Management Control Systems Flashcards
(127 cards)
1
Q
What is management control?
A
The process by which management:
- ensures that people in the organization carry out organizational objectives and strategies
- encourages, enables, or, sometimes forces͟ employees to act in the organization͛s best interests
2
Q
What are the two ways used to classify control system?
A
- Proactive
- Reactive
3
Q
What are the 3 steps of management?
A
- Objective setting (financial/non-financial, explicit/implicit, triple bottom line)
- Strategy formulation
- Management control
4
Q
What are the 2 basic functions of control systems?
A
- Strategic Control: Is our strategy valid?
- Management control: Are our employees likely to behave appropriately?
5
Q
What are 3 basic control issues?
A
- Lack of direction
- Lack of motivation (lack of goal-congruence, self-interested behavior)
- Personal limitations
6
Q
What is the solution to lack of direction?
A
communication & reinforcement
7
Q
What is the solution to personal limitations?
A
Training, job assignment/promotion, job design.
8
Q
What are the 3 types of management control systems?
A
- action controls
- result controls
- cultural controls
9
Q
What are some kinds of control avoidance systems?
A
- Activity elimination (outsourcing, licencing, divesting)
- Automation
- Centralization (superiors take most critical decisions)
- Risk sharing (insurance, fidelity bonds, joint venture)
10
Q
What are result controls?
A
rewarding individuals for generating good results (or punishing them for poor results)
11
Q
What are the steps in implementing results controls?
A
- Defining performance dimensions
- Measuring performance based on the predefined dimensions
- Providing rewards (or punishment)
12
Q
What are the conditions for effective results controls?
A
- managers understanding the relevant performance dimensions
- employees being able to influence said dimensions
- managers being able to measure results effectively
13
Q
What are some types of action controls?
A
- Behavioral constraints
- Pre-action reviews
- Action accountability
- Redundancy
14
Q
What is the role of cultural controls?
A
To ensure that employees monitor and control their own and others’ behavior
15
Q
What are the 3 steps in implementing effective personnel controls?
A
- Selection and placement (finding the right people for the job)
- Training
- Job design + provision of necessary resources
16
Q
What are some ways to shape culture?
A
- Codes of conduct
- Group-based rewards (profit-sharing, offering company stock)
- Intra-organizational transfers
- Physical and social arrangements (controlling artifacts)
- Tone at the top (leadership trough example)
17
Q
What are SMART goals?
A
Specific, Measurable, Attainable, Relevant, Timely
18
Q
What are the costs of control?
A
Direct out of pocket costs
- Quantifiable: costs of bonuses, internal audit staff
- Difficult to quantify: costs of time for planing, pre-action reviews
Harmful side-effects
- Behavioral displacement
-Gamemanship
- Operating delays
- Negative attitudes
19
Q
What are behavioral displacements?
A
When the control system encourages behaviors that are not consistent with the
organization͛s objective
20
Q
What is means-ends inversion?
A
When employees are induced to pay more attention to what they do and lose sight of
what they should try to accomplish –> you should focus on the goal not on the steps
21
Q
What is gamesmanship?
A
Refers to the actions managers take to improve their performance indicators without producing any
positive economic effects (Data manipulation, excess consumption of resources)
22
Q
What are the adaptation costs?
A
- National culture
- Local institutions
- Local business environment
23
Q
What steps should a manager take when designing a control system?
A
- Understand objectives and strategies of the company
- Translate into key action & results
- Translate into specific demands on the key roles of employees
- Define control problems within areas ͞direction͟, ͞motivation͟ and ͞ ͞personal limitations͟
- Feasible controls & evaluation of net benefits
- Decision 1 -> choice of controls
Decision 2 -> choice of control tightness
24
Q
What are the 4 main ways to classify costsin reports?
A
- For preparing financial statements (IFRS)
- For strategic decision-making (cost-driver analysis)
- For short-term planning and decision-making
- For control/feedback
25
Describe the process of cost assignment.
Cost assignment is the process of assigning costs to cost pools or from cost pools to cost objects. *Direct costs can be conveniently and economically traced to a cost pool or a cost object
*Indirect costs cannot be traced conveniently or economically to a cost pool or a cost
object
26
What are direct material costs?
