Difference Between Transfer Pricing And Balanced Scorecard

Running head: FINANCIAL MANAGEMENT 2 1

Transfer pricing and Balanced scorecard 13

The concepts of Transfer Pricing and Balanced Scorecard

Marvin Grant

Samoya Paulton

Tashiel Phillip

Excelsior Community College

A control system is a set of formal and informal systems to assist the management in steering the organization towards its goals. A Management Control System (MCS) on the other hand is a set of interrelated communication structures that facilitates the processing of information to assist the managers in coordinating the parts and attaining the purpose of an organization on a continuous basis, (Das, 2011).

Types of Management Control System

Management Control System in an organization generally fall under two categories:

1. Formal

The management control system include the following areas of planning and control:

1. Strategic Planning

2. Management Control

3. Strategic Control

4. Operational Control

The Strategic Planning and control deal with the issues relating to an organization 's basic objectives and implementation followed by monitoring of its progress. The management deals proper allocation and effective utilization of resources, sustenance in competition and transformation of the organization 's objectives into reality. The task and operation controls deal with the factors of efficiency in operations of the firm.

Role of Management Control System

The control systems assist the executives in meeting overall purpose of the organization and the requirements of its constituents. There are three essential management functions of an executive, and these are:

1. Securing essential efforts from the employees as well as the stakeholders of the firm

2. Providing a good communication system to coordinate various activities of the firm

3. Setting up the purpose, goals, and activities for an organization delegating responsibility to various sub-units to accomplish the goals.

Elements of Management Control

The role of the assessor is to compare the actual results with the standards set. An effector is supposed to minimize the gap between the standard results and actual results. The responsibility of the communication network is to transmit information among the detector, the assessor and the effector.

Transfer Pricing

Transfer pricing is or occures when one division of a company sells to another division of the same company. For example, division A sells to division B, and division A records the transaction as a sale while division B records it as a cost of goods sold. Management’s objective in setting a transfer price is to encourage goal congruence among the division managers involved in the transfer.

The general rule specifies the transfer price as the sum of two cost components. The first component is the outlay cost incurred by the division that produces the goods or services to be transferred. Outlay costs will include the direct variable costs of the product or service and any other outlay costs that are incurred only as a result of the transfer. The second component in the general transfer-pricing rule is the opportunity cost incurred by the organization as a whole because of the transfer. An opportunity cost is a benefit that is forgone as a result of taking a particular action, (Agarwal,