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TRANSFER
PRICING
​Zimmerman 5B – Kaplan & Atkinson Ch.9
(p.453-464)
From last classes…
 Organizational architecture can be
designed through:
 Responsibility accounting
 Performance measurement

 We have seen how different

performance measures can give
different incentives in investment
centers
 Today we focus on profit centers

2
Transfer prices
 Responsibility centers are interdependent as they transfer goods or services among themselves
 In order to evaluate the performance of two profit centers, the firm needs to set transfer prices
Manufacturing Distribution
(selling division) (buying division)

External
Intermediate product Selling price=20 market
(transfer price=10)

Examples of transfer prices:

 Internal charge paid by final assembly division for components produced by other divisions
 Service fees to operating departments for telecommunications, maintenance, and services by service departments
 Cost allocations for central administrative services (general overhead allocation)
Page 3
Transfer prices
A transfer price is an internal price that is assigned to goods/services when they are transferred from one
profit (or investment) center to another

Manufacturing Distribution
(selling division) (buying division)
Transfer price 10 Selling price 20
-Variable cost (4) External
-Transfer price (10)
=contr.margin 6 Final product Selling price=20
market
-Variable cost (2)
(transfer price=10) =contr.margin 8

The transfer price:

 Is charged as cost for the center which is receiving the goods/services (the purchasing/buying division)
 Is assigned as revenue to the center which is transferring the goods/services (the producing/selling division)

Page 4
Transfer prices
A transfer price is an internal price that is assigned to goods/services when they are transferred from one
profit (or investment) center to another

Manufacturing Distribution
(selling division) (buying division)
Transfer price 10 Selling price 20
-Variable cost (4) External
-Transfer price (10)
=contr.margin 6 Final product Selling price=20
market
-Variable cost (2)
(transfer price=10) =contr.margin 8

For the company as a whole:

Selling price 20 Transfer prices distribute profit among divisions, allowing
-Variable costs (4+2) (6) for separate performance evaluations
=contribution margin 14
Page 5
Transfer pricing for decision making and decision control

Decision management:
Transfer prices allow responsible
managers to make decisions regarding
the volume of products and services
transferred between divisions Decision control:
(bring the market inside the firm) Transfer prices allow top managers to
evaluate (and reward) the performance of
each division

Page 6
Transfer prices: trade off between decision making and
decision control
“the choice of transfer pricing method does not
merely reallocate total company profits among
business units; it also affects the firm’s total
profits” (Zimmerman, p.171).

The “wrong” transfer price can induce managers

to make decisions that max their division's
performance but reduce firm’s value (agency
problem)

Page 7
Example
​Underestimated transfer price

Manufacturing Distribution
(selling division) (buying division)
Transfer price 3 Selling price 20
-Variable cost (4) -Transfer price (3) External market
=contr.margin (1) Final product -Variable cost (2) Selling
(transfer price=3) =contr.margin 15 price=20

The company benefits by producing and selling the

product (contribution margin =14).
However, the manager of the manufacturing division
has not incentive to produce it
Page 8
Example
​Overestimated transfer price

Manufacturing Distribution
(selling division) (buying division)
Transfer price 19 Selling price 20
-Variable cost (4) -Transfer price (19) External market
=contr.margin 15 Final product -Variable cost (2) Selling
(transfer price=19) =contr.margin (1) price=20

The company benefits by producing and selling the

product (contribution margin =14).
However, the manager of the distribution division has
not incentive to handle it (or has the incentive to buy it
from external suppliers, if cheaper)
Page 9
Example
​How to set the transfer price

Manufacturing Distribution
(selling division) (buying division)
Transfer price … Selling price 20
-Variable cost (4) -Transfer price … External market
=contr.margin … Final product -Variable cost (2) Selling
(transfer price=…) =contr.margin … price=20

The transfer price must be set in such a way as to

induce the two managers to make the transfer.
For the manufacturing division: TP > 4 (variable cost)
For the distribution division: TP< 18 (selling price –
variable costs)
Page 10
Example
​Underestimated transfer price with external market

