CMA Foundation · Fundamentals of Business Economics and Management · Stewardship Theory and Agency Theory of Management
Shareholders of Ganga Foods spend ₹6 lakh on audits and ₹4 lakh on board oversight, while managers incur ₹3 lakh on preparing extra reports to reassure owners. Despite this, managers' suboptimal decisions still reduce firm value by ₹5 lakh. What is the total agency cost?
Total agency cost is ₹18 lakh. It is the sum of monitoring costs of ₹10 lakh (6 plus 4), bonding costs of ₹3 lakh and residual loss of ₹5 lakh. Leaving out the residual loss or the bonding cost gives wrong totals of ₹13 lakh or ₹15 lakh.
- A₹10 lakh
- B₹13 lakh
- C₹15 lakh
- D₹18 lakhCorrect
Explanation
Total agency cost = monitoring costs + bonding costs + residual loss. Monitoring = 6 + 4 = ₹10 lakh; bonding = ₹3 lakh; residual loss = ₹5 lakh. Total = 10 + 3 + 5 = ₹18 lakh. The figure of ₹13 lakh wrongly omits the residual loss, and ₹15 lakh omits the bonding cost.
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