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PLANNING ANDFINANCIAL CONTROL
PLANNING ANDFINANCIAL CONTROL
• identify the key activities of an organization’s planning process.
• discuss the importance and interrelationship of primary and secondary organization objectives
• explain the nature of different forms of organization control
• understand the role of the balanced scorecard in organization control
• recognize common forms of responsibility centers
• understand the use of return on investment and economic value added as financial control tools
• identify the limitations of using financial controls
• identify the key activities of an organization’s planning process.
• discuss the importance and interrelationship of primary and secondary organization objectives
• explain the nature of different forms of organization control
• understand the role of the balanced scorecard in organization control
• recognize common forms of responsibility centers
• understand the use of return on investment and economic value added as financial control tools
• identify the limitations of using financial controls
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Dekke
r, Ltd.The Organization as a System
of Interrelated ElementsThe Organization as a System
of Interrelated Elements
Aspects of Organization PlanningAspects of Organization Planning
Economic factors
Changes within the firm
Consumer tastes
Industry trends
Technological changes
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Business ProcessesWhat business
processes are the value drivers?
Organization Learning
Are we able to sustain innovation, change and improvement
Customer Perspective
How do we look to our customers?
Financial Perspective
How do we look to our shareholders?
Vision &
Strategy
The Organization as a System of Interrelated Elements
The Organization as a System of Interrelated Elements
Aspects of Organization PlanningAspects of Organization Planning
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Dekke
r, Ltd.The Organization as a System
of Interrelated ElementsThe Organization as a System
of Interrelated Elements
Aspects of Organization PlanningAspects of Organization Planning
StakeholdersThe individuals, groups of individuals and institutions that
define an organization’s success or affect the organization’s ability to achieve its objectives
StakeholdersThe individuals, groups of individuals and institutions that
define an organization’s success or affect the organization’s ability to achieve its objectives
Strategy ConsiderationsIdentifying the alternatives the organization might use to
compete for customersEvaluating those alternatives relative to the capabilities and
expectations of the stakeholders
Strategy ConsiderationsIdentifying the alternatives the organization might use to
compete for customersEvaluating those alternatives relative to the capabilities and
expectations of the stakeholders
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DecentralizationDecentralization
C orpora te O rgan iza tion C hart
C ontro ller T rea surer V ice PresidentProduction
Vice PresidentSa les
President
B oa rd of D irectors
Stockholders
Decentralizatio
n
Decision–makingDecentralization
Decision–making
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Dekke
r, Ltd.Applying the ConceptsApplying the Concepts
Exercise #1
Turn to page 495 and work Problem 10-52.
Exercise #1
Turn to page 495 and work Problem 10-52.
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Linkage Example
Corporate
VPManufacturin
g
Plant Manager
DepartmentManager
ProcessDrivers
Return on Assets
Inventory days
Output/ equipment
$Output/square foot occupied
Manufacture cycle time
Finished goods inventory days
Days vendor lead time
Machine downtime
Percentage good output/total output
Number unplanned schedule changes
Defective subassembly
Parts availability Wait on QC
No manpower
Changeover times
Power failure
11-17 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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Mission identifies organization’s stakeholders and broad objectives
Objectives specify specific performance goals sought over the next 5 to 10 years
Strategies specify the organization’s form,
resource allocations, and broad business decisions used to seek objectives
Observations and measurement of short-term performance determine whether the organization is
on track to achieve its long-term objectives
Planningand
DecisionMaking
Control
11-23 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
Planning, Decision Making, and Control
Planning, Decision Making, and Control
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Element Task Control Results Control
Organization environment Stable ChangingControl question Were rules followed? Were objectives achieved?Locus of responsibility Top down Bottom upEmployee role Follow rules Achieve stated objectivesRisk level High Low
11-26 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
Task and Results Control SummaryTask and Results Control Summary
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Organization Level and Measurement Focus
Lower production workers, sales staff, customer relations staff
Performance Measurement Type
OrganizationLevel
Major Responsibility
Monitor and improve the operations of
existing systems to meet short-term
goals in cost containment, quality, and
response time
Measures of short-term operating
performance that include both output and outcome measures such as yield, productivity, and on-time delivery tat
reflect the operations of a single unit in the organization.
11-29 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
Task and Results Control SummaryTask and Results Control Summary
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Organization Level and Measurement Focus
11-29 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
Task and Results Control SummaryTask and Results Control Summary
Performance Measurement Type
A mix of operating measures that include both output and outcome measures and reflect how well units are working together to meet stakeholder requirements (system response time, system quality, and rate of new product introduction) and financial measures (cost per unit, productivity, or profit margin) that compare performance to competitors to evaluate the efficacy of the systems the organization has in place
Major Responsibility
Coordinate existing systems and develop new ones to achieve intermediate-term performance on critical success factors
Organization Level
Middle supervisors and managers
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Organization Level and Measurement Focus
11-29 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
Task and Results Control SummaryTask and Results Control Summary
Performance Measurement Type
Major ResponsibilityOrganization Level
Aggregated measures of outcome performance, such as return on investment, number of safety incidents, rate of new product introduction that reflects senior level employees’ responsibility for meeting the organization’s commitment to its stakeholders
Identify opportunities to develop new markets
Upper vice presidents,presidents
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APRJAN FEB MAR MAY JUN JUL SEP OCT NOV DECAUG
Event
Feedforward Control
Concurrent Control
Feedback or Reactive Control
11-32 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
Timing of ControlTiming of Control
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Types of Control SystemsTypes of Control Systems
Task Control - setting rules and ensuring that they are followed
Task Control - setting rules and ensuring that they are followed
Results Control - specifying what is important in the organization and
letting workers decide how best to do the job
Results Control - specifying what is important in the organization and
letting workers decide how best to do the job
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Problems with Using Results Control
Problems with Using Results Control
Has the causal link between secondary results and primary results been identified?
