acct3121studyguide - ACCT 3121 Cost Accounting Ch 1 Firms...

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ACCT 3121 – Cost Accounting Ch. 1 Firms as a Related Set of Contracts Contracts with Customers – implicit and must have merchantable quality; also indirect Contracts with Suppliers – explicit or implicit Contracts with Employees – written, oral, implicit. Most employee contracts are implicit. Employees that are extremely valuable to the firm have written contracts. All employment contracts require evaluation of employees’ performance. Contracts with Investors – written contracts. Contracts involving debt (bonds) are written with covenants (constraints) and are audited (verified). Environmental Constraints – these aren’t contracts, but they do affect accounting reporting. Contracts with Competition – joint ventures, mergers, and takeovers. Joint ventures combine knowledge (expertise) from two (plus) firms. Decision Making and Control Internal accounting uses accounting reports for two main purposes: decision making and control of organizational problems. Control means evaluating managers’ performance and inducing managers to make decisions in the firms interests. Cost plus Contracts These are contracts with customers where the price isn’t fixed. The price is determined by adding a profit (markup) to the cost of production. These contracts are used with firms that contract with the government. These contracts are also useful for pricing transfers of goods and services within firms. What Does It Mean To Manage? The objective (goal) of firms is to maximize value. 3 aspects of managing to maximize value that are important to organization design: 1) Management is forward looking, since it is the future cash flows that matter. The past is only useful if it allows managers to better forecast the future.
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2) Basing decisions on future events requires forecasts of the future events. That is, it is what managers expect to happen that affects decisions. The accounting term for forecasts is budgets . 3) Firms have infinite lives, since firms don’t plan on going bankrupt. This is, investors value all future cash flows, not just those in the near future. Managers don’t have infinite lives; they’re with a given firm for only a finite period. There is an immediate conflict between the objectives of shareholders and managers. Objective of the Book Good decisions stem from knowledge , and bad decisions stem from lack of knowledge. Control problems stem from managers having objectives (goals) that differ from those of the firm. Knowledge is king, but control is necessary. The key to effective organization design is to ensure that the person with the knowledge relevant to a decision has the right to make that decision. The firm must also ensure that the decision maker has an incentive to make the decision in the firm’s best interests Control Control problems stem from 2 sources: 1) Employees have objectives that differ from those of the firm (Value maximization) 2) Firms are subject to externalities something that one party does that
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acct3121studyguide - ACCT 3121 Cost Accounting Ch 1 Firms...

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