Critically Evaluate Roi and Eva Encourages Short Term Decision Making in Managers

2762 words 12 pages
PART A

INTRODUCTION OF PERFORMANCE MEASUREMENT

Growing global competition has affected the organisational structure. Companies have moved to divisional structure, which generates the need for top management to assess the divisional performance. Divisions tend to be categorised into either a profit centre or an investment centre. While some measure of profit is used to measure the performance of profit centres, for investment centres many firms employ measures that are based on profit and invested capital(McGraw-Hill Higher Education).

C. Drury (2008) argues that performance measurement is one of the key functions of management accounting. Neely, Adams & Kennerly (2002) has defined performance measurement as the following:
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Do not rely excessively on financial measures and incorporate non-financial measures that measure those factors that are critical to the long-term success of the organization.
(i.e. adopt a Balanced Scorecard Approach)

PART B

INTRODUCTION OF TRANSFER PRICING

An essential feature of divisionalization is responsibility centres (Heath, Huddart, & Slotta, 2009). The performance of this responsibility centres is evaluated on the basis of various accounting numbers. Transfer pricing is one of them. It is applied internally within organization to evaluate the performance of each responsibility centre to the total profit of the organization.
When business units or divisions within the organization buy goods and services from one another, the value or amount recorded in a firm’s accounting records as revenue to the selling unit and cost to the buying unit is called the transfer price(Hill, 2011). Since a transfer price affects the profit of both the buying and selling divisions, the transfer price affects the performance evaluation of these responsibility centres.
Appendix 1

MEANING AND PURPOSES OF TRANSFER PRICING

The price charged by one segment (sub-unit, department, division) of an organization for a product or service supplied to another segment of the same organization is termed the “transfer price”(Horngren & Foster, 1991). Transfer price is the notional price assigned to the intermediate products. Drury (2009) states that the intermediate

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