When we talk about the evaluation of divisions and managers, the main goal is to measure

performance fairly and accurately. A division is usually evaluated based on its overall results —
profits, efficiency, and contribution to the company. Pero ang manager, dapat i-evaluate lang sa
mga bagay na kaya niyang kontrolin, or what we call the controllability principle. This
prevents unfair judgments and motivates managers to focus on areas they can actually improve.

There are several bases for evaluation:

The first one is Internal ranking. It means comparing divisions within the same company.​
Parang class ranking sa school — kung sino ang top performer at sino ang nahuhuli.

Example: Division A may ROI na 15%, Division B 10%, Division C 5%. Kita agad kung sino ang
best.​
The internal ranking advantage is: madaling makita ang relative performance.​
Pero may risk din ito at ayun ay: baka mag-focus lang ang managers sa beating other divisions,
instead of helping the whole company.”

Second is Historical comparisons dito nag cocompare ng division performance sa sarili nilang
past results. Tinitingnan kung nag-improve ba sila over time.​
For example: Last year ROI = 8%, this year ROI = 12%. That shows progress.​
Ang strength nito ay: nakikita ang growth trend.​
Pero may Limitation: kung ang external environment ay nagbago (like inflation), baka hindi fair
ang comparison.

The third one is “Industry averages nag cocompare dito ng division performance against
competitors in the same industry.​
Parang benchmarking — kung ang industry average ROI ay 10%, tapos ang division mo ay
15%, ibig sabihin above average ka.​
Ang Advantage nito is: nakikita kung competitive ang division sa market.​
Pero may Risk din ito and that is the industry averages may not reflect unique company
strategy, so dapat gamitin with caution.”

So the last one is the Budgets. This measure actual results against planned targets, giving
managers clear goals to achieve. Managers are evaluated based on how close actual results
are to budgeted figures.​
Example: Budgeted profit = ₱1M, actual profit = ₱1.2M so the division exceeded expectations.​
Ang Strength nito is: nag momotivates ito ng managers to meet planned goals.​
And then the Risk is: kung unrealistic ang budget, pwedeng demotivating. Kaya dapat realistic
and achievable ang targets.”
Next slide
Aside from these, companies also use financial measures like ROI, RI, and EVA this help us
see kung talagang nag-a-add ng value ang division, hindi lang basta kumikita.”

But modern evaluation also includes non-financial metrics such as customer satisfaction, quality,
and employee engagement. In short, evaluation should balance numbers with real-world
performance, para maging fair sa manager at useful sa buong organization.

And lastly, important din ang controllability principle.​

Next Slide.

Now lets discuss naman ang Transfer Pricing Ito yung internal pricing kapag ang isang division
ay nagbebenta ng goods or services sa ibang division.

Halimbawa, kung ang Production Division gumagawa ng parts at ibinebenta sa Assembly

Bakit importante ito?

●​ Una, it affects divisional costs, revenues, and profits.

Pero ang transfer pricing is may effect Kapag mali ang transfer price:

●​ Too low → selling division discouraged.

Now We will look at different methods such as actual cost, budgeted cost, market-based price,
incremental cost, and negotiated price, and discuss their advantages and disadvantages.

The actual cost method sets the transfer price based on the real expenses of the producing
division. For example, if the variable cost is ₱50 and the fixed overhead is ₱30, the transfer
price becomes ₱80. The problem here is that managers have no incentive to reduce costs.
Kung tataas ang gastos, tataas din ang transfer price, so inefficiency is actually rewarded. This
makes it unfair for the buying division, kasi they end up paying for the seller’s inefficiency. That’s
why actual cost is not recommended for long-term use.

The budgeted cost method uses planned or standard costs that are set at the beginning of the
period. For example, if the budgeted cost is ₱75, then kahit tumaas ang actual cost to ₱85, the
transfer price remains ₱75. This method is fairer because it encourages efficiency

— the selling division absorbs the variance, so they are motivated to control spending. Stable
din ang presyo, which helps the buying division plan better. The only risk is if the budget is
outdated or unrealistic, kaya kailangan ng regular review and updates.

