The logic is less compelling if the purpose is to evaluate managers The branch

The logic is less compelling if the purpose is to

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The logic is less compelling if the purpose is to evaluate managers. The branch managers have little control over the cost and, thus, would see the allocation as being arbitrary. Moreover, it is unclear what performance-evaluation purpose the allocation would serve.Purchasing and Inventory Handling. This cost resembles the cost of payroll in terms ofits controllability by branch managers. Thus, a similar logic applies. The cost must be allocated to branches for profitability assessments. Allocating at least a portion of the costbased on the number of deliveries and using it for managerial performance evaluation sensitizes managers to the cost of poor forecasting. However, as with payroll, more directmechanisms (e.g., all extra deliveries must be approved by Maggie) may suffice to provide the required control.This problem highlights three issues.The reason for the allocation determines if it makes sense for the firm to allocate the cost. Taking advertising as an example, the allocation is justifiable for assessing branch performance but not managerial performance. Allocations can modify behavior. If Maggie allocates personnel costs by the number of hires and fires, and uses the cost in managerial performance evaluation,branch managers have an incentive to be more careful in their hiring and firing. However, please note that mere allocation is not enough. The allocated cost must also influence managerial compensation for the allocation to provide the correct incentives.Allocations are but one tool in the portfolio of controls available to management. Given Yin-Yang’s size, direct mechanisms may work better and be more cost effective than cost allocations to modify managerial behavior. It is easier to conceive of a role for such “control-related” allocations in larger firms. 9.61a.There are at least two salient reasons that lead to the demand for a cost allocation in this setting.1.Inventory Valuation. The problem indicates that a typical project spans many years. Great Lakes needs to value the inventory of parcels in its possession at year end to determine the income reported for a given year. The overall cost (purchase plus development) must be allocated to individual parcels for this financial accounting purpose.2.Cost Justification. For political purposes, it is likely that Great Lakes will wish to sell the parcel for the school at “cost.” Indeed, Great Lakes might even wish to Balakrishnan, Sivaramakrishnan, & Sprinkle – 2eFOR INSTRUCTOR USE ONLY9-33
choose a basis that allows it to show a “loss” from the sale to the school board. Similarly, Great Lakes probably deals with the same set of builders when selling its many properties. The allocated cost may be shared with the builders to help build the case for the price charged.

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