Direct material costs = cost of materials that can be readily traced to outputs = purchase price of
materials + freight ʹ purchase discounts + reasonable allowance for scrap and defective units
27
What are indirect material costs?
Indirect material costs = cost of materials that cannot readily be traced to outputs (e.g., rags,
lubricants, and small tools)
28
What are direct labor costs?
Direct labor costs = labor that can be readily traced to outputs = wages paid plus a reasonable
allowance for nonproductive time
29
What are indirect labor costs?
Indirect labor costs = labor costs that cannot be readily traced to outputs (i.e., they are
manufacturing support costs)
30
What is overhead?
All indirect costs for the manufacturer, including indirect materials, indirect labor, and other
indirect items
31
What are prime costs?
prime costs = Direct materials + Direct labor
32
What are conversion costs?
Conversion costs = Direct labor + Overhead
33
What are the four types of cost drivers?
o Activity-based
o Volume-based
o Structural (competitive positioning)
o Executional
34
What are the 3 core elements of financial results controls?
- Financial responsibility centers (apportioning accountability for financial results within the organization)
- Planning and budgeting systems (defining performance expectations and standards)
- Motivational contracts (defining the link between results and incentives)
35
What are revenue centers?
Revenue centers are groups in the organisation held accountable for generating revenues.
36
What are the 2 types of cost centers?
- Standard/engineered (causal relationship between inputs and outputs, which can be measured)
- Discretionary: inputs, outputs and their relationship is difficult to measure (ex. R&D,HR)
37
As a measure of performance, profit is ...
o Comprehensive
o Unobtrusive (the profit center manager makes the revenue/cost trade-offs)
38
What is transfer pricing?
The price at which products or services are transferred between profit centers within the same
firm
39
What are the principal types of transfer pricing methods?
- Market-based
- Full cost
- Full cost + markup
- Dual rate transfer
- Marginal cost
40
Describe the process of dual rate transfer pricing
o The selling PC is credited with the outside sales price
o The buying PC is charged the (marginal) cost of production only
o The difference is charged to a corporate account and eliminated at the time of financial
statement consolidation
41
Define budget
A budget is a detailed plan for the acquisition and use of financial and other resources over a
specific time period. It represents a plan for the future expressed in formal quantitative terms
42
What is capital budgeting?
Capital budgeting evaluates major projects and investments, such as new plants or equipment
43
What is operational budgeting?
Operational budgeting is a short-term plan on how you will operationalise your strategic
planning
44
What is a rolling budget?
A rolling, or continuous budget is a 12-month budget that is extended
or rolled forward by a month as soon as one-month elapses.
45
What are some negative behavioral implications of budgeting?
x Spending to budget
o Needlessly spending money in order to secure next year͛s budget
x Padding the budget
o Create slack in their budgets in order to give themselves leeway
x Creative Budgeting
o Deferring necessary expenditure until a new budget period
46
What are the 3 steps of budgeting?
- Planning
- Communicating
- Controlling
47
What are the 2 budgeting methods?
- Top-down
- Bottom-up (participative)
48
What are some advantages of participative budgeting?
x Individuals at all levels of the organization are recognized as members of the team whose views
and judgements are valued.
x The person in direct contact with an activity is in the best position to make budget estimates.
x People are more likely to work at fulfilling a budget that they have participated in setting.
x A self-imposed budget contains its own unique system of control.
49
What are some critiques of the budgeting process?
- Extremely time-consuming
- Key staff involved, and therefore a very expensive process
- will likely remain unchanged despite changes in the environment
- Managers are expected to reach their targets no matter what
- Centralization does not encourage entrepreneurship
- Much politics and game-playing
- Too much cost, not enough benefits
- Contradictory in nature (Objectives become targets for managers, affect rewards)
- Reaching targets can lead to risk-seeking, myopic and unwanted behavior ʹ General motors
50
What are the three elements of financial result controls?
- Financial responsibility centers
- Formal management process
- Motivational contracts
51
What are the main purposes of incentives?
- Information
- Motivation
- Attraction/retention of employees
- Non-control purposes (taxes)
52
What are the two bonus formulation approaches?
- Formulaically (the performance-reward link is explicit) alleviates bias or favoritism in assessing and rewarding performance
- Subjectively (allows performance to be evaluated more completely considering any of a number of
hard-to-quantify, but important, performance areas)
53
What are cut-offs?
