EVA and Transfer Pricing: Accounting Assignment

Summary

Economic Value Added (EVA) and transfer pricing are two important topics in accounting and business management. Students get an explanation of EVA and residual income, and guidance on when to set transfer prices.

EVA and Residual Income

EVA is a performance measure that adjusts income for certain transactions. It differs from residual income in how it treats costs like research and development. It explains how EVA encourages managers to invest in the company's future.

EVA Calculations

EVA calculations involve adjustments to assets and income. These adjustments aim to correct accounting distortions. Managers' performance is evaluated based on both income and asset use.

Direct Intervention in Transfer Pricing

Direct intervention in setting transfer prices is advised for infrequent or large orders between divisions. It discusses the disadvantages of this practice for top management and division managers.

Performance Measurement and Transfer Pricing

Students are asked to complete two problems on performance measurement and transfer pricing. They must show their work and respond to classmates' postings.

Key terms

Economic Value Added

A performance measure that adjusts income for certain transactions.

Residual Income

The difference between profits and the cost of assets that generate those profits.

Transfer Pricing

The price at which divisions within a company trade goods or services.

Direct Intervention

Top management setting transfer prices for divisions within a company.

Performance Measurement

The process of evaluating how well a company or division is achieving its goals.

Capitalization

Treat certain costs as assets instead of expenses.

Questions this document helps with

• What is the difference between EVA and residual income?
• When should a firm use direct intervention to set transfer prices?
• How does EVA encourage managers to invest in the company's future?

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