Questions and Answers of Managerial Of Accounting Information

10. smoothing behavior Return to the problem 9 above. Casually, we might interpret the story as one in which the manager receives a bonus when x2 is produced, but no additional reward if even more is
11. optimal production plan Return to Example 13.5. Find specific values for outputs x1 and x2 such that in the absence of contracting frictions the firm will contract for input H, but when the noted
12. risk neutrality Return yet again to the setting of Example 13.5, but now assume the manager is risk neutral. Find two distinct pay-for-performance arrangements that will ensure supply of input H
13. optimal production plan Ralph, who is risk neutral, owns a production process. Production re quires input from a manager. This input can be one of three possible quantities: L < B < H. Output
14. taxes and incentives Consider a setting where the manager’s input can be L or H and the output can be x1 = 10, 000 or x2 = 50, 000. The manager’s preferences are described in the usual
15. square root utility Ralph owns a production function that uses labor input to produce output. Output will be either x1 = 10, 000 or x2 = 20, 000. Labor is supplied by an agent. One of three
16. personal cost At this point some reflection is in order. What role does personal cost play in the contracting model developed in this chapter? Does the theory require it be everywhere positive?
1. We have stressed output is itself a source of information in the contracting game. Why is this so? Explain the connection between Examples 14.2 and 14.3.
2. What does it mean in the contracting model for a new performance measure, measure y, to be informative? What is the connection between the measure being informative and whether it is useful in the
3. What is the connection in the simple contracting model between performance measure y being useful and the manager’s risk premium?
4. When a new information variable is introduced into the contracting setting, the parties always have the option of agreeing to a contract that ignores the new information. Why is this so? Now
5. We have emphasized a story where contracting on variable x might be improved by contracting on (x, y). Now reverse the story and suppose we are initially contracting on variable y. What does it
6. The "shape" of an optimal contract depends on the information, as summarized in the likelihood ratio and displayed in expression (14.6).Now return to problem 9 in Chapter 13. What do you see?
7. scaling Ralph faces a recalcitrant manager. While Ralph wants input H, the manager prefers input L. (Yes, we have a prototypical contract story as studied in the chapter.) The manager is risk
9. qualitative shape of optimal incentives Consider a costly input setting in which output (xi) can take one of four possible values. Input can be either L or H, with H desired by the risk neutral
10. optimal contract Determine an optimal contract for the setting in problem 9 above.11. what will it cost Consider a normalized contracting story patterned after Example 14.3. Everything remains as
12. did it cost too much This is a continuation of problem 11 above. Everything remains as before, except the probabilities are given by x1/g x1/b x2/g x2/bπ(x, y|H) .2 .3 .2 .3π(x, y|L) .7 .1 .1
13. subtle points Suppose we face a contracting problem as studied in this chapter, including but two output levels, two inputs, two possible signals, etc.The manager is specified by ρ = .0001, cH =
14. good versus bad news Ralph is now thinking about evaluating and compensating his manager based on output and on a monitor. The setting is familiar: low(L) versus high (H) input, Ralph desires
1. Separation of duties is a time-honored control technique. Access to the cash register is limited, the inventory clerk does not count the inventory at year’s end, and the warden does not grant
2. If a manager is assigned a single task, we expect high-quality evaluation information to drive out lesser quality evaluation information.For example, a monitor that identified the precise input
3. source documents Ralph’s agent delivers confidential and valuable documents among a number of buildings in a metropolitan area. Rapid delivery is essential, and the agent’s average delivery
4. basics of linear model The contract derived in Example 15.1 has a negative wage of 20.What is the intuition for this (seemingly strange) conclusion? Hint:check out note 5.
5. basics of linear model Return to Example 15.1, but now assume the manager’s outside certainty equivalent is M = 900. What is the optimal contract? What does this tell you about our normalization
6. basics of linear model Return yet again to Example 15.1.(a) Suppose the manager supplies input H but allocates half of that input to each task. Determine his certainty equivalent(b) Now suppose
7. basics of linear model Return to Example 15.2, but now assume the second variable has a variance of σ2 = 5, 000. Determine an optimal (linear) contract.Explain the difference between this
8. basics of linear model Return again to Example 15.2. Recall that with equal variances and independence this can be interpreted as random sampling the manager’s performance. Let n be the size of
9. balanced allocation Consider a setting similar to that in our string of examples. Let H = 900 and L = 200. Also, cH = 100 and the manager’s risk aversion measure is ρ = .1. (Low input cost and
10. balanced allocation Consider a setting as specified immediately above, except the noise term variances for the two measures are identical: σ2 = σ2 = 15, 000.Also recall α denotes the
11. task assignment with an old friend Multitask issues are also discernible in a modest extension of our original single task story in Chapters 13 and 14. To see this suppose we have two tasks, each
12. interacting control problems Return to the setting immediately above, and concentrate on the first case where two type one tasks are assigned to a single manager. But now suppose the manager can
13. task assignment Ralph owns a production function. Output can be either x1 or x2, with x1 < x2. The manager’s input can be L or H, with H desired.Ralph is risk neutral. The probabilities are:x1
14. aggregation Return to problem 13 above. Both tasks are again present, but now only total output is observable. This implies low output from task one and high output from task two cannot be
15. multiple tasks and delayed evaluation The manager of a facility that manufactures automobile components is evaluated on the basis of output (relative to an output budget)and cost (relative to a
1. The idea of responsibility accounting is straightforward: we hold a manager responsible for those accounting measures that tell us something about that manager’s performance. Carefully discuss
2. Responsibility accounting focuses on the use of accounting measures in evaluating a manager. Might a manager be held responsible for nonaccounting measures? Give an example. How does the use of
3. Discuss the difference between an evaluation measure being controllable versus conditionally controllable by a manager.
