1 SUNDERLAND BUSINESS SCHOOL Module Strategic Management Accounting APC309 Individual assignment Hand in Date: Monday 8th July 2013 General Information 1. Weighting – 100% of the marks for this module...

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1 SUNDERLAND BUSINESS SCHOOL Module Strategic Management Accounting APC309 Individual assignment Hand in Date: Monday 8th July 2013 General Information 1. Weighting – 100% of the marks for this module 2. This is an individual assignment of about 3,000 words (plus or minus 5%), excluding appendices and bibliography. The word count MUST be shown on the front of the assignment. 3. There are a number of parts to this assignment. Each part is equally weighted. All parts are discreet from one another. 4. All of the learning outcomes for the module are being assessed in this assignment. The learning outcomes are shown in the section entitled “Marking Guide”, which is further on in this document. 5. The University’s policy on cheating collusion and plagiarism will be applied to this piece of work. 6. The hand in date is: Requirements: Part a. You are required to critically evaluate the following statement: “Both Return on Investment (ROI) and Economic Value Added (EVA), when used as performance measures in an organisation, encourage managers to be short-term in their focus and decision making”. If your critical evaluation tends to agree with the statement, briefly outline how the short term nature of such measures can be overcome. Part b. Many organisations use transfer pricing when transferring products between different divisions of the same organisation. You are required to discuss in detail the advantages and disadvantages of each of the following four methods: 1) Market based transfer prices; 2) Full cost transfer prices; 3) Cost-plus a mark-up transfer prices; and 2 4) Negotiated transfer prices. Guidance: Students are encouraged to be inquisitive and innovative in their approach as to what should be included in this report. The following may be of some use in providing guidance as to what could possibly be included, although this is in no way meant to be prescriptive. The aim of the assignment is to help you understand how key areas of strategic management accounting are applied in practice. This will include investigating topics from throughout the course linked to the above issues. Some of the principles, concepts ad models will be more relevant to your chosen approach than others and so it is likely that different students will formulate different approaches to the problems. This is normal, it is not expected that all of the course content will be used in the analysis, concentrate on that which you feel is most important. As part of your work you might find it helpful to briefly explore the underlying theory behind the key areas of investigation that you identify before applying them to report. With a total of 3,000 words you do not have a lot of room for long introductions so assume you are writing to a sophisticated audience who has a working knowledge of strategic management accounting and is well versed in business theory. Numerical example for illustrative purposes may be of use but should not be the main thrust of the work. If used they should be to provide evidence to support your findings from your other analysis of position and policies. If other sources are used remember to reference everything! Please avoid relying too heavily on descriptive sections reproducing information available from course material or the set text. It is your own logical, evaluation of the situation, the interpretation of course material and presentation, with critical analysis, of a coherent strategic plan that will attract high marks. 3 ASSESSMENT CRITERIA Criteria Fail (<34) fail (35-39) 3 rd (40-49) 2:2 (50-59) 2:1 (69-69) ist (70+) knowledge of relevant concepts and issues fails to identify the majority of the concepts relevant to the question or introduces topics that are not relevant. the ordering of the concepts indicates a lack of understanding of key concepts. fails to identify the majority of the concepts relevant to the question. those concepts that are used are misapplied. the ordering of the concepts is in appropriate. identifies some of the key concepts, but not all o f them, or displays an in correct understanding of some of the concepts discussed. the ordering of the concepts may be adhoc. identifies and utilises some of the key concepts relevant to the question. uses some of the concepts, but not always in an appropriate context. the work is ordered appropriately identifies the majority of the key concepts relevant to the question and uses them in an appropriate context. orders and structures them in a logical sequence identifies all of the key concepts relevant to the question and uses them in an appropriate