Has the causal link between secondary results and primary results been identified?
Can organizations measure the right thing?Can organizations measure the right thing?
Is it possible to associate a given result with a given person or decision?
Is it possible to associate a given result with a given person or decision?
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The Focus of Organization Learning
The Focus of Organization Learning
How do organization processes work?How do existing organization process contribute to the organization’s secondary objectives?How do the organization’s secondary objectives contribute to the achieving of its primary objectives?
How do organization processes work?How do existing organization process contribute to the organization’s secondary objectives?How do the organization’s secondary objectives contribute to the achieving of its primary objectives?
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Continuous ImprovementContinuous Improvement
Adjustments to existing processes that occur to make them more effective and efficient
Adjustments to existing processes that occur to make them more effective and efficient
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Re-engineeringRe-engineering
The development and implementation of new processes to
replace old processes in order to improve performance in achieving
the organization’s objectives
The development and implementation of new processes to
replace old processes in order to improve performance in achieving
the organization’s objectives
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Balanced ScorecardBalanced Scorecard
A set of performance targets and an approach to performance measurement that stresses meeting all the organization’s objectives relating to both its primary and secondary objectives - hence the balance
A set of performance targets and an approach to performance measurement that stresses meeting all the organization’s objectives relating to both its primary and secondary objectives - hence the balance
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Balanced Business Scorecard
Business Processes
What business processes are the
value drivers?
Organization Learning
Are we able to sustain innovation, change and improvement
Customer Perspective
How do we look to our customers?
Financial Perspective
How do we look to our shareholders?
Vision & Strategy
11-41 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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Implementation of a Balanced ScorecardImplementation of a Balanced Scorecard
Management must define the organization’s primary objectivesManagement must define the organization’s primary objectives
1. 1.
2. 2. The organization must understand how stakeholders and processes contribute to its primary objectives
The organization must understand how stakeholders and processes contribute to its primary objectives
3. 3. The organization must develop a set of secondary objectives that are the drivers of performance on primary objectives
The organization must develop a set of secondary objectives that are the drivers of performance on primary objectives
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The organization must develop a set of measures to monitor performance on both primary and secondary objectives
The organization must develop a set of measures to monitor performance on both primary and secondary objectives
4. 4.
Implementation of a Balanced ScorecardImplementation of a Balanced Scorecard
5. 5. The organization must develop a set of processes, along with their attendant implicit and explicit contracts with stakeholders, to achieve those primary objectives
The organization must develop a set of processes, along with their attendant implicit and explicit contracts with stakeholders, to achieve those primary objectives
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The organization must make specific and, therefore, public statements about its beliefs concerning how processes create results
The organization must make specific and, therefore, public statements about its beliefs concerning how processes create results
6. 6.
Implementation of a Balanced ScorecardImplementation of a Balanced Scorecard
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A Balanced Scorecard Provides:A Balanced Scorecard Provides:
A method for the organization to systematically consider what it should do to develop an internally consistent and comprehensive system of planning and control and . . .
A method for the organization to systematically consider what it should do to develop an internally consistent and comprehensive system of planning and control and . . .
a basis for understanding the difference between successful and unsuccessful organizations
a basis for understanding the difference between successful and unsuccessful organizations
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Centralized Organizations
Organizations which reserve most of the decision-making power for senior executives. Works effectively in organizations with stable environments.
Organizations which reserve most of the decision-making power for senior executives. Works effectively in organizations with stable environments.
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Decentralized OrganizationsDecentralized Organizations
Organizations which delegate a good deal of the decision-making authority to lower-level managers. Effective in environments requiring quick responses to change.
Organizations which delegate a good deal of the decision-making authority to lower-level managers. Effective in environments requiring quick responses to change.