Lower cut-off: limits to avoid paying bonuses for performance, which is considered mediocre or worse
Upper cut-off:
o To maintain vertical compensation equity
o To avoid the managers being unduly motivated to take actions to maximize bonus
payouts
o To avoid undeserved bonuses due to (one off) gains
o To alleviate the possibility of a faulty compensation plan design
54
What is the criteria for evaluating reward systems?
Rewards should be:
- valued
- clear
- timely
- durable
- reversible
- cost efficient
55
What are the two types of summary measures?
- Market measures
- Accounting measures
56
What are the measurement criteria that both market and accounting measures need to adhere to?
x Timely
x Precise
x Objective
x Congruent
x Cost effective
x Understandable
57
What is myopia?
Excessive short-term orientation resulting from a strong emphasis on meeting short-term profitability targets
58
What is meant by electronic sweatshops?
Electronic sweatshops refer to the use of controls like computer surveillance in the workplace. Key considerations include whether the use of these controls has been disclosed, if employees were involved in system establishment, and if these controls are used for monitoring both training and experienced employees.
59
What are examples of controls that are considered "too good"?
Examples include computer surveillance programs, cameras, and personal location devices, which are action controls. On one hand, they can be congruent, accurate, and timely; on the other hand, they may infringe on employees' right to autonomy.
60
61
What are the risks associated with earnings management?
If discovered, a firm may earn a reputation for reporting "low quality" earnings, users may discount the firm's claims, and it can create a gameplaying culture. Additionally, smoothed systems hinder early problem detection.
62
What is earnings management?
Earnings management involves taking actions to make short-term performance appear better than it actually is, with individuals knowingly engaging in actions that lack real long-term economic benefits.
63
How is ethics defined?
Ethics is defined as "a set of moral principles, especially ones relating to or affirming a specified group, field, or form of conduct" (Oxford Language Dictionary) and as "the discipline dealing with what is good and bad and with moral duty and obligation" (Merriam-Webster Dictionary).
64
How can ethical principles guide behavior in the workplace?
Ethical principles can provide a useful guide for defining how both employers and employees should behave. It involves considering the impact of actions on stakeholders such as shareholders, bondholders, creditors, the board of directors, management, employees, competitors, customers, suppliers, government, communities, and society at large.
65
What are some examples of ethical issues in business?
Examples include harassment and discrimination (addressed through cultural controls), health and safety in the workplace, whistleblowing or social media rants, ethics in accounting practices, non-disclosure, corporate espionage, and technology and privacy practices.
66
Why do companies have codes of conduct?
Most companies have codes of conduct to prevent ethical issues by defining what is ethical and what is not. Corporate codes often make ethical behavior explicit and include virtues such as integrity, loyalty, objectivity, confidentiality, and competence.
67
What role does the "tone at the top" play in promoting ethical behavior?
The "tone at the top" serves as a reinforcing mechanism, indicating that people follow the leader or CEO in terms of behavior. This tone is crucial in setting expectations and standards for ethical conduct within an organization.
68
Why are many important ethical issues not black or white?
Many ethical issues cannot be solely addressed by regulation. The determination of whether something is right or wrong cannot be reduced to its legality. A culture that encourages individuals to do the right thing, even when unobserved, is essential, as highlighted by Christine Lagarde, managing director at the International Monetary Fund (IMF).
69
What is the practice of creating budgetary slack, and what factors does it depend on?
Creating budgetary slack involves setting lower targets to achieve bonuses. It depends on the quality of performance measures, the rigidity of budget targets, employees' intentions (self-interest), superiors' awareness of the slack, superiors' encouragement of slack creation, whether the amount of slack is deemed "material," and whether the individual is bound by one or more explicit codes of professional conduct.
70
Define the fraud triangle
According to Albrecht, the fraud triangle states that “individuals are motivated to commit fraud when three elements come together: (1)
motivation (2) some perceived opportunity, and (3) some way to rationalize the fraud as not being inconsistent with one's values.”
71
What are the two major responsibilities of a business unit controller?
Management-Service Responsibility:
Involves actively helping business unit management in the decision-making process.
Requires active involvement in the local decision-making process.
