9787_Decentralised organisations and some accounting problems of internal transfers

DECENTRALISED ORGANISATIONS AND SOME
ACCOUNTING PROBLEMS OF INTERNAL TRANSFERS
A thesis presented for the
degree of Master of Commerce in Accountancy
in the University of Canterbury,
Christchurch, New Zealand
by
McNally,
G. M.
1970
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INTRODUCTION
The overall objective of this thesis is to evaluate some of the
accounting problems which may arise as a consequence of internal transfers
between the segments of large decentralised organisations.
Recent decades
have seen a continuing increase in the size of business units, creating new
problem s in the management of the se units.
In particular, an extension
has occurred in the degree of autonomy for decision-making which has been
granted to the managers of individual divisions or segments of the firm.
As a consequence, the problems of planning the operations of these semi-
autonomous divisions and evaluating the performance of the division
managers have become more complex, with a need to examine the theoretical
and empirical problems which may have arisen.
One specific problem
existing in many large business organisations, and which is of particular
importance in those firms having a de c entra li s ed system of decision-making,
is the need to price internal transfers.
To ensure that the planning and
evaluation of the divisions is undertaken in the desired manner,
a need has
arisen to establish transfer prices which will contribute effectively to the
purposes for which they are employed.
Without consideration being given
to the problems of pricing internal transfers, many of the benefits which are
likely to occur, as a result of establishing semi-autonomous units within the
fi rrn , may be nullified.
This study will not examine all of the aspects of accounting for internal
transfers, but will be limited to a consideration of the management and
rn anagern errt accounting aspects, with reference being made to financial
accounting aspects only when they may have an influence on the managerial
issues of transfer pricing.
Both theoretical and empirical features of the area under study are
considered.
The theoretical feature s are exarnined and criticised in an
a ttempt to establish the place of internal transfers in decentralised organisa-
tions.
Empirical data, from selected New Zealand business firms, is
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analysed in an effort to dete rrni ne the current state of practice, at least
within the sample of cornpani e s surveyed, and to consider how closely the se
practices r e s ernhle what is theoretically desirable.
The application of
transfer pricing would,
f r om the survey, appear to be lirni ted in New
Zealand business units, thus reducing the size of the aarnp l e and Hmi ting
any a ttern.pt s to analyse significant features.
However, this is in no way a
reflection on the co-operation given by the companies included in the survey,
for all of these fi rrn s gave considerable assistance in comple ting the written
questionnaire and by rna ki.ng executives available for interviews.
Without
this co-operation the ernp i r i c a l section of this thesis would not have been
possible, and thus the author is indebted to the rnana.gern ent of all the
participating c ornpani e s ,
In Part I of the thesis SOITle of the characteristics of divisionalised
and decentralised organisations are outlined.
Particular attention is given
to the reasons for decentralising the authority to rna ke decisions and the
extent of decentralised control in SOITle New Zealand business firms.
The
rn e thod s bywhich divisions rnay be evaluated are outlined, whilst the concept
of profit evaluation is exarnined in detail.
This discussion provides an
irnpor tant background and establishes the f r arn ewor k within which the issues
of internal transfers, as one p r oblern arising as a consequence of decentra-
lisation and the establishment of divisions, rna y be exarni n ed .
Transfer prices are discussed in depth in Part II.
Chapter III
reviews the historical d e veLoprnent of transfer pricing rne fhod s and indicates
the changes in acceptable practice which occurred in the early decades of
this century.
Chapter IV discusses the reasons for establishing transfer
prices and outlines the range of prices which are available.
Empirical
evidence concerning the extent of internal transfers in New Zealand, the
purposes for which they are required and the use being rnade of the available
prices is e xarn.i.ned ,
The r ema ining two chapters expand Chapter IV by
giving detailed consideration to the role of different prices for assisting the
evaluation of the pe r fo rrnanc e of division rn anage r s and as an aid to decision-
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making.
These chapters examine the issues at a theoretical level, whilst
giving attention to the prevailing empirical situation in New Zealand.
The final section, Part III, attempts to take a broader view of the
question of internal prices by considering the concept of a management
control system.
Prices may have an important role not only in market
economies, but in those economies which are substantially controlled by a
central group of rnana ge r s ,
Therefore, within the context of business
organisations SOIne of the conceptual issues of using internal prices as a
system ofrnana.g ement control are examined.
It is essential if large
organisations are to be a success, that the system of management control
adopted is the one which contributes most efficiently and effectively in a
particular firrn towards achieving the established objectives.