business unit.

Investment Center

A subunit whose manager is responsible for profits and investments, commonly measured by ROI, Residual Income (RI), EVA, or ROS.

Segment

A part or activity of an organization about which managers would like cost, revenue, and profit data.

Controllability Principle

The state that employees should only be responsible for factors they control, and should not be penalized for bad luck or rewarded for good luck.

Descentralization

The autonomy that managers at the lowest levels of an organization have to make decisions, empowering them to make critical organizational choices.

Transfer Price

The price charged by a subunit for a good or service that it supplied to another subunit of the same organization.

Intermediate Product

The good or service transmitted between sections inside the same firm, such as an engine transferred from a manufacturing section to an assembly section.

Opportunity Cost

Defined as the value of the best alternative forgone when taking a given action.

Minimum Transfer Price Formula

$$\text{Minimum Transfer Price} = \text{Marginal Cost} + \text{Opportunity Cost}$$

Balanced Scorecard

A tool used to manage and monitor a chosen strategy, serving as a control system at the highest executive level.

Strategy Map

A diagram that describes how an organization creates value by connecting strategic objectives in explicit cause and effect relationships.

Product Differentiation

An organization's ability to offer products and services that customers perceive as superior or unique relative to competitors, leading to brand loyalty.

Cost Leadership

An organization's ability to achieve lower costs relative to its competitors through productivity and efficiency, leading to lower selling prices.

Perspectives of Balanced Scorecard

The four categories used to measure strategy: Financial (shareholder view), Customer, Internal Process (what to excel at), and Learning and Growth (continuing to create value).

Budget

The quantitative expression of a proposed plan of action by management for a specified period, serving as a blueprint for the upcoming period.

Static Budget

A rigid or master budget based on the output planned at the start of the budget period.

Flexible Budget

A dynamic budget that shifts budgeted revenues and costs up and down based on actual sales or activity.

Level 0 Variance

$$\text{Actual Result Operating Income} - \text{Static-Budget Operating Income}$$

Sales-Volume Variance

The difference between the flexible-budget amount and the static-budget amount, typically analyzed in Level 2 control.

Direct Material Efficiency Variance

A Level 3 variance calculated as $Y(qa - qs)Ps$, where $Y$ is units sold, $qa$ is actual unit quantity, $qs$ is standard unit quantity, and $Ps$ is standard price.

Direct Material Price Variance

A Level 3 variance calculated as $Yqa(Pa - Ps)$, where $Pa$ is actual price and $Ps$ is standard price.

Direct Manufacturing Labor Efficiency Variance

A Level 3 variance calculated as $Y(ha - hs)Ss$, where $ha$ is actual hours and $hs$ is standard hours.

Direct Manufacturing Labor Price Variance

A Level 3 variance calculated as $Yha(Sa - Ss)$, where $Sa$ is actual salary and $Ss$ is standard salary.

Kaizen Budget

A budget reflecting continuous improvement through small, routine, incremental changes applied and sustained over a long period.

Benchmarking

An ongoing process of comparing performance levels for producing products and services against the best performance levels in different companies.

Zero Based Budget

A budgeting method developed by Peter Pyhrr where planning is carried out without considering the past and all costs must be justified in detail.

Activity-Based Budgeting (ABB)

A budgeting method where indirect costs are allocated based on activities (ABC) and treated as variable costs of those activities.

OVAR

A French method (Objetives, Action Variables and Responsibility) that transforms strategic targets into operative goals.

Enterprise Resource Planning (ERP)

A management control computer system that compiles information from all organizational units and integrates it into a single central database.