RSM322H1 Lecture 5: Lecture 5 - RSM322
Document Summary
K(cid:374)o(cid:449)ledge of the (cid:272)e(cid:374)te(cid:396)s" (cid:373)a(cid:374)age(cid:396)s is diffi(cid:272)ult to a(cid:272)(cid:395)ui(cid:396)e, (cid:373)ai(cid:374)tai(cid:374), o(cid:396) a(cid:374)al(cid:455)ze at highe(cid:396) levels. Decision rights are specified for each center. Performance measurement is obtained from internal accounting system (recall organizational architecture concepts in chap. Central manager knows optimal production quantity and budget. Cost center manager knows optimal mix of inputs. Cost center manager chooses quantity and quality of inputs used in cost center (labor, material, supplies) Minimize total cost for a fixed output. Minimizing average costs does not necessarily maximize profits. Cost centers have an incentive to produce more units to spread fixed costs over a large number of units. Quality of products produced by cost center must be monitored. P(cid:396)ofit (cid:272)e(cid:374)te(cid:396) (cid:373)a(cid:374)age(cid:396)s" k(cid:374)o(cid:449)ledge of p(cid:396)odu(cid:272)t (cid:373)i(cid:454), de(cid:373)a(cid:374)d, a(cid:374)d p(cid:396)i(cid:272)i(cid:374)g is diffi(cid:272)ult to transfer to central management. Can chose input mix, product mix, and selling prices. Setting appropriate transfer prices on goods and services transferred within the firm. How to allocate corporate overhead costs to responsibility centers.
