Accounting exam ch4-5

  1. Chapter 4
    Organizational architecture
  2. Principal/Agent relationship
    • - Principal (boss) evaluating person below them and delegating decision-making responsibilities
    • - Agent can make own decisions
    • - This is a hierarchical relationship
  3. Elements of Organizational Architecture
    • •System to partitioning decision rights
    • •System to measure performance
    • •System to rewardperformance
  4. System to partitioning decision rights
    What decisions does the manager get to make?
  5. System to measure performance
    • This is ALWAYS an amount #### !!!!
    • Sales, profit, etc.
  6. System to reward performance
    What number are you basing the reward on?
  7. General Issues in org architecture
    • •Importance of balance among elements
    • •Desirability of linking decision rights to knowledge base
  8. Importance of balance among elements
    If we change one piece, need to change another one too. Award now based on sales rather than profit --> Bonus needs to correspond to sales rather than profitability
  9. Desirability of linking decision rights to knowledge base
    Decisions should be made by those who have the knowledge about it
  10. Country Culture Differences—
    Hofstede/Hofstede and Bond
    • •Power distance
    • •Individualism/collectivism
    • •Masculine/feminine
    • •Uncertainty avoidance
    • •Confucian dynamism
  11. •Power distance
    Weak-Strong: How comfortable are people with there being differences in power? --> delegation
  12. •Individualism/collectivism
    Collectivism: people do things that are in the best interest of the group/themselves --> reward system
  13. •Masculine/feminine
    Also for reward systems: masculine has more focus on money, feminine has focus on intangible rewards like time off
  14. •Uncertainty avoidance
    Comfort/discomfort of being in an unfamiliar surrounding
  15. •Confucian dynamism
    Decisions based on the long run vs the short run
  16. Self-interest Issues
    • •Input invisibility
    • –Shirking
    • –Free rider problem
    • •Horizon problem (mgr has different time frame than the company)
    • •Goal incongruence--conflict among parties (one person focusing on improving design while the other is focusing on improving cost effectiveness)
  17. Chapter 5
    • Responsibility Accounting—
    • Cost, Revenue, Profit, and Investment Centers
  18. Direct application of organizational architecture ideas to Responsibility accounting
    • -Decisions made affect the cost.
    • -You are being measured on your performance on the basis of cost
    • -you will be rewarded based on cost
  19. Investment Center Performance Measures
    • •ROI (return on investment) = Profit/Investment
    • •Residual Income = Profit - (Cost of Capital x Investment)
  20. ROI =
    • Profit/Investment
    • - If ROI is greater than the investment, the less the ROI
  21. •Residual Income =
    • Profit - (Cost of Capital x Investment)
    • - If you get a % of this, your goal will be to increase profit while decreasing the amount of $ in investments.
  22. Controllability principle
    • •Include only controllable factors in performance measure
    • •Reasons why one might want to include uncontrollable factors in performance measure (violate
    • controllability principle)
    • –Encourage related actions
    • –Incorporate general factors
  23. Interaction issues— Transfer pricing & Rules & CONFLICT among depts
    • •Arises when market transaction is moved inside company
    • •Possible alternatives--Opportunity cost is desired
    • RULES:
    • –Transfer price is market price (adjusted)
    • –Transfer price is based on full cost
    • –Transfer price is based on variable cost
    • –Transfer price is negotiated
    • CONFLICT: Buyer wants the TP to be low while Seller wants the TP to be high
  24. Interaction issues continued— Transfer pricing
    • •Information asymmetry may be present among parties
    • •Costs associated with process of negotiation
    • •International (across jurisdiction) tax differences may be a constraint on use of transfer price in performance evaluation
Card Set
Accounting exam ch4-5
Accounting exam ch4-5