MANAGEMENT CONTROL SYSTEM

“ FINANCIAL RESPONSIBILITY CENTER ”

GROUP 3

1. PUTRI AGUSTINA 2017310031

2. RIKA KARTIKA 2017310195
3. HANA NUR AIDAH 2019340814

STIE PERBANAS SURABAYA

Advantages of financial results control system In a financial results control system, results are set in
monetary terms, generally in accounting measurements such as income, costs, profits, and returns. The
financial results control system has 3 core elements, namely:

1. Financial accountability centers, which define the equitable distribution of financial results that
can be accounted for in an organization.
2. Planning and budgeting system, which includes setting performance targets to evaluate
performance.
3. An incentive contract, which defines the relationship between the outcome and the organization's
reward and punishment.

Advantages of financial results control system

1. The most important financial goals of a profit-oriented company.
2. Financial measures provide a "summary" of company performance.
3. Most financial measures are relatively precise and objective.
4. Control of financial results can provide a subtle form of management control.
5. The costs of implementing financial outcome controls are usually relatively small compared to
other forms of management control.

Type of financial responsibility centers

The center of financial accountability is where the responsibilities of each individual are defined at least
in part in financial terms. Four types of liability centers can be distinguished:

1. Investment center. It is the center of responsibility where managers hold the responsibility for
accounting returns (return) on investments. Accounting returns can be specified in a variety of
ways, usually including the ratio of the profit generated to the dollar investment used (ROI, ROE,
ROCE, RONA, ROTC, RAROC, and so on).
2. Profit center It is the center of responsibility where the manager holds responsibility for profits,
measured by the difference between the income generated and the costs incurred to produce that
income.
3. Income center It is a central responsibility where the manager holds the responsibility for
generating income which is a measure of financial output. Common examples are sales managers
and, for non-profit organizations, fundraising managers. Revenue, compared to profit, provides a
simple and effective way to encourage sales and marketing managers to attract and retain
customers.
 4. In standard cost centers such as the manufacturing department, output is relatively easy to
measure, and the relationship between input and output is direct and relatively stable. In
discretionary cost centers, such as research and development departments and administrative
departments (eg personnel, purchasing, accounting, and facilities), the resulting output is difficult
to value in monetary terms.
5. Other Variations. The four centers of responsibility are very different (gross profit center,
incomplete profit center, profit center before tax, complete profit center), each a profit center,
although different in extent of responsibility.

Choice of financial responsibility centers

The important questions to answer this are: "for which managers must be held accountable; for
which part of the financial statements? "These choices are very important because they influence the
behavior of managers to pay attention to the size of the responsibility they are in. These choices are
clearly important because they influence the behavior in which managers pay attention to the measures by
which they are expected to be responsible. From the behavioral standpoint, the basic answer to the above
question is relatively blatantly expecting managers to be responsible for -what kind of types do you want
them to give their attention. At a broad level, the central structure of financial accountability happens to
be the same as the authority of managers. Areas of authority are defined by organizational structures and
policies that define the rights and obligations of managers to make certain decisions.

The transfer pricing problems

In the transfer of goods or services there are 2 types of decisions:
1. Sourcing Decision : The decision to buy resources from within the company or from outside
the company
2. Transfer Pricing Decision : If a decision to buy from within is chosen, the following decision
will arise: "At what price does the transfer price apply?"
Transfer prices directly affect revenue from sales (suppliers) of the profit center, costs for
purchasing (receipts) of the profit center and, consequently, profits of both entities. The
impact of transfer prices depends on the amount of internal transfers relative to the size of
each entity. When the amount of transfer is significant, failure to regulate the price of the
transfer of rights can have a significant negative effect on a number of important decisions,
including regarding the amount of production, source of procurement, allocation of resources,
and evaluation of managers from both sales and buying profits of the center.
Purpose of Transfer Rates
 1. Provide a viable economic signal that influences managers to make good decisions.
2. Transfer prices can be set to transfer earnings intentionally between entity locations. This
goal is related to efforts to minimize taxes.
 Alternative Transfer Prices
Most companies use one of five types of transfer prices. First, transfer prices can be based on
market prices. Third, the transfer price can be based on the full cost of providing a product or
service. Fourth, the transfer price can be set at the full cost plus markup. And fifth, the transfer
price can be negotiated between the seller's profit center manager and the buyer.
1. Market-based transfer prices :
The market price used for internal transfers can be the listed price of an identical (or similar)
product or service, the actual price sold to an external customer (maybe less discounts
reflecting lower sales costs for internal customers), or the price offered by competitors.
2. The price of marginal cost transfers :
Transfer prices can be based on marginal costs, with marginal costs estimated as variable or
direct production costs. When continued products and services are exchanged internally for
marginal costs, it is easy to determine the total contribution made by the final product or
service to the company as a whole.
3. Full price transfer fees:
First, they provide a measure of long-term survival. For products or services that are
economically sustainable, full costs, and not just marginal costs, must be recovered, even
ideally producing margins above full costs.
4. Price transfer negotiations:
This policy can be effective if both profit centers have bargaining power, namely that, the
seller's profit center has several possibilities for selling its products outside the company and
the buyer's profit center has several sources of external suppliers.
 Other variations
1. Marginal costs plus fixed lump-sum costs. These lump-sum costs are designed to compensate
the seller's profit center for binding some fixed capacity to produce products that are
transferred internally. This method provides information for evaluation purposes because the
sales division can recover fixed costs and profit margins through lump-sum fees.
2. The price of a dual-rate transfer (double tariff). In this variation, the seller's sales center is
credited with market prices, but the buyer's profit center pays only marginal (or full)
production costs.
 Joint Use of Various Transfer Price Methods
When companies jointly use various transfer pricing methods, they usually use one method for
internal purposes (both decision making and evaluation) and other methods for transferring
profits between tax jurisdictions. However, it is often difficult to use this method for the
above purpose because the law imposes discretion on companies operating in many countries.