Selling price=12 External market

Manufacturing Distribution
(selling division) (buying division)
Transfer price 10 Selling price 20
-Variable cost (4) -Transfer price (10) External market
=contr.margin 6 Intermediate product -Variable cost (2) Selling
(transfer price=10) =contr.margin 8 price=20

The company benefits by selling the final product (contribution

margin =14), rather than selling the intermediate product
(contribution margin 12-4=8).
However the manager of the manufacturing division has incentive to
sell the intermediate product externally (if it has limited capacity)
In this case the TP should be set at least at 12 Page 11
Transfer price
​How to set the transfer price

 The optimal transfer price for a product or service is its opportunity cost
 The opportunity cost for transferring a good/service is the value foregone by not selecting the next best
alternative (e.g. not produce or sell the intermediate product, sell it to the external market)

Variable costs are

Situation 1: Manufacturing Distribution Transfer price=4 good approximation
Transfer of opportunity cost
Var. costs = 4 price = 3 Sales price: 20 when there is excess
capacity

External market = 12
Market price is a
Situation 2: Manufacturing Distribution Transfer price=12 good approximation
of opportunity cost
Var. Costs = 4 Sales price: 20 when there is limited
capacity
Limited capacity
Page 12
Four common transfer-pricing methods
As opportunity costs are difficult to compute, companies usually adopt the following approximations
 Market-based transfer prices
 Marginal or Variable-cost transfer prices
 Full-cost transfer prices
 Negotiated transfer prices

Page 13
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MARKET-BASED
TRANSFER PRICE
​Zimmerman Ch. 5b – Kaplan & Atkinson
Ch.9 (454-455)

Page 14
Market-based transfer prices
 Market-based transfer prices are good approximations of the opportunity costs of transferred units, if
an highly competitive market for the intermediate product exits.

External market

Manufacturing Distribution
 Rule of thumbs:
 if the manufacturing division cannot make a long-term profit when it transfers the intermediate product at the
market price, then the company is better off by not producing internally and instead should purchase in the
external market.
 If the purchasing division cannot make a long-term profit with a transfer price equal to the market price of the
intermediate product, then the company is better off not processing the intermediate product and instead should
sell it to the external market
 Market-based transfer prices are more accurate (more objective and less prone to manipulation) than
accounting-based transfer prices
Page 15
Market-based transfer prices
 Market-based transfer prices tend to ignore the interdependencies and synergies among divisions
 If buying division is not profitable at a market-based transfer price, the company can still be better off
if the intermediate product is transferred, because of existing interdependences and synergies.

Transfer price (1 toner) Selling price

Toner division Copier division Distributors

Market price (n toners for each copier sold)

 If manufacturing division is not profitable at a market-based transfer price, the company can still be
better of if the intermediate product is produced internally because of lower transaction costs, better
quality control, better property/knowledge protection, synergies, …
Market-based transfer prices
 Markets are often imperfect (the products are not similar, there are too few suppliers) and not always
the market price is publicly available.

 How do the company get a market price to use for the inside transfer? (buy occasionally from the
market, ask quotations to potential suppliers, …)
 the price communicated by suppliers might not be realistic (e.g. because they know it is used for
internal purposes) or might be short-term offers (and therefore not sustainable in the long-term)

 Who should ask? The selling division or the buying division?

