ACCT2114 Flashcards
Understand Content (35 cards)
List some challenges in incentivising performance in contemporary organisations?
- Difficult to place monetary value on performance.
- Hard to put in place a proper measurement of performance.
- Need to balance between short- and long-term goals
- There is diverse workforce needs.
- Challenge is to design jobs and develop culture so employees get intrinsic motivation
Types of rewards can include:
cash bonus, profit sharing, gain sharing, stock options
What are the pros and the cons of using BSC for incentivising executive managers?
Pros
- brings about subjectivity - aspects that were difficult to measure can be accounted like learning and growth
- effects of uncontrollable factors on performance considered
- relevant unanticipated events can be taken in account
- aligns executive manager’s actions with organisation mission
- includes long + short term objectives
- enhanced communication of goals
Cons
social pressure, leniency, favouritism
arbitrary evaluations
requires trust in superior
shareholders oppose BSC as it is impossible to earn bonuses.
**- if BSC not used actively from beginning due to desire to perfect it, less use
- managers might focus on short term targets
- could choose too many or too little measures making it harder for managers to implement into their initiatives. **
What does the Modern slavery Act require?
- Act requires larger companies and other entities in Australia to report on how they are preventing and addressing modern slavery risks in operations and supply chains.
- Must submit modern slavery report annually
- Protects entities from legal, reputational and financial risks of modern slavery
What are the options to respect and enforce human rights by suppliers operating in third world countries with potentially lower labour standards?
- Develop supplier code of conduct and communicate policies clearly
- Perform risk assessments
- Regularly audit suppliers to check if they are complying with human rights
- Work collaboratively with suppliers like providing resources + training
What is the stakeholder/shareholder perspective of the firm and how does it influence corporate objectives?
- Influenced by agency theory, where shareholder own firm and managers are their agents
- Moral hazard problem occurs when agents are motivated by their own interests.
- Shareholder:
o Emphasise profit maximisation
o Focus on financial return
o Short term focus
o Avoiding riskier investments impacting their short-term returns. - Stakeholder’s influence:
o Emphasise investments in innovation
o Can be two-tier board structure
o Ensure ethical standards and corporate social responsibility
How can multiple cost pools improve overhead cost allocation? (VMD Medical centre)
- Enhanced accuracy in cost allocation
- Identification of cost drivers
- Improved decision-making
- Greater transparency
- Enhanced control over costs
What is customer life-time value or life cycle profitability?
- metric that estimates the total value a customer brings to a company over the entire duration of their relationship including:
o revenue generated by customer
o costs of acquiring and retaining customer + length of customer relationship
discounted (profit margin - costs to maintain customer) - initial acquisition costs
Which basis for transfer prices was used in Santalo case study and which in Adriatic bank case study?
SANTALO
* Negotiated transfer prices
* Negotiation between the finance directors of the Country Business Units (CBUs).
ADRIATIC
* Market-based transfer prices
o The bank employed market rates as a benchmark for determining the transfer prices for funds between segments
What is the problem with full cost transfer prices?
Rarely reflect actual, current costs of producing the products because of arbitrary overhead cost allocations. If there is also a mark-up to the full costs, there is little incentive for the selling BU to transact internally since there is little profit margin
What is BEPS and how is it performed via transfer prices?
- BEPS - Base erosion and Profit Sharing
- Refers to tax avoidance strategies used by multinational companies to shift profits from high-tax jurisdictions to low-tax jurisdictions
- Companies may establish entities in tax havens where corporate tax is low/zero to maximise profit.
- Companies may undervalue assets when transferring them to low-tax jurisdictions
How are transfer prices associated with segment or subsidiary performance? (Adriatic bank case)
- Revenue recognition
o Segments earn interest on funds lent internally and externally
o Segments earn opportunity revenues when they pay lower interest rates than market. - Cost allocation
o Charging segments market rate plus risk premiums.
o Ensuring all direct and indirect costs are accounted for.
