Question

describe how an insulating allocation promotes or discourages cooperation among managers. In your discussion, explain similarities and differences between the two allocation theories.

Answer 1

As per Insulating allocation, the allocation base is chosen such that the costs allocated to one division do not depend on the operating performance of some other division. Hence, insulating allocation gives responsibility to managers for their own division only. As a result, managers may work independently for the betterment of their own divisions without having regard for other managers and divisions. As a result , performance of divisions may inprove but oveall performance can decline. HHence, Insulating cost allocation discourages manager cooperations.

On the other hand, as per the non Insulating allocation, the allocation base is chosen such that the costs allocated to one division depends on the operating performance of other divisions as well. Thus there is mutual cooperation between managers of various divisions as their divisional performance depends on other managers as well. Where insulating allocation encourages internal trade, non insulating allocation discourages internal trade.