Financial Reporting and Internal Control Responsibility:
Involves ensuring accurate financial information from the business unit.
Requires acting as a "policeman" or local guardian for the corporate office.
72
What happens to the priorities and loyalties of a business unit controller with a "solid line" relationship?
The job priorities and loyalties of a business unit controller change when the reporting relationship changes. A "solid line" relationship typically involves divided responsibilities and loyalties.
73
What are the characteristics of centralization and decentralization in the controllership function?
Centralization:
Solid-line with the corporate controller; Dotted-line with the business unit manager (staff-relationship).
Emphasis on financial control responsibility.
May be viewed as a "corporate spy" or HQ representative.
Decentralization:
Dotted-line with the corporate controller; Solid-line with the business unit manager.
Emphasis on management-service responsibility.
Often seen as a "business unit ally" or trusted assistant.
74
What factors influence the decision to centralize or decentralize the controllership function?
Corporate's desire to exercise "tight" control, implement uniform control systems, achieve economies of scale, and speed up the introduction of control changes or procedures influence the decision to centralize or decentralize.
75
What control does the corporate controller have over the business unit controllers?
The corporate controller has functional control, including developing control systems, prescribing rules/procedures, proposing new control techniques, and training controllers.
76
How can the controller function be overseen?
Internal auditors, audit committees, personnel/cultural controls, incentive systems that do not create temptation, and solid line reporting can be used to oversee the controller function.
77
What is an audit, and what are the types of audits?
An audit is a systematic process of obtaining and evaluating evidence, judging correspondence between objects and criteria, and communicating results to relevant users.
Types:
Financial Audits: Conducted by external auditors.
Compliance Audits: Ensure compliance with laws, rules, and administrative policies.
Performance Audits: Evaluate the performance of the company, its management, a department, or a specific activity, often including recommendations.
78
What role do internal auditors play in an organization?
The internal audit function operates in staff capacity, reporting high in the organization, typically to the controller or VP Finance. They provide an objective assessment of controls and financial reporting.
79
What are the major responsibilities of corporate and division controllers?
Management-Service Responsibility:
Involves assisting business unit management in the business decision-making process.
Oversight and Fiduciary:
Ensures that actions of everyone in the organization align with the best interests of the organization.
80
What roles do controllers play in corporate financial management?
- Design and Operation of Information and Control Systems
- Preparation of Financial Reports
- Analysis of Performance Reports
- Budget Planning
- Supervision of Internal Audit
- Performs operational audits.
- Develops personnel in the controller organization.
81
What is the role of the controller or the control department?
Design and Operation of Information and Control Systems:
Example: Supervision of all accounting records, both financial and managerial.
Financial Reporting:
Prepares financial reports for shareholders and external parties.
Performance Analysis:
Prepares and analyzes performance reports, aiding managers in interpretation.
Budget Consolidation:
Analyzes program and budget proposals, consolidating plans into an overall annual budget.
Supervision of Internal Audit:
Oversees internal audit and accounting control procedures to ensure information validity.
Operational Audits:
Conducts operational audits.
Personnel Development:
Develops personnel within the controller organization.
82
What does corporate governance encompass?
Corporate governance involves the sets of mechanisms and processes that ensure companies are directed and managed to create value for owners while fulfilling responsibilities to other stakeholders, such as employees, suppliers, and society at large.
83
What is an issue of using ROE as a KPI for manager compensation?
ROE (return on equity) measures induce managers to use debt financing (if they have financing
authority)
84
How are corporate governance systems and management control systems (MCS) related?
Corporate governance systems are slightly broader than MCS, focusing on controlling the behaviors of top management.
MCS takes the perspective of top management, ensuring proper behaviors of employees in the organization.
85
Why has interest in corporate governance increased?
Interest in corporate governance has surged due to major business scandals (e.g., Enron, WorldCom) and corporate malpractices. Regulatory responses include the U.S. Sarbanes-Oxley Act of 2002 and listing requirements by stock exchanges to strengthen corporate accountability
86
What is an issue of using ROA as a KPI for manager compensation?
ROA (return on assets) measures induce managers to lease assets (again, if they have authority
over such decisions)
87
What is the purpose of the Sarbanes-Oxley Act, and what are its key provisions?