Next slide.

The market-based price method sets the transfer price equal to the external market price. For
example, if the market price is ₱120, but internal transfer saves ₱12 in shipping and packaging,
the adjusted transfer price can be ₱108. This method is considered the best because it is fair
and objective, parang external trade lang. It promotes goal congruence since divisions make
decisions based on market reality. The limitation is that sometimes walang comparable market
price, especially for unique products, so adjustments or proxies are needed.

The incremental cost method is used when the selling division has idle capacity. In this case,
the transfer price can be as low as the variable cost. For example, if the variable cost is ₱50 and
the buyer’s external option is ₱90, the company saves money by transferring internally at ₱50.
This maximizes company-wide profit because it uses spare capacity. Pero kapag full capacity
na, incremental cost is not enough. We must include the opportunity cost of lost external sales.
For example, if the external selling price is ₱120 and the variable cost is ₱50, the contribution
margin is ₱70. Selling internally at ₱50 would lose that margin, so the minimum transfer price
should cover the lost contribution.
Next slide.
The negotiated price method allows managers to bargain with each other. For example, if the
seller’s minimum price is ₱50 and the buyer’s maximum is ₱108, they can agree somewhere in
between, like ₱95. The advantage is flexibility and autonomy — managers can adjust prices
depending on quality, urgency, or service levels. Pero ang risk dito is that negotiation depends
on bargaining skills. Kung sino ang mas magaling makipag-negotiate, siya ang panalo, which
can cause unfairness. That’s why companies often set clear rules or negotiation bands to keep
deals balanced and fair.

Next slide..

For our last topic the Modern Cost Control Approaches

let’s discuss new approaches to cost control and management

Just-In-Time (JIT) is a system where you produce or move items only when there is actual
demand — no early production, no excess inventory. This cuts storage costs, reduces defects,
and exposes process problems quickly, kaya mas mabilis maayos ang bottlenecks. Typical
practices include pull systems (Kanban cards), small lot sizes, and setup time reduction, plus
tight supplier integration for on-time, high-quality deliveries.

Kaizen means continuous improvements driven by people who do the work — araw‑araw na
pagbabago, hindi one-time big-time projects. Teams use PDCA (Plan–Do–Check–Act) cycles to
test ideas, measure results, and standardize what works, building a culture of learning and
discipline. It reduces waste like defects and lowers cost over time, habang bumibilis ang cycle
time. Example: A call center trims 20 seconds per call by simplifying verification steps; maliit
lang, pero multiplied by thousands of calls, malaking time and cost savings.

Other approaches include:

Lean, Six Sigma, and Total Quality Management (TQM) are approaches to improving processes
and customer satisfaction: Lean eliminates waste and streamlines flow using tools like value
stream mapping, 5S, and takt time, ensuring smoother operations ; Six Sigma reduces defects
and variability through data-driven DMAIC steps—Define, Measure, Analyze, Improve,
Control—leading to more predictable, high-quality results ; while TQM builds a culture of quality
across the whole organization, emphasizing prevention, training, and teamwork so every
employee contributes to reliability and trust
Activity-Based Costing (ABC) assigns overhead based on actual cost drivers (like setups,
inspections, deliveries) para mas accurate ang product/service costs, helping managers adjust
pricing, product mix, or processes (halimbawa: Product X mas mahal dahil maraming setups,
kaya kailangan i-price higher or bawasan setups). Meanwhile, Throughput Accounting
focuses on the system’s bottleneck to maximize overall profit, protecting constraint time and
avoiding excess inventory (halimbawa: bakery oven as bottleneck, kaya high-margin items lang
ang priority sa peak hours, boosting profit without extra oven).

Together, these approaches shift cost control from “variance checking” to “value creation.” JIT
and Lean improve flow and cut waste; Kaizen and TQM build the culture to sustain
improvements; Six Sigma reduces defects and variability; ABC clarifies true costs; Throughput
Accounting focuses everyone on the system constraint. Result: faster, better, and cheaper
operations — aligned with customer value and long-term competitiveness.

That’s all for our report

Thank you for listening!​