Lecture questions Flashcards
Define management control
the process by which management ensures that people in the organisation carry out organisational objectives
Name the three basic classes of control issues
- lack of direction
- lack of motivation
- lack of abilities
Why is behavioural orientation important in management control
management control is about encouraging people to take desirable actions, so focus should be on behaviour
What does good control aim at (2)
- high probability of achieving firm’s objectives
- low probability of major unpleasant surprises
How does management control relate to management accounting
management accounting provides the tools and measures used by management in their managment control systems
name the three levels of controls
- action conrols
- results controls
- people controls
what do action controls clearly define
desired behaviour
which level of control is generally most easy to measure
result controls
which level of control is most vaguely defined
people controls
what is responsibility accounting
a management control system that involves identifyin and reporting financial information by areas of responsibility
incentive systems form the link between ….
results and various incentives
performance measurement is done for two things, namely:
- for motivating behaviour (i.e. the incentive system)
- for interactive learning (i.e. radar screen)
Name three benefits of decentrelisation
- lower level managers have the best knowledge to react to market demands
- promotes managment skills which helps to ensure leadership continuity
- managers enjoy higher status from being independent and thus are better motivated
Name three disadvantages of decentralisation
- managers may make decisions that are not in the organisation’s best interest
- managers tend to duplicate services that might be less expensive if centralised
- cost of accumulating and processing information frequently rises
Define a responsibility centre
an organisational unit headed by a manger responsible for its activities
define a financial responsibility centre
a responsibility centre in which the manager’s responsibilities are defined primarily in financial terms
give an example of a revenue centre
sales department
which two types of expense centres are distinguished?
standard / engineered expense centres (EECs) and mangaged / discretionary expense centress (DECs)
what makes EECs and DECs differ from each other?
EECs inputs and ouputs can be measured in monetary terms and a causal relationship can be made between them, while both are not the case for DECs
give two examples of DECs
HR and R&D departments
Which component of the financial statement is the investment centre responsible for, but not the profit centre?
the balance sheet
what problem arises from using historical data for target setting
the ratchet effect: higher performance results in higher targets
benchmark targets can be either … or …
internal or external
For planning purposes, target should be …. and …
accurate and realistic
For motivation purposes, targets should be …. …
slightly stretched
Performance targets should be … but …
challenging but achievable
What is the most important disadvantage of involving budgetees in budget setting?
slack building: revenues budgeted too low while expenses budgeted too high
Name the three categories of uncontrollables
- economic and competitive factors
- force majeure (overmacht)
- interdependencies (due to desicions made in other parts of the organisation)
name 4 methods of eliminating uncontrollables
- variance analysis
- flexible performance standard
- relative performance evaluation
- subjective performance evaluation
Name the parts of the budget cycle:
- budget preperation
- periodic evaluations against actuals
- budget revisions or ‘revised forecasts’
- result evaluation (after the budget period)
Name three examples of non-monetary rewards
Promotion
Titles
Autonomy
Recognition
Participation in decisions
Office assignments
Preferred parking places
What are long-term incentive plans often related to?
company’s stock price
Name the three options for market based performance
- stock options
- restricted stock
- stock appreciation rights
Name the charateristics of the ideal performance measure
objective, complete, responsive to individual influence
What is important if performance measures are subjective?
