ACCG100 accounting 1A
1. Agency problems and solutions
1. Bargaining failure
When a contract is not made even if it is mutually advantageous to both parties Between recruiter and interviewee
Solution: Signalling
Give him a range of salaries and say it is negotiable
2. Adverse Selection
When a individual hide certain information about himself which may be detrimental to the other party when a contract is formed Buffet and insurance
Solution: Screening, self selection and bonding
Medical checkups or a range of categories to choose from
3. Free rider problem and choice of effort
Put in less effort especially in large groups
Solution: Monitoring, rewarding and punishment
4. Perquisite takings
Detrimental to company in the long run-waste of resources
Solution: Monitoring and restricting rights
5. Differential risk exposure
Managers are afraid of taking risks as it may affect their compensation if the project were to fail but stockholders don’t mind more risk as they only have a small stake in each company Solution: Monitoring and rewarding
6. Differential horizon
Don’t take up project even if it is profitable as it may affect the manager’s bonus Solution: Monitoring and rewarding
7. Employee theft
Solution: Monitoring, investing in security guards and accounting system. Make sure benefits>costs of implementing 8. Influencing cost
Employees spend time politicking, bootlicking and winning the favour of managers Bottom up decision making will cause department to set lower targets Solution: Restrict decision rights
9. Overinvestment/ empire building
Employ more than what managers need
Reluctant to use unpopular actions to sack employees
Solution: Restrict decision rights and benchmarking
10. Bribery
Solution: Restrict decision rights and punishment
11. Lack of data integrity
The person collecting data should not be the person which the collected data will affect Solution: Hire another person to collect data as long as benefits>costs 12. Differing market practices
Employees may jump ship to other companies if their rewarding system is better Solution: Comparable market and industry practice
13. Not rewarded based on performance but given fixed pay instead Not motivated to work
Solution: reward based on performance
14. Lack of separation of duty/solely responsible for setting budgets/Authority to grant credit by sales manager Everything handled by one person may lead to corruption
Set lower budgets so easier to meet
Set lower credits for customers
Solution: separate decision rights to decision management and decision control
2. Financial ratios-refer to textbook
3. Internal Control Weaknesses
1. Lack of separation of decision rights
Solution:
One person to make purchases, one person to approve or authorise, one person to make payment and one person to record Require double signatures on cheques
Invest in cash register and make sure all customers take receipt 2. Poor custody of cash
Solution: Deposit cash to bank at end of everyday to prevent theft 3. Lack of cash planning-no cash budget or cash forecast
Solution: Cash budgeting and bank reconciliation
4. Hand written receipts-can dispose receipt to keep the cash Solution: Number receipt or cheques
4. Qualitative Explanations for decision making-refer to notes
5. Budgets
1. Self imposed budget/participative budget/bottom up budget Advantages:
Individuals at all levels are recognised as members whose views and judgements are valued Front line managers have the specialized knowledge and experience to provide more accurate figures Motivation and commitment is generally higher when you allow people to set their own budgets as the budget figures are not unrealistic Disadvantages:
Allows budgetary slack. Managers will have a natural tendency to submit a budget that is easy to attainïƒ when actual sales are higher than budgeted, overtime must be paid and it may be cheaper to acquire a permanent work force in the first place Deferring need spending such as maintenance and advertisements to meet the short term budgetïƒ long terms goals compromised Goal incongruence between managers of different departmentsïƒ Sales department setting too low a sales volume budget for production and production department will be evaluated badly Solutions:
Budget committee to facilitate the exchange of specialized knowledge and reach consensus on the key planning assumptions Decision management and decision control. Managers to initiate. Top management to ratify. Managers to implement. Top management to monitor Set long and short term budgets
Rewarding for higher performance
2. Budget ratcheting/ Top down budgeting/Incremental budget: Base next year’s budget on this year’s actual performance Advantages:
Adjusts budget upwards-Goals for departments to achieve
Disadvantages:
No motivation to achieve moreïƒ Thinks that targets are unrealisticïƒ Managers just barely meeting their quotas to avoid a high budget next year Managers try to defer sales and making big improvements to next yearïƒ company remains stagnant Does not account for changes in sales volume or sales price
Solutions:
Participative budgeting with budget committee
3. Short run budget vs long run budget
Short run: Assumptions of quantities and prices. Includes both decision management and decision control functions. Long run: What markets to be in and what technologies to acquire. Primarily for decision management 4. Line item budget: Spend only up to the specified amount on each line item Advantages:
Reduce agency problems as managers cannot reduce spending on one item and divert the savings to items that enhance their own welfare Disadvantages:
Cannot spend savings of one item on another itemïƒ less incentive to look for savings 5. Budget lapsing: Unspent funds do not carry over to next year Advantages:
Reduce agency problem as managers would not have large unused expenditures to use on perquisite takings Prevent risk averse managers from saving budget for a rainy day Disadvantages:
Incentive for managers to spend all the money
May buy items that are more expensive than usual to prevent their budgets from getting cut next year 6. Flexible budgets: Adjust variables according to actual sales volume Advantages:
Good for managers that do not have control over volume
7. Zero based budgets: Each line item in total must be justified and reviewed annually. Each line item is reset to zero annually and must be justified in total. Advantages:
Causes managers to maximize firm value by identifying and eliminating expenditures whose costs>benefits Disadvantages:
Too radical and involve more time and costs to plan
8. Rolling budgets: A method of budgeting in which as each month passes, an additional budget month is added such that there is always a 12-month budget Advantages:
Prevent a variance arising from external and uncontrollable circumstancesïƒ variance that remains are due to management problems
6. Balance score card and responsibility accounting
Refer to notes