 Managers might have discretion about where to find the market price (e.g. which potential suppliers
to choose) opening the possibilities for manipulations and biases.
 a third option could be a third division, responsible only for procurement

Consequently market-based transfer price can lead to sub-optimal decision-making and to opportunistic
behaviors
Conclusion
 Market prices are good approximations of opportunity costs if markets are perfect or
close to perfect.
 Accurate: objective and less subject to manipulation (in perfect markets)
 Congruent: often leads to correct long-run make/buy decisions

 In imperfect markets prices are prone to manipulations

 Only exist for some products
 Inaccurate: bias and manipulations are possible in imperfect markets
 Incomplete: Might not capture interdependencies among divisions

18
VARIABLE/
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MARGINAL-COST
TRANSFER
PRICING
​Zimmerman ch. 5B – Kaplan & Atkinson
Ch.9 (456-458)
Marginal-cost transfer prices
 Marginal cost is the value of the resources foregone to produce one additional unit
 It is a good approximation of opportunity cost when there is no market for the intermediate good, or if
large synergies among divisions make the market price an inaccurate measure of opportunity costs
 In economics, the optimal level of production takes place when: price = marginal cost (assuming perfect
markets and profit-maximizing rational individuals)
 Therefore, economists tend to set transfer prices = marginal cost

 Marginal cost-transfer prices are rarely used in practice:

 Marginal costs are difficult to estimate, and managers have incentives to not reveal information for
the estimation (e.g. on level of capacity use): risk of adverse selection
 Marginal costs usually varies with volumes (e.g. adding a night shifts at higher hourly rate).
 Setting transfer prices that continuously change can create confusion and makes planning difficult.

Page 20
Variable-cost transfer price
 (short-run) variable costs (standard or actual) are often used instead than marginal costs
 They do not vary with volume → no confusion

 Variations:
 Set transfer price equal to variable cost plus a fixed fee
 set transfer price equal to variable cost plus the opportunity cost of the capacity used to make the product
 If there is excess capacity → opportunity cost of the capacity used is zero, then TP= variable cost
 If there is limited capacity → opportunity cost is the benefit foregone by not using the resources in the best
alternative use, e.g. selling to external market, then TP=market price

 Problems:
 Short-term variable-cost transfer prices are not congruent with long-term product-related decisions
 Fixed costs of the manufacturing department is not covered (manufacturing department appears to be losing money)
 Incentive problems

21
Exercise 5.13: Zee Spin Wedges
Club Head Shaft Total
market
Variable manufacturing cost $16.05 $11.48 $27.53
Variable selling cost 5.43 Selling Price =23
Fixed manufacturing cost 4.17 6.52 10.69 Var. selling cost=2,43
Other common fixed costs 6.43
Grip 2.50 Shafts Wedges
Total cost for one wedge $52.58 market
(profit center) (profit center)
Selling Price =75
Transfer price?
Var. selling cost=5,43

a WEDGE The owner of Zee Spin want to maximize profits and

realize that, to properly motivate the mangers of the
Grip (outsourced) Wedges and Shafts profit centers, they need to set the
proper transfer price for the shafts.
Shaft
Using the data provided in the problem, what transfer
Head price should be used?
What problems should the owners of the Zee Spin
anticipate? What non-firm-value maximizing behaviors
Page 22
should the owners of Zee Spin expect to occur?
Exercise 5.13: Zee Spin Wedges
​Opportunity cost

Club Head Shaft Total

market
Variable manufacturing cost $16.05 $11.48 $27.53
Variable selling cost 5.43 Selling Price =23
Fixed manufacturing cost 4.17 6.52 10.69 Var. selling cost=2,43
Other common fixed costs 6.43
Grip 2.50 Shafts Wedges
Total cost for one wedge $52.58 market
(profit center) (profit center)
Selling Price =75
Transfer price?
Var. selling cost=5,43

a WEDGE
 If there is excess capacity → transfer price = variable
Grip (outsourced) manufacturing cost (11,48)
Shaft
 If there is limited capacity → transfer price = net value
foregone by not selling to external customers (23-
Head 2,45=20,57)

