Lecture 1 Q

Question 1

What causes the conflict between using internal accounting systems for decision making and control?

Answer 1

One system cannot be designed to maximize two conflicting objective better than two systems each maximizing one objective. If a single system is used for both decision management and decision control, trade-offs must be made to create a balanced system that maximizes profits for the firm.

Question 2

Describe the different kinds of information provided by the internal accounting system?

Answer 2

An internal accounting system provides managers and executives with key cost information regarding their business. examples include financial budgets, inventory costs, product costs, factory costs, and overhead costs

Question 3

Give three examples of the uses of an accounting system

Answer 3

External reports,
Performance evaluations
Decision making

Question 4

List the characteristics of an internal account system

Answer 4

1. Provide necessary information to identify profitable produts and what volume should be produces.
2. It should provide information in such a way that production inefficiencies are detected.
3. In combination with the performance evaluation and reward systems, the internal accounting system should create incentives for managers to maximize firm value.

Question 5

Do firms have multiple accounting system? Why/why not

Answer 5

Only few - Reason:

1. Additional costs required to maintain system.
2. There is confusion surrounding different measures.
3. With one system, the external auditor can also be used to monitor and control the internal reporting system at little additional costs.

Question 6

Desribe Economic darwinism

Answer 6

Surviving firms in competitive industries tend to use adminstrative procedures whose befits net of costs are at least as high as their competitors. In a competitive world, if surviving organizations are using some operating procedure over long period of time, then it is likely that this procedure is yeilding benefits in excess of costs.

Question 7

Describe major functions of CFO

Answer 7

Responsibilities incolde

• Providing all the accounting reports for both external and internal parties and management
• tax administration
• budgeting
• treasury and financing
• investments
• intenral audit.

Question 8

Define opportunity cost

Answer 8

The oppoertunity cost consist of the receipts from the most valuable forgone alternative when making a decision or choice among many options.

Question 9

What are some characteristics of opportunity costs

Answer 9

1. Opportunity costs are not necessarily the same as payments
2. Opportunity costs are forward-looking.
3. Opportunity costs can bed dated at the moment of financial decision.

Question 10

A firm paid 8.325 last year for some raw material it planned in production. when is the 8.325 a good estimate of the opportuniy costs of material?

Answer 10

The 8.235 is an accurate estimate of the opportunity cost if we can resell the material for the amount or we can replace the materials and the future price is expected to be 8.235. In generel, historical costs can be reasonably accurate estimates of opportunity costs if the current market price has not changed and there is a ready market to buy and sell the material.

Question 11

Define sunk cost

Answer 11

Sunk costs are incurred in the past that cannot be recovered and are therefore irrelevant for future decision making.

Question 12

What are aviodable and unavoidable costs? How are they related to opportunity costs?

Answer 12

Avoidable costs are those cost that will not be curred if an existing operation is closed or changed. Avoidable costs are the opportunity costs. Unavoidable costs that will conteniue t be incurred regardless of the decision.

Question 13

Define mixed cost

Answer 13

Mixed cost are cost categories that cannot be classified as being purely fixed or variable.An example is utilities.

Question 14

Define step cost

Answer 14

Is costs that is fixed over a given range of output level. Ex. supervisory personnel.

Question 15

Define fixed cost

Answer 15

Does not vary with the number of units produced.

Question 16

Define variable cost

Answer 16

Vary with the number of units produced. Important in desicion making.

Question 17

What generates agenecy costs?

Answer 17

Agency costs are the decline in value resulting from agents pursuing theiyr own interest instead of the principal’s interests. differences between risk tolorances, working horizons, and excessive job perquisites all contribute to agency costs. Agency costs also arise when agents seek to manage larger organizations, to increase either their job security or their pay.

Question 18

How are agency costs reduced, and what limits them?

Answer 18

Agency costs are reduced by monitoring and bonding activities. Agency costs are limitied by the existence of a labor market for managers, competition from other firms, and the market for corporate goal.

Question 19

Define goal incongruence

Answer 19

Goal incongruence means simply agents and principals have different utility functions.

Question 20

How does one achieve goal congruence

Answer 20

By restructuring the agent’s incentive scheme, the agentøs and principals objectives can be made more congruent.

Question 21

Why are knowledge and decision making linked within a firm?

Answer 21

Because knowledge is valuable in decision making, the right to make a desicion should reside with the person who has the specific knowledge for the decision.

Question 22

What are influence costs?

Answer 22

Influence costs consist of the forgone opportunities arising from employees trying to affect decisions by politicking and other ptentially nonproductive influence activities. Influence costs are when employees waste valuable time trying to influence decisions.

Question 23

Define decision management and decision control

Answer 23

Decision management refers to those aspect of the decision process whereby the manager either initiates or implement decision.(Manager get employee to run department more efficiently)
Decision control referes to those aspect of the decision process whereby managers either ratify or monitor decisions.(supervisor’s boss ratifying the decision and allowing her to hire an additional employee.9

Question 24

Describe tree systems all organizations must construct to control agency problems.

Answer 24

1. System that partition decision rights.
2. System that measures performance
3. System that reward and punish performance. It must match point 2.

Question 25

Describe four major steps in the management decision process. How are agency problems reduced in this process?

Answer 25

1. Decision initiation - the beginning of the decision process.(decison management function)
2. Decision ratification - reviewing and approving the request; (decision control function).
3. Decision implementation - usually associated with the individuals who initiated the process (decison management function).
4. Decision monitoring - evaluting the implementation; (decision control function)

The seperation of management and control helps reduce agency costs. The seperation is structured so that the decision makers do not measure their own performance.