Inter-Departmental Cost Allocation and Investment Incentives

Inter-Departmental Cost Allocation and Investment Incentives This paper endeavors to demonstrate that fixed cost allocation can align investment incentives in a multi-period and multi-division setting. In a decentralized firm, a divisional manager can make an investment that benefits both his own and the operations of a downstream division. The relative budgeted activity (RBA) cost allocation method assigns fixed cost charges according to the ratio of a division’s budgeted activity in proportion to that of the firm, and thereby resolves the hold-up problem created by the decentralized setting. Internal accounting rules can be designed to give managers strong incentives to internalize the firm’s objective regarding efficient investment levels, and alleviate the tension between ex ante investment efficiency and ex post production efficiency. This paper examines how much the fixed charges should be in order to achieve the optimal level of investment. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Inter-Departmental Cost Allocation and Investment Incentives

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2004 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/B:RAST.0000013630.18838.04
Publisher site
See Article on Publisher Site

Abstract

This paper endeavors to demonstrate that fixed cost allocation can align investment incentives in a multi-period and multi-division setting. In a decentralized firm, a divisional manager can make an investment that benefits both his own and the operations of a downstream division. The relative budgeted activity (RBA) cost allocation method assigns fixed cost charges according to the ratio of a division’s budgeted activity in proportion to that of the firm, and thereby resolves the hold-up problem created by the decentralized setting. Internal accounting rules can be designed to give managers strong incentives to internalize the firm’s objective regarding efficient investment levels, and alleviate the tension between ex ante investment efficiency and ex post production efficiency. This paper examines how much the fixed charges should be in order to achieve the optimal level of investment.

Journal

Review of Accounting StudiesSpringer Journals

Published: Oct 18, 2004

References

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