Page 23
Exercise 5.13: Zee Spin Wedges
​Opportunity cost
• The shaft division manager Clubwill
Headalways argue
Shaft it hasTotal
no
excess capacity in order to get the higher transfer market
Variable manufacturing cost $16.05 $11.48 $27.53
price of $20.57.
Variable selling cost Or, the Shaft manager will actually5.43 Selling Price =23
plan
Fixed production cost
manufacturing so there is no4.17
excess capacity
6.52 to get
10.69 Var. selling cost=2,43
the common
Other $20.57 transfer price.
fixed costs 6.43
•Grip
The Shaft division manager will try to argue that some 2.50 Shafts Wedges
Total cost costs that are currently classified as “fixed”
of the $52.58 market
(profit center) (profit center)
manufacturing costs should be reclassified as Selling Price =75
Transfer price?
“variable” manufacturing costs so as to increase the Var. selling cost=5,43
variable cost and hence the transfer price if there is
a WEDGE
excess capacity.
• The Shaft division manager will Grip change the production
 If there is excess capacity → transfer price = variable
(outsourced) manufacturing cost (11,48)
process to convert fixed manufacturing costs to
variable manufacturing costs, thereby Shaft raising the
 If there is limited capacity → transfer price = net value
transfer price above $11.48. One way to do this is by foregone by not selling to external customers (23-
outsourcing some of the currentHead intermediate 2,45=20,57)
production processes.
Page 24
Variable-cost transfer prices: what we can expect

Agency problems with variable-cost transfer prices (managers of the

selling division during initiation and implementation phase): Decision Management Decision Control
 Misclassification: untruthful reporting or misclassification of true
marginal or variable costs to upward bias variable costs
 Conversion of efficient fixed costs into inefficient variable costs: 1.
Initiation
 Outsourcing 2.
Give info for
 Use direct labor (variable costs) instead of machines (fixed costs). setting Ratificatio
 Ratchet effect: Lack of incentives to reduce costs to avoid a transfer n
subsequent decrease in standard cost (next slide) price Choose a
transfer
 Lie about capacity levels (if marginal cost is used) price
 Myopia: Under-provide elements that are not measured (e.g.
quality, delivery, inventory), and lack of incentives for innovation or
risky investments 3. 4.
Implementa
tion
Monitorin
g
Production
process Control 25
performanc
Misclassification of fixed costs as marginal or variable costs

No misclassification VC= Direct labor $100 +Direct materials $100= TP $200

Misclassification VC= Direct labor $150 + Direct materials $100 = TP $250

$50 indirect labor is classified as direct labor

26
Misclassification of fixed costs as marginal or variable
costs
Selling division Buying division
(Rewarded on profit)
Perfect number of
1. Revenue (the trans-
fer price) 200 transferred products
Transfer price $200
2. Cost of goods sold 200
3. Contribution margin 0
(’true’ opportunity
4. Capacity costs cost) 1. Revenue
(not transfered) 100 2. Cost of goods sold
5. Profit $-100 (the transfer price)
3. Capacity costs
(wages etc.)
1. Revenue (the trans- _______________
fer price) 250
Transfer price $250 4. Profit
2. VC Cost of goods sold 250 ($50 above OP)
3. Contribution margin 0 Too few products sold
4. Capacity costs
(not transfered) 50
(firm value is not maximized)
5. Profit $-50 27
Conversion of efficient fixed costs into inefficient variable costs

Example outsourcing: (The make/buy decision)

Component B:
Make: $100 fixed costs (not part of TP).
Buy: $150 variable costs (part of TP).

Though ’Make’ is more efficient for the company, an agent can

choose to ’Buy’, since variable costs can be reimbursed from
the buying division.
28
Ratchet Effect
​Standard Cost

 Using historical data on past costs is a

common mechanism for setting next year’s
standard cost
 The ratchet effect refers to basing next year’s
standard cost on this year’s actual cost.
However standards are usually adjusted in
only one direction – upward.
 The Ratchet effect refers to the incentive for
employees to temper this year’s better-than-
budgeted cost to avoid being held to a lower
standard in future periods.
 (more about the Ratchet effect in the budgeting modules)

Page 29
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FULL-COST
TRANSFER PRICE
​Zimmerman Ch. 5b – Kaplan & Atkinson
Ch. 3 (60-71), and Ch. 9 (458-45)

