Page 173 - E2 Integrated Workbook STUDENT 2018

The finance function

6.2 Hierarchy solution

Costs will include:

 staff recruitment and training

 provision of managerial supervision

 production planning

 payments and incentive schemes to motivate performance

 the development of budgetary control systems to coordinate activity

 divisional performance measurement and evaluation

 provision and maintenance of non-current assets, such as premises and capital
equipment.

6.3 Market solution

Transaction costs = 'buy-in' costs + external control cost

External control costs will include:

 negotiating and drafting a legal contract with the supplier

 monitoring the supplier’s compliance with the contract

 pursuing legal actions for redress due to non-performance by the supplier

 penalty payments and cancellation payments if the firm later finds it needs to
change its side of the bargain and draft a new contract with the supplier.

167