Book: Management Control Systems Flashcards
What is the diference between control and controls
Controls are the measurements and information that directs the control decisions
What is the management control system
The entire array if controls used by an organization
What is the difference between management control and strategic control
Strategic control focuses on how a firm can compete with the outside while management control influences employee behavior
What are the three types of controls in an organization
Action or behavior control
Personal , social or culture control
Result or output controls
What are action or behavior controls
The observation of individuals as they go about their work
What are personnel,social or cultural controls
To develop a culture of shared values and to make sure that employees know what is required of them do they can control themselves
What are output or results controls
Measuring performance metrics about the outcome of work
How are output controls implemented
Select measurements to monitor. Establish targets. Measure performance and implement rewards and punishment
What is feedback control
To monitor outputs against targets and taking corrective actions.
What is feed forward control
To measure likely outcomes to desired outcomes and to take corrective actions to put them in line
When should feedback and feed forward controls be implemented
When the time lag is short feedback and when long feed forward
When is controls considered harmful
When they motivate employees to behave in a way that does not benefit the organization, a lack of goal congruence
By what process can a high focus on specific measures be damaging
For example if managers disregard corporate interests that are not measured or if they over achieve the measures at the expense of other corporate interests
What is a responsibility center
A part of a businesses controls that top management delegates responsibility over to a lower manager
What are the four types of responsibility centers
- Cost or expense center, 2. Revenue center, 3. Profit center, 4. Investment center
What are standard cost centers
A cost center where input and output can be measured and specified. Their difference is called variance.
What are discretionary cost centers
A cost center where inputs and outputs cannot be clearly measured. All that can be done is too keep within budget and make sure that the tasks are done
What are revenue centers
A responsibility center entailing revenue from a specific source
What are profit centers or business units
A responsibility center responsible for both cost and revenue and thus has great autonomy
What is an investment center
A profit center with the authority ti make capital investments
What is responsibility accounting
To accumulate data on performance and see how and who deviates from the budget
What are performance repports
Monthly reports on performance that are compared to the budget
What decisions are involved in management accounting
Distinguishing between what managers can control and not, setting appropriately challenging targets and determine how much influence managers should have
What is the controllability principle
That it is only appropriate to assign costs to cost centers where managers can influence them
How can you remove the distorting affects of uncontrollable factors of management controls
Before you can identify and separate the uncontrolled factors and after you may perform variance analysis, use flexible standards, evaluate them relatively and subjectively
What is variance analysis
Find what costs vary and trace them to accountable individuals
What is flexible budgeting
To reevaluate the budget to the conditions of the report so called ex post budget adjustments
What are relative performance evaluations
To compare responsibility venters to similars operating under similar conditions
What are the downsides of subjective evaluations
They cannot be known to be accurate
What if the manager can control the quality but not the price of a service
Then only responsible for costs due to usage
What is the diference between an expectations budget and an optimal performance budget
For optimal performance the budget had to be above expectation but within the realm of possibility
Why is a small adverse variance a healthy sign in a budget
Because it means that the target is just out of range where it can motivate managers
What are the benefits of having managers participate in making their budgets
They are more likely to accept it if it is bottom up and they can give insights about their view of the operation and so lessen the information asymmetry
When should participation be discouraged in budgeting
When managers have created a reward system they should not make it too easy to achieve them. Negotiation takes time so if the situation is controled there is no need
What is the budget constrained style to evaluate a budget
To rigidly compare against the budget and too see variation as error
What is the profit conscious style of evaluating the performance
To focus in long term profits focusing on the minimization of long run costs and to look at the budget flexibly
What is the non accounting style to evaluate performance
To not compare against the budget
What is the negative side affect related to the budget constrained approach to measure perfomance
Managers may see it as unfair which causes stress and conflict
What is contingency theory
The idea that management accounting should be adapted to the company’s situation
What non economic reasons are there of management accounting
It can be used to legitimize already made decisions, to create a base of power and to signal that the company is rational
What is a functional organizational structure
A structure where all activities of a similar type are structured under one responsible department head
What is the advantage if dividing the company into autonomous divisions
Speed and quality of decitions
What is the main drawback of divisionalization of a firm
That departments might compete excessively and take actions for their own gain that hurts the whole
Which companies are divisionalization suited for
Large companies engaged un many dissimilar activities
How do you measure the profit of a division
Either check the controllable profit by removing all management cannot influence or you add all costs that would be removed if the division did not exist and arrive at the divisional profit contribution
Why allocate administration fees related to a division when comparing to other firms
Because different companies might divide work differently
Why measure divisional profit before tax
To let managers know the total cost of operating their divisions, to make divisional managers know that outside costs related to them exist and that they must justify them and to compare them similar units
What is ROI
Return on investment, how much you get out relative to you put in
Why might it be bad to evaluate managers based in ROI
Because they would be reluctant io make profitable investments with relative small return even if they have no alternative
What are the pros and cons of using residual income as a base for performance
Pro because it is exactly what the principles want but von because it is absolute so you cannot compare departments of different sizes
How is economic value added calculated
Division profit + - accounting adjustments - cost of capital (opportunity cost) on division assets
Does the economic valye added eva method capitalize RnD
Yes
Why do ROI discourage investing in new assets
Because if an asset continue to give but is depreciated it often reflects better on the figures than actually investing in improvements
Why is it advantageous ti measure ROI and EVA using the historic cost of an asset
Because depreciation makes these numbers artificially high
What dangerous effect can performance controls have on decision making
Managers might ignore taking the option with the best net present value and instead go for what improves their metrics most
What are the pros and cons of short term financial ratios
Pro is that they accurately reflect the present but a con is that it encourages risk taking and short term thinking however if the bonuses are far into the future they might be less motivating
What is the diference between eva and residual income
Residual income uses target ROI while EVA uses weighted average cost of capital
Is debt only interestbearing liabilities
Yes
