In the Situation Where a Contractual Arrangement Has Been Negotiated

question 38

Multiple Choice

In the situation where a contractual arrangement has been negotiated that provides managers with a bonus based on the profits generated by the entity:

• A) The efficiency perspective identifies this as a way of minimising agency costs by aligning the interests of the principal and the agent.
• B) The opportunistic perspective predicts that managers will seek to adopt accounting methods that best reflect the performance of the organisation.
• C) The underlying premise of PAT is that agents (managers) aim to act in the best interests of the organisation, so the bonus is recognition of those efforts.
• D) Both the efficiency perspective identifies this as a way of minimising agency costs by aligning the interests of the principal and the agent and the opportunistic perspective predicts that managers will seek to adopt accounting methods that best reflect the performance of the organisation.
• E) None of the given Answers.

---

Definitions:

Variable Production Costs

Costs that vary directly with the level of production output, such as raw materials and direct labor.

Useful Life

The estimated period over which an asset is expected to be usable by the owner, affecting its depreciation calculation.

Book Value

The value of an asset according to its balance sheet account balance, taking into account the cost of the asset minus any depreciation, amortization, or impairment costs.

Fixed Factory Overhead

Indirect manufacturing costs that remain relatively constant regardless of the level of production, such as rent, utilities, and salaries of managers.