Goal Congruence and Transfer PricingGroup Number 3:Nikita Chitalia-05Dhaval Dhruv-11

Parin Shah-47Pooja Shahani-48

Dhwani Vibhakar-57

Goal Congruence

What is Goal congruence?

• The goals of the organization's individual members should be in alignment with the goals of the organization.

• In a goal congruence process, the actions people are led to take in accordance with their perceived self-interest are also in the best interest of the organization.

Informal Factors that influence Goal Congruence

External Factors• Norms of desirable behaviour that exist

in the society of which the organisation is a part .

• Referred to as work ethic-loyalty to the organization, their diligence, spirit, their pride in doing a good job.

Internal Factors

Region-specific Eg- Silicon Valley ( entrepreneurial spirit, a zest for hard work, high ambition, a preference for informal work settings.)

Industry-specific Eg- Railway and airline industry.

Culture

Management style

Informal organisation

Perception and communication

DD

• A Business Unit is responsible for all the functions involved in producing and marketing a specified product line.

• Business Unit managers act almost as if their units were separate companies.

• It is suitable for medium sized to big companies, expanding geographically or on customer base.

• Business Units may be divided based on :– Markets served– Product Lines– Geography

BUSINESS UNITS

• High customer satisfaction• High task coordination• Clear performance responsibility• General management training.

Strengths

Weaknesses

• Resources may not be utilized properly• Focus on division’s objectives• Coordination between headquarter and the division• Loss of control

• Matrix structure is a hybrid of divisional and functional structure.

• This Hybrid design has divisional units as well as functional departments specialized and centralized in the headquarter.

• Typically used in large multinational companies, the matrix structure allows for the benefits of functional and divisional structures to exist in one organization

MATRIX STRUCTURE

• Better Utilization of resources• Enhances skill development • Communication • Provides flexibility

Weaknesses

Strengths

• Dual line of command• Is time consuming• Implementation is difficult

Controller

• The person who is responsible for designing and operating the management control system is know as the controller

• Functions of Controller:– Preparing financial statements and reports– Supervising internal audit and accounting control

procedures– Analyzing performance reports and budget proposals

HMS

Cost Based Pricing

• How to define cost?– Actual cost– Standard cost

• How to calculate profit mark-up?– Percentage of cost– Percentage of investment

Upstream Fixed Costs and Profits

• Transfer pricing can create problems in integrated companies.

• The final profit center may not be aware of the upstream fixed costs and profit included

• Even if they are aware: They may be reluctant to reduce the profits

• There have to be systems in place to make all entities in the organization aware of the various components of cost so that decisions can be taken that benefit the organization.

Systems facilitating Cost awareness

• Agreement among the business units• Two-step pricing• Profit sharing• Two Sets of Prices

Agreement among Business units-

• Done through a process of negotiation among business units

• Representatives from buying and selling units work on profit sharing

• The same is reviewed periodically.

Two Step Pricing-

Consists of two charges-• Product Charge: Standard variable cost of

production• Periodic charge : Fixed costs associated with the

facilities reserved for the buying unit. • Profit may be included in the above.

Profit Sharing-

• If two – step pricing method not feasible, a profit sharing is used.

• The product is transferred at standard variable cost.• Profit is contributed after selling the product. ( Selling

price – Variable manufacturing cost – Marketing cost )• Applicable were demand is not steady

Two Sets of Prices-

• It is used when there are frequent conflicts between buying and selling unit and can not resolve by any other method.

• Manufacturing unit revenue is credited at the out side selling price.

• Buying unit charged to a total standard cost.• Difference is charged to head office and eliminated at

the time of business unit statement is consolidated