Management Decisions and Control Flashcards
Week 1:
What is management accounting?
Identify four differences between management accounting and financial accounting
The processes and techniques that focus on the effective and efficient use of organisational resources to support managers in their tasks of enhancing both customer value and shareholder value
Differences:
- MA used internally, FA used externally
- MA is not regulated, FA is heavily regulated
- MA uses financial and non financial data drawn from many sources, FA uses financial data drawn from organisations core transaction-based accounting system
- MA reports past, current, and future oriented information, FA reports past information.
Week 1:
Why do organisations need management accounting?
management accounting has a two-way role of importance. It works downstream to inform, direct and motivate employees. And it works upstream to inform managers about the operations of the business.
Week 1:
Why do managers need management accounting information to control? What does this mean?
Need for information = Information flows downwards the hierarchy and up the hierarchy.
Down = information flows from managers to direct, inform and motivate employees.
Up = information flows from employees to inform managers about the operations of the business
Control = managers utilise this information to control employee performance
Week 2:
What is performance?
How is performance different from measurement?
Performance = the achievement of the organisations objectives = take the company statement and ask the question “given this statement, what do we base our performance on?” e.g. market share, quality, product range, etc.
Performance vs Measurement = measurement allows us to ascertain how we are performing. Performance allows us to ascertain how we meet our objective
Week 2:
What is corporate strategy?
What is competitive strategy?
Corporate strategy = How best to finance and structure the organisation = single business unit or multiple business units = which model has the lowest transaction costs?
Three options exist:
1. Single business
2. Multi business - Portfolio (diversified industries)
3. Multi business - Leverage (same industry)
Competitive strategy = the way a business competes within its chosen market = cost leadership, differentiation and niche (focus).
Week 2:
What are the stages of the cybernetic loop and what is its purpose?
Cybernetic loop = the cycle of implementing and correcting performance measurements
- Establish metric standards or targets (planning stage)
- Measure actual performance
- Compare actual to standard
- Evaluate variance
- Take corrective action
Cybernetic loop use = for feedback on performance
Week 2
What are the design criteria for a good performance measure?
- Validity = the extent to which a measure captures what is intended
- Reliability = the extent of accuracy, objectivity and precision of the measurement
- Clarity = the extent to which the measure (and measured output) is easy to understand, without vagueness in interpretation
- Cost efficiency = the cost of collecting and measuring performance information does not outweigh the information benefits
- Timeliness = the extent to which information arrives in time for analysis and action to be taken
- Access = the extent to which the measurer has the right to access the required performance information
- Controllability = the extent to which you can improve or reduce the value of the measured output through action
- Cannot be gamed = gaming when a measure alters the behavioural patterns of employees (agency costs)
- Cannot be manipulated = manipulation is when managers or employees influence a measure so that it no longer reflects what was originally intended
Week 2
What are the five traps of performance measurement
Trap 1 = Looking only at your own company = looking at other companies will help you define competitive priorities and connect executive compensation to relative rather than absolute performance
Trap 2 = Looking at the past
Trap 3 = Putting your faith in numbers
Trap 4 = Gaming metrics = learning to play the game associated with the metric = expending less effort whilst attaining a more favourable result.
Trap 5 = sticking to your numbers too long = need to change metrics as your business develops
Week 3
What are some the commonly used Financial performance measures?
Profit and profit margin Revenue growth Price and cost variances (revenue, labour, material, overhead) ROI, ROE, ROA Asset turnover NPV
Week 3
What are the associated advantages and disadvantages of decentralisation?
Advantages:
- Conserve top-managers time for use on strategic matters (don’t have to fuss with the smaller issues)
- More timely responses (information doesn’t need to flow up the hierarchy and then back down)
- Develop expertise (instead of one person with a good understanding of everything, have several people with expertise in their field)
- Training
- Motivation (provide sense of a higher purpose and motivate workers)
Disadvantages:
- Narrows focus on own units goals
- Potential duplication of tasks
- Minimised coordination between units
- Potential loss of goal congruence
Week 3
Briefly explain responsibility accounting?
Responsibility accounting = the practice of holding managers responsible for the activities and performance of their area of business. The type of responsibility centre should reflect the activities and decisions the manager supervises. Four types of centre exist: (appropriate performance measures have been listed too)
- Cost centre = cost variances, total labour costs, actual vs budgeted costs
- Revenue centre = sales volume, actual vs budgeted sales
- Profit centre = profit margin, profit variance, profit today vs profit last year
- Investment centre = ROI, ROE, ROCE, ROA
Week 3
What is the controllability principle?
What differentiates cost, revenue and profit centres from an investment centre in terms of what is not controlled by management?
Controllability principle = We should only hold employees accountable for what they control
Cost, profit, revenue VS investment centre = common to cost, profit, and revenue centres is that investment in inventory and fixed assets is not controlled by the centre manager.
Week 3
What are the problems with measuring financial performance?
