Cost accounting chapter 12 answer key Essay

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Chapter 12 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…
This problem of the “economies of scale” results in a need to find a basis for allocating the cost savings arising from such economies. No entirely satisfactory and unique solution is readily determinable. The allocation method affects the costs (and profits in a profit center) of the different units. If a manager’s compensation depends on costs or profits, he or she will have an interest in showing as good performance as possible. This means that although one allocation method led to better performance (as measured) in one unit, a different allocation method will likely show better performance in the new unit. Large divisions are, all other things being equal, more likely to rank in the upper half. Hence, a large division manager would tend to receive a bonus with performance that is just barely above the cost of capital whereas a smaller division might need to earn a return far in excess of the cost of capital in order to earn a bonus. The approach used also does not take into account differences in capital charges that might be appropriate for different divisions. Although there is no explicit bonus, better performance is likely to lead to greater chances for promotion (and higher salary). Answers will vary. There are many reasons for pay not to reflect performance. In some cases, the reasons are because of collusion or other unethical or illegal reasons.

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