Page 30
Full-cost transfer prices
 Full-cost calculation includes:
 Direct costs (direct material and labour), mostly variable
 A share of overheads, which can be computed using different allocation methods

 A full-cost transfer price usually overestimate the opportunity cost of the transferred
units
 except when production is close to capacity, then marginal cost are higher than variable costs, and
full-cost can be a better approximation
Full-cost transfer prices
​Pros and cons

 For the selling division:  For the buying division

 The full-cost transfer price allows covering all  With an accurate allocation method (e.g. ABC) the
costs, including the capacity-related costs buying division sees the long-term costs of the
 The full-cost transfer price protects the selling transfer
division from unexpected fluctuations in the  It incentives a prudent use/consumption of the
internal demand service/product (but it might lead to a suboptimal
 No incentive to misclassify or convert costs (both quantity transferred)
fixed and variable costs are transferred)  If allocation rate is based on planned use (rather
But… than actual use) the buying divisions have
incentive to give trustworthy information in long-
 The selling division can transfer the inefficiencies
term production planning
to the buying division (every cost increases, both
fixed and variable, is transferred to the buying But…
division)  A full-cost transfer price usually overestimate the
opportunity cost of the transferred units resulting
in too few units transferred.
Page 32
Full-cost transfer prices
​Responsibility over capacity decisions

 A car dealer has three departments: new cars, used cars, and service
 New cars reserves 20% of capacity
 Used cars reserves 30% of capacity
 Service reserves 50% of capacity
 Overheads are allocated based on the planned use:
 The transfer price will in part reflect the short-term cost of the units transferred (variable cost)
 In part it will reflect the long-term cost of providing the service/products (overhead quota)
 The managers of the three departments have the incentive to be honest during the
planning phase, and to stick to the plan in later years:
 If they overstate their expected requirements, they will pay an higher transfer price in later years
 If they understate their expected requirements, they might not have sufficient capacity for their needs
in later years
Full-cost transfer prices
 The calculation of the full cost of a transferred product or service depends on the
allocation method of overhead costs
 An arbitrary cost allocation (e.g. allocation rate = capacity costs/units produced) can
create various problems:
 Transfer price is not stable, as cost per unit changes with capacity use
 It obscures the underline cost structure: both fixed- and variable-costs inefficiencies can be
transferred
 It distorts information, leading to wrong decisions

 (We’ll see more about cost-allocation in the next classes)

full cost transfer prices in multiple consequential
​The effects of arbitrary cost allocation in multiple consequential transfers
transfers
General and Administrative costs $12.000

Alloc.: $4.000 Alloc.: $4.000 Alloc.: $4.000

Division 2 Division 3
Division 1
Own costs: … Own costs: …
Full cost Full cost
+20% Overhead: 4.000 +20% Overhead: 4.000
Own costs: …
Transfer price: 4.800 Transfer price: 10.560
Overhead: 4.000
(4.000+20%) (8.800+20%)

External market:
selling price = costs + 20%markup
Page 35 =
14.560 + 2.912 = 17.472
P5-11 Cogen
Turbine division Generator division External market
Selling prices:
Manufacture of turbines Assemblage of steam- $1.000 (if Q=1)
(Excess capacity) generating units $ 950 (if Q=2)
$ 900 (if Q=3)
Var.costs/unit $150.000 Var.costs/unit $200.000 …
Fixed costs $1.800.000 Fixed costs $1.400.000 $ 700 (if Q=7)
$ 650 (if Q=8)

 How many turbines would be transferred if the transfer price is set at

Turbine’s variable cost?
 How many turbines would be transferred if the transfer price is set at
Turbine’s full cost? (assume turbine estimate to produce 20 turbines)
 Which transfer price to use? Page 36
P5-11 Cogen

If transfer price is set at Turbine’s variable cost (150) the Generator’s profit would be as follows:

