Cost accounting chapter 12 answer key Essay
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 …show more content…
The balancing act firms must always perform when compensation is tied contractually to performance is between adhering to the terms of the contract and being “fair” to the managers when unforeseen circumstances arise. The problem is, of course, that the unforeseen circumstances more often cause performance to be below expectation, rather than the other way around.
The Treadway Commission listed the pressures to achieve unrealistically high, short-term financial results and incentive systems that focus on short-term financial results as examples of factors that might produce financial fraud. Combined, the two factors produce an environment that is highly conducive to fraud.
Recent examples include Enron, Worldcom, and Tyco. In each of these cases, strong incentives and lack of strong oversight allowed managers to engage in unethical and illegal behavior.
Two explanations for the existence of unrealistic profit objectives for division managers are that upper management might be uninformed about the division, and that they might