4. The informativeness criterion can be interpreted as saying that the information content of a potential evaluation measure must be controllable by the manager in question; otherwise, the particular
5. informativeness and off-equilibrium randomness Consider a variation on Examples 16.1 through 16.4, where everything remains as specified except the probabilities. The probabilities are partially
7. designer informativeness Consider yet another variation on Examples 16.1 through 16.4, where everything remains as specified except the probabilities. The probabilities are specified below.
8. cost allocation We know cost allocation is commonplace, and a distinctly accounting phenomenon. We saw its use in decision framing, but what about performance evaluation? Give two institutional
9. multitask setting A popular metaphor is that of a balanced scorecard, that a variety of measures should be used in evaluating a manager and that they should be treated in balanced fashion. Taking
11. informativeness and usefulness Ralph, who is risk neutral, owns a production process. One of three feasible labor inputs, L < B < H, must be selected and H is desired.The labor supplier’s
12. randomized monitoring This is a continuation of problem 8 in Chapter 13. Everything remains as before, except Ralph now has an information source. For a cost of 4,000 the source will report,
13. risk taking and insurance A major retailer, at one time, moved toward more centralized buying of merchandise that would be inventoried by its many locations.Each such location was evaluated in
14. flexible budget Consider a manager who produces goods or services according to customer demand. The accounting library uses an estimate of total cost based on an LLA of TC = F +vq, where q is
15. nonfinancial measures Performance evaluation has a long history. For example, Bokenkotter[1979, page 153] reports the following practice in the Medieval Church. "The tasks of the bishop were many
16. evaluation practices Suppose you, as manager, have just been moved to a new location.One of your initial tasks is a quick study of how the individuals whom you will now supervise have been
17. local and firm-wide bonus determinants A common practice is to define an overall bonus pool in terms of how well the firm has performed. For example, the pool might be a percentage of accounting
17. local and firm-wide bonus determinants A common practice is to define an overall bonus pool in terms of how well the firm has performed. For example, the pool might be a percentage of accounting
18. change of pace Ralph is studying principal-agent problems. The principal is risk neutral, while the agent is risk averse and also incurs a personal cost.The agent can supply input L or input H.
19. cost versus profit center and information content Ralph owns a production function and seeks the services of a manager.The manager’s input can be L or H; Ralph desires input H.The manager will
20. return on investment Ralph manages a regional home products store. A variety of hardware, lumber, and small appliance items are stocked and sold to the general public. A smaller portion of the
21. current cost Ralph manages a consumer products outlet. Inventory is important.Customers will not return if the outlet is out of stock; and inventory carrying costs are far from trivial. Changing
1. Our study of communication stresses the theme that a control system must be coextensive with the control problem it is designed to address. If a manager is called upon to supply input and to
2. The stylized contracting model accommodates the idea that a wellinformed player might be induced to communicate what is privately known. This requires we pay attention to incentives. After all, it
3. control hot spots Return to the self-reporting setting of Example 17.3. What are the shadow prices on the constraints in program (17.2) in this setting?How do the shadow prices relate to the
4. information arrives after manager acts Ralph is contracting with the usual (overly familiar) manager, in a setting where the manager’s input can be high (H) or low (L), with H desired. While
5. information arrives before manager acts17 Repeat your analyses in problem 4 above, but now under the assumption the manager privately observes the good (g) or bad (b) news after contracting but
6. two-sided opportunism Return to the setting of Example 17.3. Now assume the firm, rather than the manager, privately observes y ∈ {g, b} after the manager acts but before output is observed.
7. two-sided opportunism What happens in Example 17.4 if the firm rather than the manager possesses the private information?
8. communication and input supply incentives Return to Example 17.5. Draw the manager’s decision tree for the first two cases and verify he can do no better than accept the offered terms, supply H
9. valuable private information Return to Example 17.5. Suppose no information is available, and the firm desires supply of input H. Determine an optimal pay-forperformance arrangement, and contrast
10. private information with negative value Return to Table 17.7, and assume the manager is as specified in problem 4 above. Input H is desired, regardless of any information. Initially suppose no
11. information management In problems 9 and 10 above you have encountered numerical examples where private information in the hands of a manager is or is not in the best interests of the firm.
