Decision management: Refers to those aspects of the decision process in which the manager either
initiates or implements a decision.
Decision control: Refers to aspects of the decision process whereby managers either ratify or
monitor decisions.
Cost driver input measure = quantity produced
Direct labor hours
Number of different order produced
Agency problems:
- Free-rider problem
o Agents have incentives to shirk because individual efforts are not directly observable
- Horizon problem
o Agents expect to leave firm in near future place less weight on l-t consequences
- Employee theft
o Employees take/steal firm resources for unauthorized purposes
- Empire-building
o Managers seek to manage larger number of agents to increase their own job or
compensation. If this goes against the profit maximization, this is a problem
Agency asymmetry problems:
- Adverse selection
o Prior to contracting, agents have better private information than principals
- Moral hazard
o After contracting, agents have an incentive to deviate because the principal cannot
readily observe deviations (hidden action or hidden information).
Cost centers tries to minimize the costs of a subunit
Profit centers tries to maximize the profit of a subunit. Managers responsible for input, output, pricing
Investment centers (potential performance measures: ROI, RI, EVA) not just looking at costs and
profit, but also at what kind of investments they should make in order to maximize profit in the
future.
Paper Sikka & Willmott
Transfer pricing defined: the internal price (or cost allocation) charged by one segment of a firm for a
product or service supplied to another segment of the same firm. Ideal transfer price = opp. costs
Opportunity cost = benefits forgone by choosing one alternative from the opportunity set rather than the best non-selected alternative.
- If a firm has excess capacity, opportunity cost is identical to the variable production cost
- If a firm does not have excess capacity, opportunity cost is identical to the revenue available
if the product is sold outside
Methods to determine transfer price:
1. Market price method transfer price based on external market prices. Objective, but does
not take transaction cost into account
2. Variable production cost method marginal variable cost represent the value of resources
forgone. Doesn’t cover fixed costs. Incentive: selling department will convert fixed into
variable costs and reaches his limit of production capacity.
, 3. Full cost production method includes both direct labor/ materials and overhead.
Overstate opportunity costs. Selling division can export inefficiencies to buying division (all
costs are included). Buying division will purchase to few units. Adv: avoids disputes of vari/fix costs
4. Negotiated pricing method result in transfer price that approximate opportunity costs
because supply department won’t agree to price below its opp. cost and buying department
won’t pay price that is above production price elsewhere. Time consuming + depends on
power of departments. Adv: both departments have incentive to transfer number of units
that maximize their combined profits.
Disputes over transfer pricing occur frequently because transfer prices influence performance
evaluation of managers and hence there compensation or bonuses.
To reduce disputes, firms may reorganize by:
- Combining interdependent departments
- Converting supplier into a cost center instead of a profit center
- Converting profit centers into cost centers - - > Also you can decide to convert both supplier
and buying departments into cost centers. Give the pricing and quantity decisions in his own
hands. This may only be useful if the department do not have specific knowledge about some
products or service that is difficult to transfer across the firm
Segment in higher tax country: reduce taxable income in that country by charging high prices on
imports and low prices on exports
Segments in lower tax country: increase taxable income in that country by charging low prices on
imports and high prices on exports
Favourable (F) variance if:
- Actual revenue > budgeted revenue OR
- Actual expense < budgeted expense
Unfavourable (U) variance if:
- Actual revenue < budgeted revenue OR
- Actual expense > budgeted expense
In the static budget we do not adjust for the changes in volume but in the flexible budget we do.
Several budget options:
- Top-down budgets (dc) top management can make aggregate forecasts, disaggregate down to lower levels.
- Bottom-up budgets (dm) lower levels have more knowledge and make budget forecast
- Budget ratcheting basing next year’s standard of performance on this year’s actual performance.
Creates dysfunctional behaviour: employees reduce output to avoid being held to higher standard in future
- Incremental budgets begin with current year’s base budget and make incremental changes
- Zero-based budgeting each line item must be justified each year, reset to zero. Motivates
managers to eliminate inefficient expenses.
- Line-item budgets authorize managers to spend only up to the specified amount on each line item
- Rolling budgets don’t have year to year, but continuously move the 18 months together.
Used to avoid thinking in short-term
- Budget lapsing funds allocated for a year can’t be carried over to the following year.
Creates incentive to spend all their budget, because unspent must be returned to authority
that issued the money
Focussing on Performance Evaluation System - - >
Anthony:
- Strategic planning deciding on the goals of the organisation and on the strategies
- Management control goals and strategy are accepted, but now implement the strategies. Does not involve day-to-
day operating decisions.
o The process by which managers assure that resources are obtained and used effectively in the
accomplishment of the organizations objective. Influenced by principles of economic/ social psychology
- Operational control processes used in carrying out day-today activities of organisation, ensuring that specific tasks
are carried out effectively.
Voordelen van het kopen van samenvattingen bij Stuvia op een rij:
Verzekerd van kwaliteit door reviews
Stuvia-klanten hebben meer dan 700.000 samenvattingen beoordeeld. Zo weet je zeker dat je de beste documenten koopt!
Snel en makkelijk kopen
Je betaalt supersnel en eenmalig met iDeal, creditcard of Stuvia-tegoed voor de samenvatting. Zonder lidmaatschap.
Focus op de essentie
Samenvattingen worden geschreven voor en door anderen. Daarom zijn de samenvattingen altijd betrouwbaar en actueel. Zo kom je snel tot de kern!
Veelgestelde vragen
Wat krijg ik als ik dit document koop?
Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.
Tevredenheidsgarantie: hoe werkt dat?
Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.
Van wie koop ik deze samenvatting?
Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper IRadboud. Stuvia faciliteert de betaling aan de verkoper.
Zit ik meteen vast aan een abonnement?
Nee, je koopt alleen deze samenvatting voor €3,49. Je zit daarna nergens aan vast.