Problems:
- Too narrow
- only measures one aspect of performance
- does not capture quality, speed, sustainability
- does not measure what creates value
- incomplete reflection of managerial performance - Too backwards looking
- summarises historical outcomes - Too late
- only available at the end of the period (no early-warnings and does not measure inputs or activities) - Too broad
- aggregate measures capture everything and so reflect results of non-controllable factors AND requires approximations (particularly overheads) - Too financial
- not intuitive for many managers
- not meaningful to employees day-to-day activities - Motivate gaming and manipulation
Week 3
What are three ways in which transfer prices may be determined?
What is the optimal way for determining a transfer price?
Who benefits from the price set for transfer prices, the company, buyer, or supplier?
Determining price:
- Market based prices
- Cost plus prices
- Negotiated prices
Optimal determination = transfer price = additional outlay cost per unit to the supplying unit + opportunity cost per unit to the supplying unit
Who benefits:
The company will always have a neutral stance as long as the transfer price is below what could be sourced elsewhere. i.e. the company looses profit overall if the transfer price is higher than the market price.
In regards to buyers and suppliers it is important to realise that each department will have financial goals. If the buyer can obtain goods internally at a price cheaper than they could externally than this will make their cost figures look good. Conversely, the supplier would want to sell at the highest possible price. Therefore it is important to consider excess (or unused) capacity. If the supplier is able to produce more goods then it always should as long as it can achieve a revenue greater than the associated costs. However if the supplier has already met its capacity then it should not sacrifice selling goods at market prices simply to sell goods at a lower price to an internal department.
Week 4
Outline the advantages of non-financial measures as compared with financial measures
1: Non-financial measures may emphasise strategy
2: Non-financial measures can be the drivers of future financial performance
3: They are easier to query and more actionable (easily investigated)
4: May be more timely (some measures can be reported very quickly and lead to immediate correction of problem areas)
5: They are more understandable and easier to relate to (compare ‘reject per 100 units’ vs ‘monthly variable overhead cost variance percentage’)
Week 4
What is the difference between a lead measure and a lag measure?
Are financial measures mostly lag or lead measures?
What do non-financial measures commonly capture (3)?
Lead (Performance drivers) = are you likely to achieve the goal? = Measure critical INPUTS and PROCESSES that drive outputs = provide information that is actionable and manageable = early-warning measures
Lag (Output measures)= Have you achieved the goal? = Measure OUTPUTS = show achievement (or not) of objectives
Financial measures = mostly lag measures (profit, % of cost reduction, etc.) However, can be a lead indicator (cost per product) = most non-financial measures are lead indicators
Non-financial measures capture:
- Customer performance (Market share, customer acquisition, customer retention, customer satisfaction, customer profitability)
- Operational process performance
- Long-term value-driver performance
Week 4:
What are 5 metrics we can use to measure customer performance for an organisation?
- Market share = how many customers organisation has captured
- Customer acquisition = the rate at which organisation attracts and wins new customers
- Customer retention = the rate at which organisation retains customers
- Customer satisfaction = self-explanatory
- Customer profitability = the profit attributable to a customer or customer group = can measure by distinguishing between high cost customers and low cost customers e.g. a low cost customer requires standard products and is satisfied with 3 day delivery, a high-cost customer requires customised products and overnight delivery.
Week 4:
What are 5 metrics we can use to measure Internal processes?
- Quality = Degree of meeting product/service expectations
- Productivity = ratio of output to input
- Time and Timeliness = time it takes to complete a process = measured in absolute terms (average, maximum, minimum) or as a ratio (waiting time/ total time to fulfil order)
- Innovation
- Improvement
Week 4:
What are the sources of long-term growth and improvement in terms of organisational inputs?
- Information capital = technology and information systems
- Physical capital = machines, buildings, equipment
- Social and organisational capital = workplace culture, relationships with stakeholders
- Human capital = people, talent, knowledge
Week 4:
What are the potential problems of measuring non-financial performance
What is the suggested fix?
- May not link measures to organisational strategy = if not tailoring choice to organisation or if adopting common measures = Solution would be to establish causal chains
- Not validating the links = ensuring a cause and effect relationship between inputs, activities and outputs
- May measure incorrectly = inconsistency, use of wrong information (invalid or unreliable)
- May set incorrect targets = therefore must test and revise targets over time
Fix = Develop a causal model for the chosen measures. Monitor and asses all relevant data and turn it into information. Continually refine the model. And take action based on findings.
Week 5
What is a performance management system?
PMS = a set of processes that includes the collection, analysis and reporting of actual performance, usually compared to a target. A collection of measures does not equal a system. We also need to know who is responsible, how often we should measure, how should we present findings, etc.
Week 5
Why are there trade-offs when considering what to measure in a PMS?
trade-off = the result of factors such as information overload, costs, usefulness. You don’t want to measure everything as it will be costly and time consuming. Additionally, it will be in-actionable as you cannot act on all factors given time constraints. It is more appropriate to have a select few appropriate measures than many standardised measures.
Week 5:
What is the Balances Scorecard? (BSC)
What are the key characteristics of the BSC (4)? Note: these characteristics are relevant to all forms of PMS
Under the Financial perspective of the BSC why is there typically no ‘Initiative’?