context. the material is structured to show significant understanding of the key issues. depth of understanding and extent of critical evaluation (including evidence of wider reading) the student has failed to address the question set or appears to have answered a different question to that set. there is no evidence of any reading. no key issues identified. there is no evaluation of the validity of the sources used or the work is based on one key source. inappropriate sources are used extensively. there is no evidence of appropriate wider reading. no reflection on key issues. there is some evaluation of the materials used in the work. the work is based on a limited number of appropriate sources. little reflection on key issues. good evaluation of materials used, with discernment obvious as to key sources. the work is based on a number of appropriate sources. some reflection on key issues. good evaluation of all key/important sources materials used. the work is based on a wide range of appropriate sources. good reflection on key issues. the work is set in a context where wider reading and appreciation of the context is obvious. the material included is relevant to the topic and appropriate in addressing the key issues identified in the assignment evidence of appropriate analysis the student fails to draw any relationships from the material used or the student is incorrect in the relationships that they draw. the student draws one or two basic relationships from the material used, but then subsequently misapply these concepts. the student draws one or two basic relationships from the material used, but fails to identify other important relationships. there may be some evidence they have not clearly understood all of the material they have presented the student draws some limited relationships from the material used. there might be minor issues where the student is incorrect in the assertions that they make, but overall they demonstrate appropriate analysis. the student starts to demonstrate they understand the key relationships from the material used. there are no substantive errors in their analysis. all the key connections are drawn between materials from different sources. the student makes no substantive errors in their analysis and reflects upon the key issues identified in their analysis. ability to synthesise relevant material from a range of sources the student fails to use any appropriate sources. there is extensive repetition of notes given out in class. the student uses just a few non-academic sources of information or the material used is inappropriate for ug level study. they quote verbatim extensively from one or two sources. they use quotations incorrectly to support an argument. the student uses a few sources of information or the material used is inappropriate for ug level study. extensive verbatim quotes are used as a replacement for the students own work. the student may be limited in their use of academic sources such as journals and books, but there is evidence that they have attempted to access a range of sources including non-academic ones. the student has accessed a range of academic sources such as journals and books, and also appropriate non-academic ones. verbatim quotes are used to enhance the arguments being developed rather than as a replacement for the students own work. the student has accessed a wide range of appropriate sources. they make reference to a wide range of material in their work. verbatim quotes are used from a range of sources to illustrate and support the arguments being developed, but without becoming a substitute for the students own work. structure and clarity of presentation. the work has no coherent structure. the work is littered with spelling and typographical errors. very poor use of english. where appropriate tables/graphs are not used. referencing is poor or non-existent. the work is poorly organised, and structured. there are many spelling and typographical errors. poor use of english. where appropriate tables/graphs are not used. referencing is patchy and incomplete. the work is poorly structured. there are spelling and typographical errors. poor use of english. where appropriate tables/graphs are not used appropriately. some of the referencing is incomplete the work has a clear structure and generally a logical progression. occasional typographical and spelling errors. some use of tables/graphs is made where appropriate. the work has overall a coherent structure and a clear and logical progression. very few typographical and spelling errors. good use of tables/graphs is made where appropriate. the work is well structured with clearly defined objectives that are achieved. typographical and spelling errors are rare. excellent use of tables/graphs is made where appropriate. 