CMA Foundation · Fundamentals of Business Economics and Management · Stewardship Theory and Agency Theory of Management
Shareholders of Kaveri Ltd. spend ₹4 lakh on auditors and board monitoring, the manager spends ₹1 lakh on bonding (reports and guarantees), and despite this, divergent decisions cause a residual loss of ₹2 lakh to shareholders. What is the total agency cost?
Total agency cost is ₹7 lakh. Agency cost comprises monitoring costs of the principal (₹4 lakh), bonding costs of the agent (₹1 lakh) and the residual loss (₹2 lakh). Adding the three components gives ₹7 lakh.
- A₹7 lakhCorrect
- B₹5 lakh
- C₹6 lakh
- D₹3 lakh
Explanation
Agency cost is the sum of monitoring costs borne by the principal, bonding costs borne by the agent, and the residual loss. Total = 4 + 1 + 2 = ₹7 lakh. Option ₹5 lakh wrongly omits the residual loss, and ₹6 lakh omits the bonding cost.
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