Lecture 3 - Responsibility centers Flashcards
(?) Describe responsibility centres in general
General
- Org. unit headed by responsible manager
- Responsibility = Controllability
- Input: Resources used
- Output: Results achieved
Centers:
- Revenue center
- Expense center
- Profit center
- Investment center
(!) Describe expense centers
General:
- Lowest level of responsibility
Types:
Engineered expense center:
- Standard cost center
- Strong input-output relation
- Input: Monetary term
- Output: Non-monetary term
- Poss. to specify input-to-output amount
- Standards: Centrally
- Not investments
- Responsible for efficiency, not activity level
- Should be effective: Align w. quality & timeliness std.
Discretionary expense center:
- Weak input-output relation
- Not financially measurable
- Standards: Industry
- Often look at ress. used iso. output
- Higher costs may be favorable
- General & administrative departments
- Focus: Quality & service level
- Eg. Hospital
- Eg. R&D
__________
Problems:
Controllable & measurable
- Joint contribution: Interdepartmental relations
- Operational myopia
- Intrinsic vs. extrinsic motivation
- Efficiency: Effectiveness
- Strategy & influence
Non-financial PM:
- Composite measure: Delivery, quality & cost
- Weights
- Tight control
Know the right norm:
- Subjectivity of standards
- Benchmarks
New technologic & social context:
(!) Describe revenue centres
General:
- Input: Non-monetary terms
- Output: Monetary terms
- Not investments
Problems:
- Responsibility
- What do you measure
- What is right norm
- Dysfunctional behavior
Examples:
- Price decisions
- Marketing
- Product mix decisions
- Budget variance: Volume & sales price
- Price reductions
- Order entry
, Market share
- Internal failures
- Customer satisfaction
Alternatives:
Contribution margin centre:
Pseudo profit centre:
- Limited authority over pricing & sourcing
- Manager responsible for profit to artificial transfer price: Kunstig
(!) Describe profit centre
General:
- Input: Monetary terms
- Output: Monetary terms
- Not investments
- Contribution margin centre
- Segment centre
- Complete & incomplete
- Controllable vs. influenceable
- Eg. ROS, not ROA & EVA
Pseudo-profit centre:
- Manager responsible for action not controllable
- Manager responsible for profit to artificial transfer price: Kunstig
Principles for divisional reporting:
- Controllable profit: Must reflect all controlled items
- Measurable: Independent from other profit
- Goal congruence: Not at others expense
- Know the right norm
- Problems: More or less complete profit center
Types of profit centres
- Gross margin centre
- Incomplete profit centre
- Before-tax profit centre
- Complete profit centre
(?) Describe the norms of comparison
Profit relative to some standards:
- Actual vs. past
- Actual vs. budget
Sales ratios:
- Contribution margin ratio: % of sales
- Gross margin ratio: % of sales
- Return on sales: OI as % of sales
- Compare ratios w. other subsidiaries & competitors
Exchange rates:
- Translation exposure: From local to HQ currency. Non-controllable
- Transaction exposure: When financial agreement. Often HQ controlled. Eg. Accounts receivable
- Economic exposure: Future CF. Poss. neutralized by contingent budgeting
(?) Describe targets
Level:
- Minimum
- On target
- Maximum
Strategic target qualitatively described:
- Eg. Draft new credit policy
Strategic target quantitatively described:
- Eg. Develop one new business case
(!) Describe how to balance empowerment & alignment
General:
- Action plan: How & what to reach
- Need subjectivity to balance empowering & strategic alignment in dynamic SPMS
- To take responsibility for measures
- Req. for dynamic SPMS
- Help strategic dialogue
- Important individual-level SPMS to use local knowledge: Timely, reliable & understandable
- Indirect influence from TM to individual level for strategic alignment to be empowering
- Target-setting & performance evaluation at individual manager
- Managers capabilities important to understand abstract construct
- Both for dynamic & multinational firms
- May need individual iso. firm BSC
Requirements for subjectivity
- Trustworthy superior
- Info on subordinates performance
- Rewards on personal dev
- Ongoing dialogue
- Understandability
Balance require a combination of management practices:
- DM authority on measures
- Type & number of performance measures
- Type of processes for strategic alignment
- Type of performance evaluation
- Reward processes
___________
Implications:
Engage responsibility:
- Engage managers throughout org. to central responsibility for measures
Individual vs. organizational-level SPMS:
- Use individual-level SPMS as dynamic lever for strategic alignment
- Use org.-level SPMS to monitor performance on LT fundamental issues
- Align TM objectives & LL target setting: Freedom but indirect TM influence. Ongoing dialogue
Flexibility of measures:
- Develop flexibility into individual-level SPMS
- Allowing action-oriented, qualitative strategic measures
Few targets:
- Permit only small number of individual-level targets
- Often qualitative: Central feature of empowerment
Indirect influence:
- Establish alignment processes
- Enable TM to make indirect influence on individual-level target-setting & behaviour
Sufficient leverage:
- Provide sufficient leverage in performance evaluation for changes in in- & external contexts.
