AFM482 Study Guide - Midterm Guide: Performance Measurement, Agency Cost, Horizon Problem

• School: University of Waterloo
• Department: Accounting & Financial Management
• Course: AFM482
• Professor: Carty

Document Summary

Evolution of management accounting: business environment, business strategy, organizational architecture, performance measurement, reward and punishment, decision rights assignment. Firm value: performance = function of ability and effort, effort = direction duration intensity strategy development, motivation = function of valence + instrumentality + expectancy, valence: desire for potential reward. Solution: incentive contracts, monitoring: horizon problem - leave soon, less weight on lt consequences. Solution: incentive contracts, monitoring: employee theft - take resources for unauthorized purposes. Solution: buy fidelity bond, monitoring, inventory control: empire building - manager seek to manage large number of agents to increase job security/compensation. Financial measures: profits, costs, revenues, inventory level etc, non-financial measures, quality, defects, customer satisfaction, employee turnover, objective measures, production rate, sales, meeting budgets and schedules. Incentive to produce more to spread fixed costs over large number of units: quality control must be monitored, profit, knowledge, product mix, demand, pricing, decision rights.