Management Control System Essay

1009 Words Apr 21st, 2012 5 Pages
Abrams’ top management is satisfied with their management systems and performance measurement scheme but they notice three areas of concern.

The first concern is that there are conflicts over transfer prices of parts sold by the product divisions to the AM divisions. The problem arises when the part being transferred is an AM division part. Usually the transfer prices are based on the outside OEM market prices but here it is not possible because the part has never been sold by Abrams on the OEM market. So, there is not any historical cost. This part is exclusively sold by the AM division.
The internal policy concerning the transfer pricing based on the outside OEM market prices works well when it is possible to use it. But nothing was
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the overall corporate objectives. The product divisions could optimize its division by sacrificing the overall company profit. In addition, the company compensation program also does not encourage internal sales. The factory managers were given bonuses for sales outside the company and there is no bonus and penalty for lack of internal sales. This led the tendency of division in which product divisions precedes the AM division.
The solutions of these problems are: * They need to change the existing compensation plans, in which the plant managers also get bonus for internal sales, so this could help to encourage the managers to sell to AM division. * They need the agreement or determination in internal budget by divisions and upper management. The deficiency or unwillingness of the product divisions to sell to the AM divisions could be given a penalty. This is due to the upper management who doesn’t want the AM division to buy from the outside in which this will led to damaging the image of the company.

The third problem is the excess of inventory in each division. Advantages of this preparation can be caused either by the decision of the production or marketing, the bad quality of goods and others. In addition, evaluation performance using the ROI as a measure is also not right. Moreover, investments or assets are only measured at the beginning of the year until the excess preparation is not questioned or observed