Generator's Var. Cost

Variable Transfer Total Generator's
Quantity Price (000) Revenue Cost Price Cost Profits
1 $1,000 $1,000 $200 $150 $1750 ($750)
2 950 $1,900 400 300 2100 (200)
3 900 $2,700 600 450 2450 250
4 850 $3,400 800 600 2800 600
5 800 $4,000 1000 750 3150 850
6 750 $4,500 1200 900 3500 1,000
7 700 $4,900 1400 1050 3850 1,050
8 650 $5,200 1600 1200 4200 1,000

Page 37
P5-11 Cogen
If transfer price is set at Turbine’s full cost (assume a production of 20 turbines) the Genertor’s
profit will be as follow:
(average) full cost = VC + (FC ÷ 20) = $150 + ($1800 ÷ 20) = $240
Generator's Full Cost
Variable Transfer Total Generator's
Quantity Price (000) Revenue Cost Price Cost Profits
1 $1,000 $1,000 $200 $240 $1840 ($840)
2 950 $1,900 400 480 2280 (380)
3 900 $2,700 600 720 2720 (20)
4 850 $3,400 800 960 3160 240
5 800 $4,000 1000 1200 3600 400
6 750 $4,500 1200 1440 4040 460
7 700 $4,900 1400 1680 4480 420
8 650 $5,200 1600 1920 4920 280

Page 38
P5-11 Cogen
 Conventional wisdom argues that variable-cost transfer pricing yields the firm-profit
maximizing solution. This is certainly the case as long as variable cost is reasonably
easily observed and not subject to gaming. However, the Turbine Division has
incentive to reclassify what are in reality fixed costs as variable costs and to convert
activities that are now a fixed cost into a variable cost (by replacing contracts written in
terms of fixed cash flows with contracts written so the cash outflows vary with units
produced). Thus, full-cost transfer prices, being less subject to managerial discretion,
might be preferred to variable-cost transfer prices, even though full-cost transfer
prices result in fewer units being transferred and hence slightly lower overall profits.

Page 39
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NEGOTIATED
TRANSFER PRICES
​Zimmerman ch. 5B - Kaplan & Atkinson
Ch.9 (460-461)
Negotiated transfer prices
 Given the lack of perfectly competitive market for the intermediate product/service and the limitations
of the cost-based transfer pricing methods, a solution could be to set the transfer price through
negotiation between the managers of the two divisions

 Necessary conditions:
1. Some form of outside market for both parties (no monopolistic situation).
2. Sharing of market information (the result will then be closer to the opportunity cost).
3. Freedom to buy and sell outside (i.e. possibility to reject the internal price offer). Provides
necessary discipline.
4. Support and involvement of top management. But not too much

41
 Negotiated transfer prices
 The manufacturing division provides a price
quotation (e.g. 5.5)
Price=?  The sales division may:
 Accept the deal
External markets = 4 External market = 5.5  Bargain to obtain a lower price (e.g. 4)
 Bargain with external supplier to obtain a lower price or
better conditions
Manufacturing Sales  Reject (buy from the market at 4, or not buy at all)

Var. Costs = 3 Sales price: 5  The sales division provides a price quotation (e.g. 4)
Limited capacity  The manufacturing division may:
Opp.cost = 5.5  Accept the deal (unlikely, given limited capacity)
 Bargain to obtain a higher price (e.g. 5.5)
 Bargain with external customers to obtain higher price
(if lower)
 Reject (sell to the market, or not produce at all)

42
Negotiated prices has the following limitations
1. Time-consuming.
2. Leads to conflict.
3. Makes the measurement of divisional profitability sensitive to the negotiating skills of managers.
4. Top management needs to oversee negotiating process.
5. It may lead to a suboptimal level of output if the negotiated price is above (or below!) the
opportunity of supplying the transferred good.

