The Management Control System

Management control systems

Broadly, management control system (MCS) refers to the design, installation and operation of management planning and control systems. However, management control system is a logical integration of management accounting tools to gather and report data and to evaluate performance. Horngreen, Datar and Foster define management control system “as a means of gathering and using information to aid and coordinate the process of making planning and control decisions through- out the organisation and to guide the behaviour of its managers and employees. The goal of management control system is to improve the collective decisions within an organisation in an economically feasible way.” Traditionally, it has been stated that

Transfer pricing refers to when one division (division A) of a company sells to another division (division B) of that same company. Transfer pricing within related or same companies can be negotiated at market price or can be set at cost price (variable or full absorption), all depending on the company and their policies. Division ‘A’ records the transaction as a sale while division ‘B’ records it as a cost of goods sold. Division ‘A’ clearly will want to have the highest selling price it can get, while division ‘B’ on the other hand wants the lowest cost of goods sold possible. The concept of transfer pricing is that of which aims to set a transfer price between divisions within a company or related company. This transfer price should be one which benefits the company on a whole and not just beneficial to either divisions only. Transfer pricing is sometimes seen negative when indulged in by high end company e.g. google, eBay and amazon. It is also said that companies engage in transfer pricing to avoid taxes. These company is said to be very manipulative in transfer pricing because of their powerful

The transfer will occur when it is in the best interests of shareholders, and the transfer will be refused by at least one divisional manager when shareholders would prefer for the transfer not to occur. The upstream division is generally indifferent between receiving the market price from an external customer and receiving the same price from an internal customer. Consequently, the determining factor is whether the downstream division is willing to pay the market price. If the downstream division is willing to do so, the implication is that the downstream division can generate incremental profits for the company by purchasing the product from the upstream division and either reselling it or using the product in its own production process. On the other hand, if the downstream division is unwilling to pay the market price, the implication is that corporate profits are maximized when the upstream division sells the product on the external market, even if this leaves the downstream division idle. Sometimes, there are cost savings on internal transfers compared with external sales. These savings might arise, for example, because the upstream division can avoid a customer credit check and collection efforts, and the downstream division might avoid inspection procedures