4 fail="" (35-39)="" 3="" rd="" (40-49)="" 2:2="" (50-59)="" 2:1="" (69-69)="" ist="" (70+)="" knowledge="" of="" relevant="" concepts="" and="" issues="" fails="" to="" identify="" the="" majority="" of="" the="" concepts="" relevant="" to="" the="" question="" or="" introduces="" topics="" that="" are="" not="" relevant.="" the="" ordering="" of="" the="" concepts="" indicates="" a="" lack="" of="" understanding="" of="" key="" concepts.="" fails="" to="" identify="" the="" majority="" of="" the="" concepts="" relevant="" to="" the="" question.="" those="" concepts="" that="" are="" used="" are="" misapplied.="" the="" ordering="" of="" the="" concepts="" is="" in="" appropriate.="" identifies="" some="" of="" the="" key="" concepts,="" but="" not="" all="" o="" f="" them,="" or="" displays="" an="" in="" correct="" understanding="" of="" some="" of="" the="" concepts="" discussed.="" the="" ordering="" of="" the="" concepts="" may="" be="" adhoc.="" identifies="" and="" utilises="" some="" of="" the="" key="" concepts="" relevant="" to="" the="" question.="" uses="" some="" of="" the="" concepts,="" but="" not="" always="" in="" an="" appropriate="" context.="" the="" work="" is="" ordered="" appropriately="" identifies="" the="" majority="" of="" the="" key="" concepts="" relevant="" to="" the="" question="" and="" uses="" them="" in="" an="" appropriate="" context.="" orders="" and="" structures="" them="" in="" a="" logical="" sequence="" identifies="" all="" of="" the="" key="" concepts="" relevant="" to="" the="" question="" and="" uses="" them="" in="" an="" appropriate="" context.="" the="" material="" is="" structured="" to="" show="" significant="" understanding="" of="" the="" key="" issues.="" depth="" of="" understanding="" and="" extent="" of="" critical="" evaluation="" (including="" evidence="" of="" wider="" reading)="" the="" student="" has="" failed="" to="" address="" the="" question="" set="" or="" appears="" to="" have="" answered="" a="" different="" question="" to="" that="" set.="" there="" is="" no="" evidence="" of="" any="" reading.="" no="" key="" issues="" identified.="" there="" is="" no="" evaluation="" of="" the="" validity="" of="" the="" sources="" used="" or="" the="" work="" is="" based="" on="" one="" key="" source.="" inappropriate="" sources="" are="" used="" extensively.="" there="" is="" no="" evidence="" of="" appropriate="" wider="" reading.="" no="" reflection="" on="" key="" issues.="" there="" is="" some="" evaluation="" of="" the="" materials="" used="" in="" the="" work.="" the="" work="" is="" based="" on="" a="" limited="" number="" of="" appropriate="" sources.="" little="" reflection="" on="" key="" issues.="" good="" evaluation="" of="" materials="" used,="" with="" discernment="" obvious="" as="" to="" key="" sources.="" the="" work="" is="" based="" on="" a="" number="" of="" appropriate="" sources.="" some="" reflection="" on="" key="" issues.="" good="" evaluation="" of="" all="" key/important="" sources="" materials="" used.="" the="" work="" is="" based="" on="" a="" wide="" range="" of="" appropriate="" sources.="" good="" reflection="" on="" key="" issues.="" the="" work="" is="" set="" in="" a="" context="" where="" wider="" reading="" and="" appreciation="" of="" the="" context="" is="" obvious.="" the="" material="" included="" is="" relevant="" to="" the="" topic="" and="" appropriate="" in="" addressing="" the="" key="" issues="" identified="" in="" the="" assignment="" evidence="" of="" appropriate="" analysis="" the="" student="" fails="" to="" draw="" any="" relationships="" from="" the="" material="" used="" or="" the="" student="" is="" incorrect="" in="" the="" relationships="" that="" they="" draw.="" the="" student="" draws="" one="" or="" two="" basic="" relationships="" from="" the="" material="" used,="" but="" then="" subsequently="" misapply="" these="" concepts.="" the="" student="" draws="" one="" or="" two="" basic="" relationships="" from="" the="" material="" used,="" but="" fails="" to="" identify="" other="" important="" relationships.="" there="" may="" be="" some="" evidence="" they="" have="" not="" clearly="" understood="" all="" of="" the="" material="" they="" have="" presented="" the="" student="" draws="" some="" limited="" relationships="" from="" the="" material="" used.="" there="" might="" be="" minor="" issues="" where="" the="" student="" is="" incorrect="" in="" the="" assertions="" that="" they="" make,="" but="" overall="" they="" demonstrate="" appropriate="" analysis.="" the="" student="" starts="" to="" demonstrate="" they="" understand="" the="" key="" relationships="" from="" the="" material="" used.="" there="" are="" no="" substantive="" errors="" in="" their="" analysis.="" all="" the="" key="" connections="" are="" drawn="" between="" materials="" from="" different="" sources.