Resource title

Fixed cost allocation, residual income and investment incentives

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This paper implements a fixed cost allocation scheme that can align investment incentives in a multi-period and multi-division setting, when the manager's performance evaluated using residual income. 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 cost allocation method assigns fixed cost charges according to the ratio of a division's budgeted activity in proportion to that of the firm. In conjunction with suitably chosen depreciation schedules that provide proper matching of revenues and expenses over time, internal accounting rules can be designed to give managers strong incentives to internalize the firm's objective regarding efficient investment levels.

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en

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application/pdf

Resource resource URL

http://flora.insead.edu/fichiersti_wp/inseadwp2003/2003-35.pdf

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Copyright INSEAD. All rights reserved