Hence, it helps in measuring financial performance, motivating cost efficiency, and setting realistic managerial targets to provide realistic and market-aligned basis for revenue recognition, cost allocation, and profitability measurement.
In Adriatic case:
By lending at higher market-based rates and borrowing at lower rates, segments generate a net interest margin. Treasury borrows low, lends high, capturing maturity transformation effect. Risk premiums ensure each segment accounts for risk.
What is the international two pillar agreement that address the problem of digitalisation of companies and tax base erosion?
- agreement aims to modernize the international tax system to ensure that multinational companies pay their fair share of taxes, especially in jurisdictions where they generate profit.
o Pillar one – reallocation of taxing rights for large multinational enterprises from their home countries to the market jurisdictions where their users and customers are located.
o Pillar two - introduce a global minimum corporate tax rate of 15% for corporations in scope
Differentiate between various responsibility centres
Responsibility centre
Organisation unit headed by manager with responsibility for inputs and/or outputs
Revenue centres
Volume is controlled but prices are often set.
Focus on budgeted vs actual sales
Some managers of revenue centre are accountable for some expenses
Profit centres
Divisions or separate sections of company
Fairly large centres
Focuses on calculation of
controllable margin =Contribution Margin - Controllable fixed costs
Cost centres
Usually service or manufacturing sectors of a company
Focus on costs that are controllable by manager (controllable costs)
Causal relationship between inputs and outputs
Discretionary cost centres
Output and input are not necessarily linked eg. marketing, HR
Investment centres
Incurs revenue + costs, but manager controls asset decisions
Includes subsidiaries or large business segments.
Calculation of ROI and controllable margin.
Performance control: return on capital
Deficiency of ROI approach in measuring investment centre performance
- Too narrow for effective control.
- Profit-seeking organisations should make investments until the marginal cost of capital of the last dollar invested equals the marginal return generated by that dollar.
- ROI motivates managers to turn down investments that are expected to earn more than their cost of capital.
Understand which financial and non-financial measures are appropriate for their performance measurement
Financial:
* * Revenue centres
o Focus on budgeted vs actual sales
* Cost centres
o Focus on controllable costs
* Profit centres
o Focus on controllable margin = contribution margin – controlled fixed costs
* Investment centres
o Focus on ROI, return on capital and controllable margin
Non Financial
* * Revenue centres
market share, customer satisfaction
* * Cost centres
Process improvement, product efficiency
* * Profit centres
customer retention, market penetration
* * Investment centres
innovation, r&d
The controllability principle in measuring performance of different subsidiaries (Santalo case study)
- manager of a responsibility centre should be held accountable only for the revenues, costs, or investments that a responsibility centre controls
The concept of residual income or economic value added (see slides)
Residual Income=Income-Cost of capital or investment.
Evaluates income relative to level of investment.
Unlike ROI, residual income does not motivate managers to turn down investments that can earn more than their cost of capital
What is transfer pricing?
Rules of an organisation to allocate jointly earned revenue among responsibility centres.
Conversion Costs
All manufacturing costs not direct material.
What is cost pool, cost object, cost rates, direct and indirect costs
Cost Pool
- grouping costs incurred together (primarily indirect)
Cost Object
could be product in manufacturing
Cost Rates
cost pool / cost driver
Direct Costs
specified to a cost object
Indirect Costs
cannot be traced to a specific object
Contribution margin
Revenue left over after all VC deducted from sales.
Make-Or-Buy
Whether costs avoided internally are greater than added external costs when purchasing product from supplier.
Internal costs that can be avoided * Typically, all variable costs * Any avoidable fixed costs
Market-based transfer prices
managers of both selling and buying BU make decisions optimal from corporate perspective. The market price provides an independent
valuation of transferred product/service and how much each profit centre has
contributed to the total profit earned by the organization.
Cost-based transfer prices
When there is no well-defined market price, variable cost, VC + % Markup on VC
full cost, FC + % Markup on FC are used.