="" the="" student="" makes="" no="" substantive="" errors="" in="" their="" analysis="" and="" reflects="" upon="" the="" key="" issues="" identified="" in="" their="" analysis.="" ability="" to="" synthesise="" relevant="" material="" from="" a="" range="" of="" sources="" the="" student="" fails="" to="" use="" any="" appropriate="" sources.="" there="" is="" extensive="" repetition="" of="" notes="" given="" out="" in="" class.="" the="" student="" uses="" just="" a="" few="" non-academic="" sources="" of="" information="" or="" the="" material="" used="" is="" inappropriate="" for="" ug="" level="" study.="" they="" quote="" verbatim="" extensively="" from="" one="" or="" two="" sources.="" they="" use="" quotations="" incorrectly="" to="" support="" an="" argument.="" the="" student="" uses="" a="" few="" sources="" of="" information="" or="" the="" material="" used="" is="" inappropriate="" for="" ug="" level="" study.="" extensive="" verbatim="" quotes="" are="" used="" as="" a="" replacement="" for="" the="" students="" own="" work.="" the="" student="" may="" be="" limited="" in="" their="" use="" of="" academic="" sources="" such="" as="" journals="" and="" books,="" but="" there="" is="" evidence="" that="" they="" have="" attempted="" to="" access="" a="" range="" of="" sources="" including="" non-academic="" ones.="" the="" student="" has="" accessed="" a="" range="" of="" academic="" sources="" such="" as="" journals="" and="" books,="" and="" also="" appropriate="" non-academic="" ones.="" verbatim="" quotes="" are="" used="" to="" enhance="" the="" arguments="" being="" developed="" rather="" than="" as="" a="" replacement="" for="" the="" students="" own="" work.="" the="" student="" has="" accessed="" a="" wide="" range="" of="" appropriate="" sources.="" they="" make="" reference="" to="" a="" wide="" range="" of="" material="" in="" their="" work.="" verbatim="" quotes="" are="" used="" from="" a="" range="" of="" sources="" to="" illustrate="" and="" support="" the="" arguments="" being="" developed,="" but="" without="" becoming="" a="" substitute="" for="" the="" students="" own="" work.="" structure="" and="" clarity="" of="" presentation.="" the="" work="" has="" no="" coherent="" structure.="" the="" work="" is="" littered="" with="" spelling="" and="" typographical="" errors.="" very="" poor="" use="" of="" english.="" where="" appropriate="" tables/graphs="" are="" not="" used.="" referencing="" is="" poor="" or="" non-existent.="" the="" work="" is="" poorly="" organised,="" and="" structured.="" there="" are="" many="" spelling="" and="" typographical="" errors.="" poor="" use="" of="" english.="" where="" appropriate="" tables/graphs="" are="" not="" used.="" referencing="" is="" patchy="" and="" incomplete.="" the="" work="" is="" poorly="" structured.="" there="" are="" spelling="" and="" typographical="" errors.="" poor="" use="" of="" english.="" where="" appropriate="" tables/graphs="" are="" not="" used="" appropriately.="" some="" of="" the="" referencing="" is="" incomplete="" the="" work="" has="" a="" clear="" structure="" and="" generally="" a="" logical="" progression.="" occasional="" typographical="" and="" spelling="" errors.="" some="" use="" of="" tables/graphs="" is="" made="" where="" appropriate.="" the="" work="" has="" overall="" a="" coherent="" structure="" and="" a="" clear="" and="" logical="" progression.="" very="" few="" typographical="" and="" spelling="" errors.="" good="" use="" of="" tables/graphs="" is="" made="" where="" appropriate.="" the="" work="" is="" well="" structured="" with="" clearly="" defined="" objectives="" that="" are="" achieved.="" typographical="" and="" spelling="" errors="" are="" rare.="" excellent="" use="" of="" tables/graphs="" is="" made="" where="" appropriate.="">
Answered Same DayDec 31, 2021

Answer To: 1 SUNDERLAND BUSINESS SCHOOL Module Strategic Management Accounting APC309 Individual assignment...

David answered on Dec 31 2021
103 Votes
ROI & EVA: Measures to overcome the short-term nature of decision making & Transfer Pricing
Methods: Advantages and Disadvantages 1
ROI & EVA: Measures to overcome the short-term nature of decision making &
Transfer pricing methods: Advantages and disadvantages
Writer’s name
Course name and number
Instructor’s name
Date
ROI & EVA: Measures to overcome the short-term nature of decision making & Transfer Pricing
Methods: Advantages and Disadvantages 2

Abstract
This paper focuses on the measures that can be adopted to overcome the short-term nature of
decision making of performance measures,
namely, Return on Investment (ROI) and Economic
Value Added (EVA). It also provides details about how these measures are calculated with few
examples. The second focus of this paper is about the four methods of transfer pricing along with
its advantages and disadvantages.