BSC = A tool that translates an organisation’s mission, objectives and strategies into performance measures for each key strategic area of the business = used to implement strategy and to monitor and manage organisational performance
Key characteristics:
1: Conforms to a particular design and structure = uses four perspectives each with their own objectives, measures, targets, and initiatives. HOWEVER, the four perspectives can be altered to include more/less depending on strategy and goal (think about non-profit BSC’s).
2: Strategic alignment = selection of measures is driven by vision and strategy of organisation (the four perspectives are linked to
3: Balance of measures = use of lead/lag, financial/non-financial, subjective/objective, and short/long term measures
4: Cause and effect relationships (most important) = logical and empirical relations as well as Heuristic relations (managers expectations)
Financial perspective no initiative = because initiatives are implemented through the other perspectives to achieve financial results.
Week 5:
What are the four perspectives of the BSC?
What may one argue is the predominant appeal of the BSC?
- Financial perspective: To succeed financially, how should we appear to our shareholders. Central objective is to increase shareholder value = profitability measures
- Customer perspective: To achieve our vision, how should we appear to our customers = market share, no. of complaints, etc.
- Internal business perspective: To satisfy our shareholders and customers, what business processes must we excel at = on time delivery, quality, lead times, waste, etc.
- Innovation and learning perspective: To achieve our vision, how will we sustain our ability to change and improve. Centres on establishing what skills, capabilities, technology and corporate climate are needed to support the overall strategy = employee skills, training, employee satisfaction and retention, etc.
Predominant appeal = Traditional measurement systems specify the actions they want employees to take and then measure to see whether the employees have in fact taken those actions (control). The BSC, on the other hand, puts strategy and vision, instead of control, at the forefront and positions a company to be what it is trying to become.
Ultimately the BSC is forward looking
Week 5:
What is a strategy map in relation to a BSC?
What are the two important functions of a strategy map?
Strategy map = graphical representation of main objectives (no measures) within a BSC = shows causal linkages between measures and perspectives. Starts with base business attributes or qualities such as sales skills. Then flows to what this helps the business with. Then to how this improves the business. And then to the final performance. For example: Sales Skills -> Acquire new customers -> Corporate sales -> Market Share
Function 1: Communicate the strategy to managers and employees = what is the desired outcome and how can we achieve it.
Function 2: Set out cause-and-effect relationships that form an ‘action plan’ for implementing strategy and evaluating performance
Week 5:
How do we evaluate a PMS?
We evaluate a PMS in relation to the key characteristics of a PMS ( conformity to particular design and structure, strategic alignment, balance of measures, cause-and-effect linkages) = is the system coherent, complete and clear?
1: How well does it conform to the basic structure. layout or design (this only applies to ‘off-the-shelf systems such as Du Pont, BSC, Performance pyramid)
2: How closely does the system align and represent the organisations strategy? How customised is it? Is it too vague? Does it capture key strategic drivers and dimensions of performance?
3: Does the system achieve balance between lead/lag, financial/non-financial, subjective/objective, and short/long term measures?
4: Are there cause-and-effect linkages between the measures (or objectives) and how well designed are the measures?
Week 5:
True or false: BSC provies holistic picture of an organisations performance?
True or False: BSC always contains Kaplan and Nortons perspectives?
Holistic picture = False, not an entirely holistic picture.
Kaplan and Norton perspectives: False, this is not always the case. Many BSC are tailored with varying perspectives.
Week 6:
What does planning essentially do?
What are the reasons for planning?
Planning = Connects an organisations strategy with action = the process of deciding about goals of an organisation as well as the means to attain those goals. = decision-making in advance
Planning reasons:
1: Provides information
2: Identifies information gaps
3: Clarifies assumptions of decisions
4: Helps coordinate activities and manage inter-dependencies (align goals of different functional areas of an organisation and identify and manage inter-dependencies in work activities of different groups/individuals)
5: Directs effort and behaviour (set out goals/expectations and standards/targets and the behaviour expected for achievement)
Week 6:
What is a budget?
What budgets are included in the master budget?
Budget = a detailed plan summarising the financial consequences of an organisations operating activities for a specific future time period
Master budget:
- Operating budgets = Sales budget, cost budget, expenses budget
- Cash budget (cash receipts / payments
- Capital expenditure budget (cash inflows/outflows) (investment/returns)
- Project budgets = Core operating projects (building construction…) And Operating process support projects (New IT system…)
Week 6:
What is an operating budget?
From what does an operating budget derive its value for an organisation?
What are budgets used for? (6)
Operating budget = Specifies how operations will be carried out to meet the forecast sales demand = Sales budget, cost budget, expense budget
Operating budget value = comes from the fact that budgeting forces management to examine in detail both the general economic situation of which the company is a part and the economic interrelationships among all the company’s various activities (Summary: force analysis of economic environment and economic interrelationships of company activities)
Budgets are used to:
- Express a plan of action in financial terms
- Facilitate communication and coordination
- Allocate resources
- Set performance targets and standards
- Evaluate performance and provide motivation
- Learn and educate