Purpose: To improve transparency, timeliness, and the quality of financial reporting.
Key Provisions: Regulation of external audit and auditors, independence of boards, and stiffer penalties for fraud.
88
What impact did Section 404 of the Sarbanes-Oxley Act have on internal controls?
Before the Act: Good internal controls were considered good business practice.
After the Act: Good internal controls became a legal requirement, with managers and auditors required to examine various controls over financial reporting.
89
What control responsibilities do boards of directors have?
Safeguard Equity Investors' Interests: Ensure management seeks to maximize shareholder value.
Protect Stakeholders' Interests: Ensure employees act legally and socially responsibly.
90
What is the primary objective of for-profit organizations, and what constraints do they face?
Objective: Maximize shareholder value, subject to constraints such as compliance with laws and concerns for employees, customers, and other stakeholders.
Note: Profit remains the dominant and primary objective in for-profit organizations.
91
What characterizes C corporations in terms of ownership and control?
Ownership: Investor-owned corporations with owners exercising control by voting for the board of directors.
Control: Board of directors has control over top management, and management is responsible for the firm's profitability.
92
How do B corporations differ from C corporations, and what flexibility do they have?
Difference: B corporations actively engage with a range of stakeholders and set goals related to environmental and social aspects.
Flexibility: B corporations allow the board and managers to sacrifice shareholder value for the greater good under specified conditions.
93
What characterizes not-for-profit organizations in terms of ownership and control?
Ownership: No shareholders, and no individual or group has ownership rights over residual earnings.
Control: Exercised by a Board of Trustees.
94
What are the diverse types of services provided by non-for-profit organizations?
Non-for-profits provide various public services, including charitable, religious, scientific, educational, political, and those operated for mutual benefit.
95
What challenges do management control systems face in not-for-profit organizations?
Challenges: Goal ambiguity and conflict arise as various constituencies may enforce conflicting goals. Organizations are directed from multiple sources, making it difficult to design and assess the effectiveness of management control systems
96
Why is measuring performance challenging in not-for-profit organizations?
Challenges: The degree of achievement of the overall goal (provision of quality service) is challenging to measure accurately in financial terms. Results controls, responsibility centers, and comparing performances of dissimilar subunits are difficult.
97
Who often constitutes the governing body of not-for-profit organizations, and how does this impact management control systems?
Governing Body: Many overseers (donors, government entities, alumni, etc.) often constitute the governing body.
Impact: Extra demands on management control systems, including detailed project proposals, action reports, and lengthy planning and budgeting processes.
98
How do resources obtained by not-for-profit organizations differ, and what extra control is required?
Differences: Resources obtained are donated or granted, often with restrictions to specific purposes.
Control: Managers must ensure that these resources are used for their intended purposes, demanding extra control.
99
What are characteristics of employee compensation and commitment in not-for-profit organizations?
Compensation: Not always competitive, impacting employee quality.
Commitment: Employees are often highly committed, and control can be achieved through personnel and cultural controls.
100
According to the controllability principle, what should employees be held accountable for?
Employees should be held accountable only for what they alone can control or
Employees should be held accountable only for what they have significant influence over.
101
Provide examples of uncontrollable factors mentioned in the context.
Financial crisis
Explosion
Natural disaster
Virus (e.g., COVID)
102
Why is it important to adjust for uncontrollable factors?
Uncontrollable factors distort performance measures and evaluations.
Uncontrollable risks are best borne by shareholders who can diversify them, avoiding the need for managers to be compensated or engage in undesirable actions.
103
What considerations should be taken into account when making adjustments for uncontrollable factors?
Purpose(s) for adjustments (e.g., salary raises, incentive pay, job retention)
Types of uncontrollable factors (e.g., acts of nature, economic and competitive factors, interdependencies)
Decision-makers for adjustments (e.g., immediate superior, upper management, board of directors, automatic rules)
Methods for adjustments (e.g., variance analysis, flexible performance targets, relative performance evaluations, subjective judgments)
104
What are other choices and decisions related to adjustments for uncontrollable factors?
Total or partial adjustments?
Adjustments for negative uncontrollable factors only or in both directions (positive and negative)?
105
How should companies decide whether to make adjustments for uncontrollable factors?
Weigh costs vs. benefits.
