Skip to content

ACCA Strategic Professional · Advanced Performance Management · Performance optimisation in specific contexts

A multinational sets transfer prices between subsidiaries in different tax jurisdictions mainly to shift profit to a low-tax country. Which is the most significant performance management consequence for the subsidiaries?

The main consequence is distorted divisional profit. Tax-motivated transfer prices shift profit artificially, so reported results no longer reflect managers' real performance, which weakens evaluation and may demotivate managers in the divisions that are made to look worse, even if group tax falls.

  1. ADivisional profit figures become distorted, reducing their usefulness for evaluating managers and potentially demotivating themCorrect
  2. BDivisional profit becomes more accurate because tax rates are removed from the calculation
  3. CGoal congruence is automatically strengthened because group tax falls
  4. DResidual income can no longer be calculated for any division

Explanation

Tax-driven transfer prices move profit between divisions artificially, so reported divisional profit no longer reflects managerial performance. This can demotivate managers of divisions that are penalised, and may need adjustments or separate performance measures. Lower group tax does not fix the evaluation problem, and RI can still be computed though it would be distorted.

Did you get it right without looking?

One question tells you little. A timed set on Performance optimisation in specific contexts shows your real accuracy, how long you take and where you lose marks.

Practise Performance optimisation in specific contextsFree diagnostic mock

More Performance optimisation in specific contexts questions