12. hidden reserves A familiar contention when a new management team takes over is the suspicion that various expenses associated with the outgoing team have been aggressively identified, thereby
13. communication from subcontractor Ralph is trying to finish a rush job for a favored customer. The schedule is tight and Ralph can save 8,000 in overtime cost if part of the job is turned over to
14. evaluation dynamics An apparel manufacturer centrally plans production schedules and treats each manufacturing facility as a cost center. Well-engineered standards are in place for each facility,
15. accounting library The accounting library, as we have stressed, is well defended. Revenue recognition is an important policy instrument in this regard.We delay recognition of revenue, and hence
16. communication in root utility case Ralph’s manager acquires information after acting, but before output is realized. As usual, Ralph, is risk neutral. The manager has preferences for cash
1. Our study of coordination sweeps across master budget, short-run versus long run, inter-division trade and sabotage issues. What is the common theme?
2. Transfer pricing uses prices and quantities to record trade between divisions. In general terms this is often thought of as using a price mechanism to guide such trade. To what extent is this
3. We used the managerial input model to highlight the importance of allocating the gains to inter-division trade between two divisions. In that setting, how do the managers learn of possible gains
4. In laying out a transfer pricing exercise, we were careful to append it to an existing control problem and to wrap the benefits to trade in uncertainty. What purpose is served by this elaborate
1. Our study of coordination sweeps across master budget, short-run versus long run, inter-division trade and sabotage issues. What is the common theme?
2. Transfer pricing uses prices and quantities to record trade between divisions. In general terms this is often thought of as using a price mechanism to guide such trade. To what extent is this
3. We used the managerial input model to highlight the importance of allocating the gains to inter-division trade between two divisions. In that setting, how do the managers learn of possible gains
4. In laying out a transfer pricing exercise, we were careful to append it to an existing control problem and to wrap the benefits to trade in uncertainty. What purpose is served by this elaborate
5. biased evaluation Compare the piece rates in Examples 18.1 and 18.2. Provide an intuitive explanation for their equality in the first setting and inequality in the second. What would likely happen
6. shadow prices We have repeatedly stressed the connection between shadow prices in an incentive design program and what we call control "hot spots."Determine the shadow prices in Examples 18.1 and
7. short-run versus long-run incentives Return to Examples 18.1 and 18.2, but change the specification of the second period’s evaluation noise from σ22= 10, 000 to σ22= 15, 000.Determine the
8. trade of output for accounting currency United Management has a divisionalized structure. Division B has encountered an opportunity to provide specialized manufacturing for an established
9. trade of output for fungible currency Return to problem 8 above. Now assume division A is unable to accommodate division B, and B must, as a result, go to an outside source. This source is paid
10. classical analysis Ralph’s firm consists of divisions A and B. All of the output of A is transferred to B, where it is processed further and then sold. No costs are incurred at center. The
11. noisy gains to trade Return to Example 18.4, where each manager’s compensation is determined by Ii = ωi + βixi. Determine each manager’s wage, ωi, for three cases: α ∈ {0, .5, 1}.
12. noisy gains to trade Return to Example18.4 but now assume H = 900,L = 300 and the high input personal costs are cH1 = cH2 = 120.(a) Determine the optimal contracts and transfer price.(b) Repeat
13. sourcing dispute22 Ralph’s Firm is a large, decentralized firm. Each major product group is manufactured and marketed by a separate division. The divisions are free to trade among themselves as
14. insurance arrangements A large bank evaluates commercial lending officers in terms of the profitability and quality of their loan portfolios. When a loan is consummated, the loan officer
15. internal cost of funds and rationing23 Ralph manages a decentralized firm where division managers have significant authority to make production and investment decisions.All capital expenditures
16. relative performance evaluation Ralph is at it again. Output from the production process owned by Ralph can be x1 or x2. The manager’s input can be L or H. Ralph is risk neutral. The manager is
17. encouraging profitable investment24 Ralph’s firm is always looking for new, innovative products. A manager in Ralph’s firm every now and then discovers a new product.Any such discovery is
1. Why are the metaphorical questions "what might it cost" and "what did it cost" fundamentally different questions?
2. The dynamic theme of decision making and performance evaluation emphasizes use of the accounting library simultaneously for decision making and performance evaluation purposes. Here the basic
3. Accounting governance is visible (and contentious) in the world of financial reporting, as evidenced, by FASB, IASB and GASB activities.Yet accounting governance is important inside the firm and
4. an old friend Return to one of your favorite illustrations, Example 13.5, where the following probability structure was assumed:x1 x2π(x|H) .5 .5π(x|L) 1 0 Further recall the optimal
5. labor market conditions We usually have difficulty writing long term contracts. Suppose a manager is known to the labor market and has a reputation (good or bad). The employer cannot write an
6. factors of production Ralph’s firm is expanding. It tentatively plans to add a sales force.The sales force will require the usual trappings of an automobile, personal computer, state-of-the-art
7. time not on our side Consider a Chapter 15 style multitask setting, especially Example 15.1 where two tasks are present and the firm wants all of the input assigned to the first task. As in that
1. The Chapter stresses the idea that the firm straddles input and output markets. Explain this notion.What role does the firm’s cost function play as it straddles input and output markets?
2. Expressions (2.1) and (2.7) provide equivalent descriptions of the profit maximizing firm’s behavior. Why is a cost function present in expression (2.7) but not in expression (2.1)? What purpose

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