Fair perception:
- Helped by subjectivity in target-setting, performance evaluation, processes, systems & capabilities
(?) Describe Otleys performance measures
Role of financial performance measures:
- Different views & contexts
- Never universal
- Calc. depend on judgement & facts: Metaphysical view
- Past performance less useful if dynamic changing context
- Financial indicator represent underlying activity
- Non-financial measures important
- Ref. FA & DM
- ST vs. LT
Major concerns:
- CF planning
- Profitability: For private firms
- Assets: ROCE
Conflict of applying budgets:
- Financial planning: Estimate likely outcomes
- Management control: For motivation
______
Main functions of financial performance measures:
Financial management:
- Efficient provision & use of financial ress. to support strategy
- Use ress. within constraints: Else distress or bankruptcy
- Develop financial plans: CF, profitability & assets incl. financing
- Boundary role to keep firm alive
Financial performance as main objective:
- Reporting to shareholders
- Not all info is public: Risk insider trade
- Earnings represent cum dividend: Increase in BV from previous year’s activities
- Share price = Historical value + Future expectations
- Profit, EPS, P/E & ROI
- P/E = Future expectations
- CAPM: Benchmark for returns
- Market already reflect all info
- Historical cost not good basis
- Creative accounting: Stretch judgement. Twist results since not facts
- EVA also imperfect reflection
Financial performance for motivation & control:
- Monitor financial plans
- Limits in historical accounting measures
- ROI, ROCE, EVA, RI etc.
- “Challenging, yet attainable”
- Budgets often out of date: Especially if uncertainty
- Should include non-financial measures
- Weakness of budgets helped by BB-movement
- Group reward > Individual reward
- Eg. BSC: Should adapt to context & consider right measures
(?) Describe three types of costs
Engineered cost
- Unit-related costs
- Ref. Engineered expense center
- Eg. One wheel
Product costs:
- Costs not directly tied to units
- Ref. Discretionary expense center
- Eg. Staff
Facility sustaining costs:
- Not controllable on ST
- LT costs
(?) Describe productivity measures
Financial productivity measures:
Return on investment / ROI:
- Org. use of capital
- Net income / Investment
__________
Non-financial productivity measures made into financial ones:
Material yield:
- Cost of mat. allowed for output / Actual cost of mat. used
- Especially for firms w. much raw mat.
- Higher yield = Lower cost per output
Labour yield:
- Cost of labour allowed for output / Actual cost of labour used
- Especially in assembly industries
Equipment yield:
- Cost of machine hours allowed for production / Actual cost of machine hours used
- Not variable in ST
- Builds up inventory
- Seeks to be avoided by JIT
(!) Describe the critiques of budgets
General:
- Budget = Fixed
- Benchmarks = Flexible
- By BB movement
Critiques:
- Constrain responsiveness: Barrier to change
- Rarely strategic focus: Contradict
- Add little value: Especially ift. time req.
- Cost reduction > Value creation
- Encourage “gaming”
- Dev. & update too infrequently: Often annually
- Based on unsupported assumptions & guesswork
- Departmental barriers > knowledge sharing
- People feel undervalued
