Chapter 15

Question 1

What is organizational control?

Answer 1

• Organizational control is the systematic process through which managers regulate organizational activities to meet planned goals and standards of performance.

Question 2

What are the steps in the feedback control model?

Answer 2

1. Establish standards of performance.
2. Measure actual performance.
3. Compare performance to standard.
4. If # 3 adequate: Do nothing or provide reinforcement.
5. If # 3 inadequate: Take corrective action

Question 3

What is a balanced scorecard approach?

Answer 3

• The balanced scorecard is a comprehensive management control system that balances traditional financial measures with operational measures relating to a company’s critical success factors.

Question 4

What are the four components of the balanced scorecard?

Answer 4

• Financial performance. The financial performance perspective reflects a concern that the organization’s activities contribute to improving short- and long-term financial performance. It includes traditional measures such as net income and return on investment.
• Customer service. Customer service indicators measure information such as how customers view the organization and customer retention and satisfaction.
• Internal business processes. Business process indicators focus on production and operating statistics.
• Potential for learning and growth. The final component of the balanced scorecard looks at the organization’s potential for learning and growth, focusing on how well resources and human capital are being managed for the company’s future.

Question 5

What is budgetary control?

Answer 5

• Budgetary control, one of the most commonly used forms of managerial control, is the process of setting targets for an organization’s expenditures, monitoring results and comparing them to the budget, and making changes as needed.

Question 6

What is the fundamental unit of analysis for a budget control system?

Answer 6

• A responsibility center is any organizational department or unit under the supervision of a single person who is responsible for its activity.

Question 7

What is included in an expense budget?

Answer 7

• An expense budget outlines the anticipated and actual expenses for a responsibility center.

Question 8

What is included in a revenue budget?

Answer 8

• A revenue budget lists forecasted and actual revenues of the organization.

Question 9

What is the purpose of a cash budget?

Answer 9

• The cash budget estimates receipts and expenditures of money on a daily or weekly basis to ensure that an organization has sufficient cash to meet its obligations.

Question 10

What is the purpose of a capital budget?

Answer 10

• A budget that plans and reports investments in major assets to be depreciated over several years is called a capital budget.

Question 11

How does zero-based budgeting work?

Answer 11

• Zero-based budgeting is an approach to planning and decision making that requires a complete justification for every line item in a budget, instead of carrying forward a prior budget and applying a percentage change.
• A zero-based budget begins with a starting point of $0 and every dollar added to the budget is reflected by an actual, documented need.

Question 12

What is the difference between top-down and bottom-up budgeting?

Answer 12

• Many companies use top-down budgeting, which means that the budgeted amounts for the coming year are literally imposed on middle- and lower-level managers.
• Bottom-up budgeting involves lower-level managers anticipating their department’s budget needs and passing them up to top management for approval.

Question 13

What is included in a balance sheet?

Answer 13

• The balance sheet shows the firm’s financial position with respect to assets and liabilities at a specific point in time.
• Think of the balance sheet as a thermometer that provides a reading on the health of the business at the moment you take its temperature.

Question 14

What is included in an income statement?

Answer 14

• The income statement, sometimes called a profit-and-loss statement or P&L for short, summarizes the firm’s financial performance for a given time interval, usually one year.

Question 15

What does a liquidity ratio measure?

Answer 15

• The liquidity ratio indicates an organization’s ability to meet its current debt obligations.

Question 16

What does an activity ratio measure?

Answer 16

• The activity ratio measures the organization’s internal performance with respect to key activities defined by management.

Question 17

What do profitability ratios measure?

Answer 17

• The profitability ratio describes the firm’s profits relative to a source of profits, such as sales or assets.

Question 18

What do leverage ratios measure?

Answer 18

• Leverage refers to funding activities with borrowed money.
• Managers therefore track their debt ratio, or total debt divided by total assets, to make sure it does not exceed a level that they consider acceptable. Lenders may consider a company with a debt ratio above to be a poor credit risk.

Question 19

What are the differences between hierarchical versus decentralized approaches to control?

Answer 19

• Hierarchical control involves monitoring and influencing employee behavior through extensive use of rules, policies, hierarchy of authority, written documentation, reward systems, and other formal mechanisms.
• With decentralized control, the organization fosters compliance with organizational goals through the use of organizational culture, group norms, and a focus on goals rather than rules and procedures.

Question 20

What is open-book management?

Answer 20

• Open-book management allows employees to see for themselves—through charts, computer printouts, meetings, and so forth—the financial condition of the company.

Question 21

What is total quality management?

Answer 21

• Another popular approach based on a decentralized control philosophy is total quality management (TQM), an organization-wide effort to infuse quality into every activity in a company through continuous improvement.

Question 22

What are the techniques used to implement total quality management?

Answer 22

• A quality circle is a group of six to twelve volunteer employees who meet regularly to discuss and solve problems affecting the quality of their work.
• Benchmarking is defined as the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognized as industry leaders to identify areas for improvement.
• Six Sigma is a quality control approach that emphasizes a relentless pursuit of higher quality and lower costs.
• Quality partnering involves assigning dedicated personnel within a particular functional area of the business to identify opportunities for improvement throughout the work process.
• Continuous improvement, or kaizen, is the implementation of a large number of small, incremental improvements in all areas of the organization on an ongoing basis.

Question 23

What are ISO 9000 standards?

Answer 23

• Many countries have adopted a universal benchmark for quality management practices, ISO 9000 standards, which represent an international consensus of what constitutes effective quality management as outlined by the International Organization for Standardization (ISO).

Question 24

What is corporate governance?

Answer 24

• Corporate governance refers to the framework of systems, rules, and practices by which an organization ensures accountability, fairness, and transparency in its relationships with all stakeholders, including investors, employees, customers, and the general public.