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Management Control Systems > Financial Results Control Systems > Flashcards

Financial Results Control Systems Flashcards

1
Q

Describe the advantages of financial results control systems?

A
  • easy to evaluate for-profit firms by outsiders
  • comparable measures
  • summary measures that are inexpensive
  • complex organizations do not need to track their actions: “management-by-exception”
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2
Q

What core elements do financial results control systems have?

A
  • Financial responsibility centers
  • Planning and budgeting systems
  • Incentive contracts
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3
Q

Describe the different types of cost centers.

A
  • standard cost center: comparing standard with actual cost
  • discretionary cost center: budget level of expenditures, largely subjective
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4
Q

What is the major output of a planning and budgeting system?

A

A written plan that clarifies the company objectives, strategies and performance targets

  • reflection on future
  • motivation to discuss plans with others
  • prepare projections
  • motivation to be committed to achieve objectives
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5
Q

name and describe the main purposes of planning and budgeting systems

A
  • Planning
  • Coordination
  • Top management oversight
  • Motivation
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6
Q

What is a “feedforward control”?

A

Decisions regarding staffing, strategies and operational tactics are adjusted before the firm suffers major problems

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7
Q

What is a “feedforward control”?

A

Decisions regarding staffing, strategies and operational tactics are adjusted before the firm suffers major problems

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8
Q

What does strategic planning typically involve?

A

involves senior executive managers

analysis of past and future to:

  • define vision and mission
  • understand present position
  • define types of (core business) activities
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9
Q

What are the typical characteristics of budgeting targets?

A

typically in financial nature and on annual basis

match the firms responsibility center structure

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10
Q

Name and describe the different types of performance targets.

A
  • model based, historical: derived from predictions of performance
  • fixed vs flexible: flexible also in terms of relative to others
  • internal vs external (e.g. benchmarks)
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11
Q

How much influence should subordinates have in setting their targets?

A

bottom-up and top-down planning

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12
Q

What are the major criticisms concerning the planning and budgeting process?

A
  • rife with politics and gameplay
  • produce only incremental thinking
  • centralize power
  • separate planning (thinkers) from execution (doers)
  • many costs and far too few benefits
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13
Q

Name and describe the several types of management control benefits.

A
  • Informational: effort-directing benefit, signal which areas are important
  • Motivational: effort-inducing benefit
  • Attraction and retention of personnel
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14
Q

What non-control purposes do incentive systems also serve?

A
  • make compensation more variable with firm performance
  • can affect company tax payments
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15
Q

What has to be decided in designing an incentive system?

A
  • inventive formula
  • shape of the incentive function
  • size of the incentive pay
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16
Q

Name and describe the different categories financial measures can fall in.

A
  • Summary measures: multiple performance areas
  • Disaggregated financial measures: e.g. revenues, expenses
  • Combination of financial measures
17
Q

What is the primary objective of for-profit organizations?

A

maximize value of the firm

  • increasing size of future cash flow
  • reducing risk of future cash flow
  • accelerate the timing of cash flow
18
Q

How can the value of an economic asset be calculated at any specific time?

A

by discounting the future cash flow that the company is expected to generate

19
Q

Name the different types of financial performance measures.

A
  • Market measures
  • Accounting measures
  • Return on investment
  • Residual income
20
Q

What are the advantages and limitations of market measures?

A

Advantages:

  • precise, timely, objective, understandable, cost effective

Limitations:

  • market not always informed, not always reflective of performance
  • can only be affected by top few managers
  • only available for publicly traded firms
21
Q

In which forms can accounting measures come?

A
  • residual measures (profit measures): EBIT, EBITDA, net income, residual income
  • ratio measures (return measures)
22
Q

What are the advantages and disadvantages of accounting measures?

A
23
Q

What are the advantages and disadvantages of accounting measures?

A
24
Q

What are the advantages and disadvantages of accounting measures?

A

Advantages:

  • understandable, inexpensive, satisfy many measurement criteria
  • congruent with profit goal of for-profit organisations

Disadvantages:

  • not always a good indicator of firm value (profits and stock correlate commonly on long terms)
  • transaction oriented: changes in value hidden
  • ignore the cost of equity capital
  • ignores risk, focuses on past
25
Q

Define the term “corporate governance”

A

set of mechanisms and processes that help to ensure that companies are directed and managed to create values for their owners while fulfilling responsibilities to their shareholders

26
Q

What were the explicit goals of the SOX-Act?

A

improve the transparency, timeliness and quality of financial reporting

27
Q

What are the key provisions of the SOX-Act?

A
  • senior company managers need to confirm to have read annual and quarterly financial statements
  • external auditing industry became highly regulated
28
Q

What are the key provisions of the SOX-Act?

A
  • senior company managers need to confirm to have read annual and quarterly financial statements
  • external auditing industry became highly regulated
29
Q

What is stated in SOX-Act Section 404?

A

mandated an evaluation of the effectiveness of a companies’ internal controls by

management

external auditor

30
Q

What are the main control responsibilities of the board of directors?

A
  • safeguarding equity investors, ensuring that management maximizes value
  • ensuring that employees act in legal an socially responsible manner
31
Q

Name and describe the important situational factors that influence both, the design of the MCS and its effectiveness.

A
  • environmental uncertainty: political and economic climate, actions of competitors, suppliers, regulators
  • multinationalism: multidimensional organizational problem (national culture, local institutions, local business environments)
  • organizational strategy: corporate strategy, business strategy
32
Q

What effects does uncertainty have on MCS?

A

action and result controls are harder to use

33
Q

What is a “diversification strategy”?

A

Corporate strategy to determine what business to be in and how resources should be allocated among those businesses

33
Q

What is a “competitive strategy”?

A

business strategy how to compete in its industry and how to get a competitive advantage to its competitors:

cost leadership

differentiation strategy (innovation)

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