43
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REORGANIZATION

Page 44
Reorganization: the solution if all else falls
 Setting a transfer price can:
 Create conflict between divisions and undermine cooperation
 Lead to too few (if above the opportunity costs) or too many (if below the opportunity cost) units
transferred, with consequences in the overall profit of the company

 If transfer pricing becomes too much dysfunctional, reoroganize the firm.

 Combine two profit centers with a large volume of transfers into a single division
 Convert the manufacturing division into a cost center rather than a profit center
 Centralize decisions regarding quantity of units transferred (in this case, both divisions can be
converted into cost centers)
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SUMMARY
 Advantages and disadvantages of transfer pricing
methods
Method Advantages Disadvantages
Market-based Accurate: objective and less subject to Only exist for some products
transfer manipulation (in perfect markets) Not always objective: bias and manipulations in
prices Congruent: often leads to correct long-run imperfect markets
make/buy decisions Incomplete: Might not capture interdependencies
among divisions
Variable Can approximate the opportunity cost of Marginal cost might vary with output & variable cost
(marginal) transferring one more unit can be a poor approximation of opportunity cost
cost transfer Congruent: Gives the buying division Not always accurate: Selling division has incentive to
prices incentive to purchase the correct number classify costs as variable costs/ Selling division has
of units if selling division has excess incentive to overuse variable cost / Conversion of
capacity efficient capacity costs to inefficient variable costs
Incomplete: ignores capacity cost

Page 47
 Advantages and disadvantages of transfer pricing
Method Advantages Disadvantages
methods
Full-cost transfer prices Can approximate opportunity costs Overstate opportunity costs (with excess
when activity is close to full capacity)
capacity Uncontrollability: Selling division can export
Complete: includes a component its inefficiencies to the buying division
related to long-term capacity costs Death spiral
Understandable: avoids disputes Imprecise calculations (due to cost
over which costs are fixed and allocation)
which are variable **it all depends on the allocation method**
Negotiation Both selling and buying divisions Time consuming
have incentives to transfer the Depends on the relative negotiating skills of
number of units that maximise the two divisions (power)
their combined profits
Reorganize selling and Eliminates costly disputes over Reduces the benefits from having two
buying divisions (e.g. transfer pricing decentralized responsibility centers
merging, or transform
in cost centers)

Page 48
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GROUP
ASSIGNMENT
Write an essay on the roles of management accounting in designing a well-balanced organizational architecture
that mitigates agency problems, with a focus on the performance evaluation of responsibility centers.

To pass, the essay must:

- Use and quote the relevant literature from the course (up to module 4)
- Define all the relevant concepts and describe their relationships
- Problematize, by explaining trade-offs and agency problems
- Exemplify, also by using numerical exercises from the textbook
- Create a well-written, well-structured and coherent manuscript.

Page 50
Write an essay on the roles of management accounting in designing a well-balanced organizational architecture
that mitigates agency problems, with a focus on the performance evaluation of responsibility centers.

Recommended exercises from

To pass, the essay must:
chapter 5 are:
- Use and quote the relevant literature from the course (up to module 4)
- Transfer pricing 5-8 Shop and
- Define all the relevant concepts and describe their relationships Save, 5-9 Microelectronics, 5-10
- Problematize, by explaining trade-offs and agency problems US Copier, 5-16 University Lab
- Exemplify, also by using numerical exercises from the textbook Testing, 5-17 Beckett Automotive
Group, 5-18 WBG
and/or cases (e.g. from next class) - Evaluation of investment centers:
- Create a well-written, well-structured and coherent manuscript. 5-3 Sunder Properties, 5-5
Performance Technologies, 5-12
Wegmans, 5-14 Creative Learning
Centers, 5-15 Warm Boots

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 Instructions:
 Write maximum 5 pages.
 Formatting rules: times new roman 12 pt, 1,5 line spacing
 Write the names of all students in the group in the first page.
 Name the file with class 1st assignment + group number (e.g. 1st assignment group 3)
 Upload the file in Canvas as an answer to the discussion forum in Module 5.
 Deadline: November 20, at 23:59

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