Consider factors such as total uncontrollability, lack of manager response expectation, and objective calculability of the effect.
106
What are the benefits of making adjustments for uncontrollable factors?
More accurate performance evaluations
Less manager frustration; better motivation
Better decision-making; less "noise" in performance measures
Lower compensation costs in the long run (less risk, less turnover)
107
If a company wants managers to respond to an uncontrollable factor, what approach should be taken?
Avoid completely buffering managers from the effects.
Consider partial adjustments to encourage responsiveness.
108
What challenges arise when the effect of an uncontrollable factor can only be estimated, or if it is partially uncontrollable?
Enter subjectivity, introducing evaluation bias and the creation of an excuse culture.
Consider not making adjustments if performance measures provide some information about the manager's performance.
109
What is the definition of a performance measurement system?
A performance measurement system is an indicator used to assess how well or poorly a company or business is performing.
110
What are some ways to cope with myopia?
1. Reduce pressure for short-term profit
2. Control investments with preaction reviews
3. Extend the measurement horizon
4. Measure changes in value directly
5. Improve the accounting measures
6. Measure a set of value drivers
111
112
What are the key roles of performance management within an organization?
- Motivate employees to help achieve strategic objectives
- Evaluate the performance of managers, employees
- Help allocate resources to productive opportunities
- Provide feedback
113
What is the definition of the balanced scorecard (BSC)?
The BSC is a strategic management system that provides a set of measures giving top managers a comprehensive view of the business.
114
Name some benefits associated with the balanced scorecard.
Puts strategy and vision at the center
Aligns with the organization's mission and vision
Addresses information overload
Guards against suboptimization
Requires managers to translate general mission statements into specific measures for the four perspectives
115
What are the four perspectives derived from an organization's mission, vision, and strategy in the balanced scorecard?
Financial perspective
Customer perspective
Process perspective
Learning and growth perspective
116
What are objectives in the balanced scorecard, and what do they include?
Concise statements articulating what the organization hopes to accomplish
Action phrases telling the story of the strategy through cause-and-effect relationships
Typical objectives in each perspective (e.g., financial, customer, process, learning and growth)
117
What is the purpose of measures in the balanced scorecard?
Provide specificity and reduce ambiguity in word statements
Give employees a clear focus for improvement efforts
Managers select targets for each measure once objectives are translated into measures
118
What are performance indicators (KPIs), and what do targets establish in the BSC?
KPIs are metrics, and all KPIs are metrics, but not all metrics are KPIs.
Targets establish the level of performance or rate of improvement required for a measure.
119
What characteristics make a performance measure system balanced?
Gives policy and objective-related information to the board of directors.
Balanced between financial and non-financial measures.
Balanced between short-term and long-term measures.
Incorporates leading and lagging measures.
120
What is the ultimate objective for profit-seeking companies in the financial perspective of the BSC?
The ultimate objective is improved financial performance, indicating whether the company's strategy, implementation, and execution contribute to bottom-line improvement.
121
What are the measures in the customer perspective of the BSC?
Measures include achieving customer satisfaction and loyalty, acquiring new customers, increasing market share, and enhancing customer profitability.
122
What is the role of the process perspective in the BSC?
Identifies critical processes for achieving the value proposition for customers and productivity improvements for financial objectives.
123
What are the objectives in the learning and growth perspective, and what areas do they cover?
Objectives cover human resources, information technology, organization culture and alignment.
Human resources include strategic competency availability.
Information technology includes strategic information availability.
Organization culture and alignment include culture, climate, goal alignment, and knowledge sharing.
124
What actions should an organization take to realize the benefits of the balanced scorecard?
Communicate the strategy to all employees and organizational units
Align employees' individual objectives and incentives to successful strategy implementation
Integrate the strategy with ongoing management processes
125
What are some barriers to the effective use of the balanced scorecard?
Lack of senior management commitment
Scorecard responsibilities not filtering down
Overdesigning the solution or treating the scorecard as a one-time event
Treating the scorecard as a systems or consulting project
126
What are potential pitfalls and criticisms associated with the balanced scorecard?
Lack of a well-defined strategy
Too much focus on lagging measures
Use of generic metrics
Risk of self-serving managers aiming for desired results for personal rewards.
127