ROI & EVA: Measures to overcome the short-term nature of decision making & Transfer Pricing
Methods: Advantages and Disadvantages 3

Table of contents
Part 1: Performance measures…………………………………………………………………4
Return on Investment (ROI) …………………………………………………………...4
ROI: Short-term in focus and decision making when used as a performance measure………4
Economic Value Added (EVA):………………………………………………………6
EVA: Short-term in focus and decision making when used as a performance measure……..6
Measures to overcome the short-term nature of ROI & EVA:………………………………..8
Part 2: Transfer Pricing……………………………………………………………………………….10
Market based transfer prices……………………………………………………………………10
Full cost transfer prices…………………………………………………………………………12
Cost plus a mark-up transfer prices…………………………………………………………….14
Negotiated transfer prices……………………………………………………………………….15
Conclusion………………………………………………………………………………………………..16
References…………………………………………………………………………………………………17
ROI & EVA: Measures to overcome the short-term nature of decision making & Transfer Pricing
Methods: Advantages and Disadvantages 4

Part 1: Performance measures
Performance measures are the metrics or measures used to evaluate the performance or
efficiency of the managers in utilization of the assets and generating income. The widely used
performance measures include Return on Investment (ROI) and Economic Value Added (EVA).
Both of these measures encourage the managers to be short-term in decision making but EVA is
a superior method than the ROI method due to its greater merits on comparison.
Return on Investment (ROI)
Return on investment is a profitability measure and also being used as a performance measure
for managers. Return on investment denotes the returns earned as a percentage of total
investment. It is also called as the return on assets. Whenever details about the average assets are
available, this figure will be considered instead of the total assets at the end of the year. The
average assets can be calculated by taking the average of the beginning and the ending total
assets. This ratio can be computed as follows:
Return on Investment (ROI) = Net income/Average investment
If ROI is calculated for a company’s division, then ROI = Division’s net income/Division’s
investment.
ROI: Short-term in focus and decision making when used as a performance measure
ROI as a performance measure is purely based on profitability and does not aim at wealth
creation. Higher the profits are shown, higher would be the ROI. Profits can be manipulated in
many ways. A manager may increase the volume of credit sales without being concerned about
bad debts expense and investment in accounts receivable, just to show increase in revenue and
ROI & EVA: Measures to overcome the short-term nature of decision making & Transfer Pricing
Methods: Advantages and Disadvantages 5

profits. This may result in more uncollectibles and implied interest cost for the company for cash
blockage in receivables. The focus for the manager here is short-term, just to improve revenue
for the period, without considering the long-term effects of such decisions. The problem of
uncollectibles will not occur immediately in the short-term but in the long-term. But at the same
time the manager would also be concerned about investment in receivables as this is going to
increase the investment amount in the denominator. The manager may also postpone some
expenses to show higher profits. For example, if performance is measured based on ROI, the
manager may be induced not to show the utility cost bills that arrived at the end of the
accounting period. This explains the nature of short-term focus.
Example of performance evaluation based on ROI:
Let us assume that a company has a net income of $30,000 and average investment in assets as
$200,000 and the required return of the company is 10%.
ROI = $30,000/$200,000  15%
In this case, ROI of 15% is higher than the required return of 10%. This, as a performance
measure, will indicate that the manager has performed well. If the ROI had been, say 8%,
indicates that the manager has not performed well.
Although ROI has advantages, it suffers from the following limitations:
1. Any profitable project would be rejected by the managers for want of increased
investment. This is because increased investment would reduce the ROI in the initial
stages which would lower their pay.
2. It is not as efficient way as EVA as it does not cover all the aspects of business cycle.
ROI & EVA: Measures to overcome the short-term nature of decision making & Transfer Pricing
Methods: Advantages and Disadvantages 6

3. Increase in ROI is not necessarily good for the owners or the shareholders. Maximizing
ROI alone cannot be the goal or target for operating business.
4. ROI is a problematic controlling tool and cannot be relied always.
5. Evaluation using ROI can lead to under-investment.
6. Focused in short-term decision making and not long term.
Economic Value Added (EVA):
EVA measures the residual income available after deducting the cost of investment. It measures
the real economic profit available to the owners. If the cost of investment is higher, lower would
be the EVA and if the cost of investment is lower, higher would be the EVA. EVA is calculated
as follows:
EVA = Net operating profit after taxes (NOPAT) – Cost of investment
If the compensation is based on EVA, it will address the issues relating to higher investment in
assets like inventory, accounts receivable etc.
EVA: Short-term in focus and decision making when used as a performance measure
Although EVA as a performance measure gives significance to value creation by owners, it is
again short-term focused in decision making. For example, if annual incentives are given to the
managers based on EVA, the managers would be focused to increase the period’s...
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