1. Bargaining failure
When a contract is not made even if it is mutually advantageous to both parties Between recruiter and interviewee
Solution: Signalling
Give him a range of salaries and say it is negotiable
2. Adverse Selection
When a individual hide certain information about himself which may be detrimental to the other party when a contract is formed Buffet and insurance
Solution: Screening, self selection and bonding
Medical checkups or a range of categories to choose from
3. Free rider problem and choice of effort
Put in less effort especially in large groups
Solution: Monitoring, rewarding and punishment
4. Perquisite takings
Detrimental to company in the long run-waste of resources
Solution: Monitoring and restricting rights
5. Differential risk exposure
Managers are afraid of taking risks as it may affect their compensation if the project were to fail but stockholders don’t mind more risk as they only have a small stake in each company Solution: Monitoring and rewarding
6. Differential horizon
Don’t take up project even if it is profitable as it may affect the manager’s bonus Solution: Monitoring and rewarding
7. Employee theft
Solution: Monitoring, investing in security guards and accounting system. Make sure benefits>costs of implementing 8. Influencing cost
Employees spend time politicking, bootlicking and winning the favour of managers Bottom up decision making will cause department to set lower targets Solution: Restrict decision rights
9. Overinvestment/ empire building
Employ more than what managers need
Reluctant to use unpopular actions to sack employees
Solution: Restrict decision rights and benchmarking
10. Bribery
Solution: Restrict decision rights and punishment
11. Lack of data integrity
The person collecting data should not be the person which the collected data will affect Solution: Hire another person to collect data as long as benefits>costs 12. Differing market practices
Employees may jump ship to other companies if their rewarding system is better Solution: Comparable market and industry practice
13. Not rewarded based on performance but given fixed pay instead Not motivated to work
Solution: reward based on performance
14. Lack of separation of duty/solely responsible for setting budgets/Authority to grant credit by sales manager Everything handled by one person may lead to corruption
Set lower budgets so easier to meet
Set lower credits for customers
Solution: separate decision rights to decision management and decision control
2. Financial ratios-refer to textbook
3. Internal Control Weaknesses
1. Lack of separation of decision rights
Solution:
One person to make purchases, one person to approve or authorise, one person to make payment and one person to record Require double signatures on cheques
Invest in cash register and make sure all customers take receipt 2. Poor custody of cash
Solution: Deposit cash to bank at end of everyday to prevent theft 3. Lack of cash planning-no cash budget or cash forecast
Solution: Cash budgeting and bank reconciliation
4. Hand written receipts-can dispose receipt to keep the cash Solution: Number receipt or cheques
4. Qualitative Explanations for decision making-refer to notes
5. Budgets
1. Self imposed budget/participative budget/bottom up budget Advantages:
Individuals at all levels are recognised as members whose views and judgements are valued Front line managers have the specialized knowledge and experience to provide more accurate figures Motivation and commitment is generally higher when you allow people to set their own budgets as the budget figures are not unrealistic Disadvantages:
Allows budgetary slack. Managers will have a natural tendency to submit a budget that is easy to attainïƒ when actual sales are higher than budgeted, overtime must be paid and it may be cheaper to acquire a permanent work force in the first place Deferring need spending such as maintenance and advertisements to meet the short term budgetïƒ long terms goals compromised Goal incongruence between managers of different departmentsïƒ Sales department setting too low a sales volume budget for production and production department will be evaluated badly Solutions:
Budget committee to facilitate the exchange of specialized knowledge and reach consensus on the key planning assumptions Decision management and decision control. Managers to initiate. Top management to ratify. Managers to implement. Top management to monitor Set long and short term budgets
Rewarding for higher performance
2. Budget ratcheting/ Top down budgeting/Incremental budget: Base next year’s budget on this year’s actual performance Advantages:
Adjusts budget upwards-Goals for departments to achieve
Disadvantages:
No motivation to achieve moreïƒ Thinks that targets are unrealisticïƒ Managers just barely meeting their quotas to avoid a high budget next year Managers try to defer sales and making big improvements to next yearïƒ company remains stagnant Does not account for changes in sales volume or sales price
Solutions:
Participative budgeting with budget committee
3. Short run budget vs long run budget
Short run: Assumptions of quantities and prices. Includes both decision management and decision control functions. Long run: What markets to be in and what technologies to acquire. Primarily for decision management 4. Line item budget: Spend only up to the specified amount on each line item Advantages:
Reduce agency problems as managers cannot reduce spending on one item and divert the savings to items that enhance their own welfare Disadvantages:
Cannot spend savings of one item on another itemïƒ less incentive to look for savings 5. Budget lapsing: Unspent funds do not carry over to next year Advantages:
Reduce agency problem as managers would not have large unused expenditures to use on perquisite takings Prevent risk averse managers from saving budget for a rainy day Disadvantages:
Incentive for managers to spend all the money
May buy items that are more expensive than usual to prevent their budgets from getting cut next year 6. Flexible budgets: Adjust variables according to actual sales volume Advantages:
Good for managers that do not have control over volume
7. Zero based budgets: Each line item in total must be justified and reviewed annually. Each line item is reset to zero annually and must be justified in total. Advantages:
Causes managers to maximize firm value by identifying and eliminating expenditures whose costs>benefits Disadvantages:
Too radical and involve more time and costs to plan
8. Rolling budgets: A method of budgeting in which as each month passes, an additional budget month is added such that there is always a 12-month budget Advantages:
Prevent a variance arising from external and uncontrollable circumstancesïƒ variance that remains are due to management problems
6. Balance score card and responsibility accounting
Refer to notes
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