trust should be high
what is an important risk of an incomplete measure
may lead to dysfunctional behaviour
what are the two negative cognitive effects of having many targets for performance
dilution: individual measure’s importance decreases
overload: cognitive biases or information overload frequently causes evaluators to overemphasise common measures
in a multi-task environment, it is important that bonuses…
are only paid when all measured tasks are performed at a certain threshold
why should there be an upper bound in the bonus curve
to prevent undeserved bonuses through dysfunctional behaviour or unforeseen good luck
Name four advantages of performance based pay
- direction of effort
- inducing of effort
- attraction and retention of employees
- risk spreading
name four disadvantages of performance based pay
- excessive rewards and bonus culture
- too materialistic
- you get what you pay for
- cheaters prosper
name the three forms of subjective performance measurement
- flexibile weighting of objective performance measures ex-post
- ex-post discretion in using additional performance criteria
- the use of subjective performance measures
name four advantages of subjectivity in performance measurement
- risk reduction
- mitigation of incentive distortion
- limitation of vulnerability to manipulation
- more flexibility to adapt to changing conditions
Name the five biases leading to inaccurate assessment in subjective performance measurement
- leniency bias (being nice)
- centrality bias (giving everyone mediocre grade)
- favouritism
- spillover effect (translating excellence in one part to the rest)
- recency effect
describe the myopia problem
financial measures often create pressures for short-term performance potnetially at the expense of long-term value creation
Name three solutions for the myopia problem
- selection and retention management
- extensions of the measurement window
- alternatives to traditional measures of accounting performance
What is meant by selection and retention management
Selecting people and holding people that plan to stay at the company for a long time and therefore focus on long-term succes
why is myopia inherent
mental discount rate exceeds time value of money
How does EVA differ from RI?
accounting adjustments
EVA = …
adjusted NOPAT - (WACC * adj. assets employed)
why does EVA help in overcoming myopia?
involves capitalisation of expenditures that managers might otherwise try to cut if they were pressured for performance
Name two objections to using EVA
- may still lead to evasion of EVA negative projects that are profitable in the long run
- can be biassed by managers (–> use in conj with bonus bank)
which operational measures are incorperated in the balanced scorecard?
- customer satisfaction
- internal processes
- firm innovation and improvement activities
Give three reasons why the balanced score card can be considered to be broader
- systematises the various measures into a number of perspectives
- emphasises the link between strategy and performance measurement
- establishes cause-effect relationships among measures
Why does the BSC help to overcome myopia?
leadint indicators are included that shift the balance toward long-term concerns through incentivising and cognitive effects
which type of inter-organisational relationship is supplemented by equity investments by one or both partner(s) into the other partner?
equity alliances
what is paradoxical about corporate alliances?
growing in number despite high failure rate
what are the six steps toward a successful supply chain collaboration
- develop a cross-functional team
- preliminary supplier screaning
- in-depth supplier screening and qualification
- supplier selection
- contract development
- ongoing measurement and management
what are examples of social controls in a inter-organisational management control system
frequent interaction and team building approaches
What is the use of sustainable supply chain management?
looking at the entire supply chain to identify social and environmental externalitites prevents outsourcing as an avoidance strategy
how is being out of control defined
high probability of low performance despite having a sound strategy in place
How does one get from business strategy to performace goals and objectives
via designing an organisational structure and allocating decision rights
In standard expense centres, costs depend on ….
activities that are necessary for the final product
in discretionary expense centres, costs depend on …
managerial discretion
RI =
profit - capital charge
(capital charge = cost of capital * assets employed)
end of year evaluation may concern:
- managerial performance evaluation and compensation
- eliminating uncontrollables
as the contollability principle is all but a water tight system, what alternative is proposed in this course?
influenceability principle: hold employees accountable for what they can sufficiently influence
Despite cognitive effects, having many targets can be disadventageous due to …
being too costly / unfeasible
the slope of the reward line should depend on… and specificies the … of the …
controllability, intensity, incentive
To prevent myopia, one may use alternatives to traditional measures. these can be either ………………… or ………………….
improved accounting measures or complement measures(BSC)
why is managing the employment time horizon difficult
because there is always uncertainty about how long employees will stay: temporary contracts can be renewed on the one hand and youn managers can be planning to quit on the other hand
Bonus banks prevent myopia by …
reducing management’s incentives to focus on current period performance at the expense of future performance
Besides the incentivising effect through the use of leading indicators when using the BSC, it also overcomes myopia through…
cognitive effects: causal effects become more salient
When an alliance is not supplemented by any equity investments, it is a …
non-equity alliance
Name three specific types of interorganisational management control tools
- value chain analysis
- integrated information systems
- open book accounting
