Fundamentals of Management Control Systems
Solutions to Review Questions
Accounting assigns costs and revenues to “responsibility centers” that correspond to the decision authority of managers. This allows the firm to measure performance based on the results of decisions by the manager. An effective corporate cost allocation system separates the results of decisions by corporate managers from those of business unit managers.
Although there are well-developed standards for many accounting transactions, accounting decisions still depend on the judgment of managers. There are also many estimates (for example, the depreciable lives of fixed assets) that are subject to managerial discretion. Performance measures based on accounting estimates are affected by these judgments, just as are the reported accounting numbers.
Top managers are viewed as agents of the Board of Directors. The Board of Directors can be considered the agent of the shareholders.
The division president would be the principal relative to subordinate managers.
In many cases managers are content to take a stated salary and perform optimally. However, in other organizations managers appear to perform better when given profit targets and other incentive devices. Lower-level managers are also closer to their respective markets. With an incentive system, these managers are more likely to take actions to respond to changes in their respective markets. However, an executive manager elects the performance evaluation and incentive system that is best for the specific organization. Hence, these comments would make sense in the right organization setting.
Separation of duties helps prevent financial fraud because it limits the opportunity to commit the fraud. When a separation of duties exists, two or more individuals must engage in collusion to commit fraud. While collusion can and does occur, it increases the risk that someone will “blow the whistle” on the fraud. The