Case Study: Nmc's Cost Allocation

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The purpose of this memo is to discuss and suggest solutions/manager incentives for NMC’s cost allocations in evaluating the performances of two divisions, Classic and New Wave.
The Problems of Cost Allocations from Classic and New Wave Divisions
Throughout the problems, both Classic and New Wave’s management divisions were lacking of goal congruence in achieving the company’s objective, which was an effective cost allocation set by the upper management. While New Wave wants to focus more on producing high-quality products and innovation, Classic is more concerned with maintaining low labor cost per unit. Evidently, the inefficient cost allocation to the products can result in less quality assurance and product reliability (which consumers might end up buying somewhere else for better qualities despite large marketing and advertisements).
On the other hand, the addition of New Wave division resulted in a good sales level but their quality and innovation focus were costly and ineffective. New Wave spent more on total MLH than machine hours that was account for more labor and less capital intensive than Classic. Spending more on quality control and
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A company with fewer divisions, such as Classic and New Wave in this situation, may exhibit fewer budget imbalances than one with many divisions (Ray & Goldmanis, 2008). Evidently, each division from NMC acts as a profit center and therefore the goal is to maximize the profit for each of their division. It is a challenge for both divisional managers from Classic and New Wave to obtain goal congruence through management by objectives (MBO) (Hilton & Platt, 2014). Both of the divisions need to participate in setting goals that are expressed in financial or other quantitative terms, and the responsibility-accounting system in evaluating performances and achieving them (Hilton & Platt,

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