TRANSFER PRICES AND COMPENSATION: AN ACTIVITY-BASED COSTING APPROACH IN THE TELECOMMUNICATIONS INDUSTRY

Abstract

ABSTRACT This case study deals with a division of a large telecommunications company that intends to improve its product profitability using Time-driven Activity-based Costing, and align the incentives of executives by setting feasible transfer prices and motivating targets. It can serve both as a discussion basis in class as well as an exam for students in management, operations, and accounting. The case illustrates how Time-driven Activity-based Costing may help managers to better understand differences in product profitability. The open questions at the end of the case study allow for an adjustment to the level of knowledge of the students. They also serve the purpose of raising students’ awareness of the limits of linear bonus contracts. 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. Keywords Product profitability; Activity-based Costing; transfer prices; target setting; incentives; restructuring; case study; teaching notes; shareholder value; customer satisfaction.