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Activity-Based Costing as a Basis for Transfer Prices and Target Setting

Rainer Lueg

International Journal of Economics & Business Administration (IJEBA), 2020, vol. VIII, issue 3, 489-499

Abstract: Purpose: The article deals with a division of a large electronics company. The disvison intends to improve its product profitability using Time-driven Activity-based Costing. It also aims at aligning the incentives of executives by setting feasible transfer prices and motivating targets. Design/Methodology/Approach: The article illustrates how variance analysis and Activity-based Costing help managers to understand the different profitability of products better. Findings: The case study can serve both as a discussion basis in class as well as an exam for students in management, operations, and accounting. Practical Implications: Students will need to reflect on how a mechanical application of incentive systems can lead to dysfunctional decisions that run counter to a company’s business model. Originality/Value: The open questions at the end of the article serve the purpose of raising students’ awareness of the limits of cash-based incentive systems.

Keywords: Product profitability; Activity-based costing; transfer prices; target setting; incentives; restructuring; shareholder value; customer satisfaction. (search for similar items in EconPapers)
JEL-codes: M10 M41 (search for similar items in EconPapers)
Date: 2020
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Handle: RePEc:ers:ijebaa:v:viii:y:2020:i:3:p:489-499