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Conditions for Effective Decentralization
Conditions for Effective Decentralization
Employees must be given, and accept, the authority and responsibility to make decisions
Employees must have the training and skills they need to accept the decision-making responsibility
The organization must have a system in place that guides and coordinates the activities of decentralized decision makers
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Operations ControlOperations Control
Focuses on finding the best operating decisionsFocuses on finding the best operating decisions
Financial ControlFinancial Control
Focuses on an overall assessment of how well operations control is working to improve financial performance
Focuses on an overall assessment of how well operations control is working to improve financial performance
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Dekke
r, Ltd.Responsibility CenterResponsibility Center
An organization unit for which a manager is made responsibleAn organization unit for which a manager is made responsible
Responsibility Centers and Small Businesses Similarities
Responsibility Centers and Small Businesses Similarities
• The manager is asked to run the center
• The center’s manager and supervisor establish specific and measurable goals for the responsibility center
• The goals should promote the long-term interest of the organization
• The manager is asked to run the center
• The center’s manager and supervisor establish specific and measurable goals for the responsibility center
• The goals should promote the long-term interest of the organization
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Cost CenterRevenue Center
Profit CenterInvestment Center
Cost CenterRevenue Center
Profit CenterInvestment Center
COST CENTERA responsibility center whose employees control costs but do not control its revenues or investment level
COST CENTERA responsibility center whose employees control costs but do not control its revenues or investment level
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Moncton Carpet ProductsMaster Budget
Product 1 Product 2 Product 3 Product 4 Totals
Units made 245,000 385,000 636,000 1,250,000 Units per batch 500 2,500 1,500 5,000 Number of batches 490 154 424 250Cost per unit 5.40 3.20 4.25 1.45 Cost per batch 325.00 680.00 400.00 135.00
Unit-related costs 1,323,000 1,232,000 2,703,000 1,812,500 7,070,500 Batch-related costs 159,250 104,720 169,600 33,750 467,320 Product-sustaining costs 125,000
$
$
$ $ $ 168,000
$ $
$ $ $ 256,000
$ $
$
$ $ 355,000
$ $
$ $
$ 904,000 Facility-sustaining costs 1,450,000
$
$ $
$ $9,891,820Total costs
12-19 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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Moncton Carpet ProductsActual Results
$
$9,978,050
$ $
$ $
Product 1 Product 2 Product 3 Product 4 Totals
Units made 297,000 345,000 675,000 960,000 Units per batch 600 2,300 1,800 6,000 Number of batches 495 150 375 160Cost per unit $5.43 3.18 4.33 1.40Cost per batch 335.00 670.00 387.00 144.00
Unit-related costs 1,612,710 1,097,100 2,922,750 1,344,000 6,976,560 Batch-related costs 164,820 100,500 145,125 22,896 433,341 Product-sustaining costs
$
133,000
$ $ $ 163,000
$
$ $ $ 259,000
$
$ $ 362,000
$
$ $
$ 917,000 Facility-sustaining costs 1,650,000
$
$ $
$ Total costs
12-20 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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Variances are differences between actual and
estimated costs and are a necessary step for managers who are
attempting to understand why a difference occurred
Variances are differences between actual and
estimated costs and are a necessary step for managers who are
attempting to understand why a difference occurred
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Favorable/Unfavorable Variances
Favorable/Unfavorable Variances
F Favorable variances signify that actual costs were less than estimated costs -- shown as negative numbers
U Unfavorable variances signify that actual costs were greater than estimated costs -- shown as positive numbers
F Favorable variances signify that actual costs were less than estimated costs -- shown as negative numbers
U Unfavorable variances signify that actual costs were greater than estimated costs -- shown as positive numbers
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Moncton Carpet ProductsSimple Cost Analysis
Master ActualBudget Variance Results
Unit-related costsProduct 1 $ 1,323,000 278,850 $ 1,612,710Product 2 1,232,000 (134,900) 1,097,100 Product 3 2,703,000 219,750 2,922,750 Product 4 1,812,500 (482,500) 1,344,000 Total $ 7,070,500 (118,800) $ 6,976,560
Batch-related costsProduct 1 $ 159,250 5,570 $ 165,825Product 2 104,720 (4,220) 100,500 Product 3 169,600 (24,475) 145,125 Product 4 33,750 (10,854) 23,040 Total $ 467,320 (33,979) $ 434,490
Product-sustaining costs Product 1 $ 125,000 8,000 $ 133,000
Product 2 168,000 (5,000) 163,000 Product 3 256,000 3,000 259,000 Product 4 355,000 7,000 362,000 Total $ 904,000 $ 13,000 $ 917,000
Facility-sustaining costs $ 1,450,000 $ 200,000 $ 1,650,000 Total costs $ 9,891,820 $ 60,221 $ 9,978,050
12-23 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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Dekke
r, Ltd.Flexible BudgetFlexible Budget
A forecast of what expenses should have been, given
the actual volume and mix of production and sales.
A forecast of what expenses should have been, given
the actual volume and mix of production and sales.
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Flexible budgets recast cost targets in the planned or master budget to reflect
the actual level of production. This allows comparisons of actual
results to targets based on the achieved level of
production.
Flexible budgets recast cost targets in the planned or master budget to reflect
the actual level of production. This allows comparisons of actual
results to targets based on the achieved level of
production.
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Dekke
r, Ltd.Flexible BudgetsFlexible Budgets
Time
Dol
lars
Budget
Timephased
Flexible (Time)
Flexible Budget
}
Unfavorable Cost
Variance
} Favorable Cost Variance
Look Familiar?
(Circa 1925…)
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• Comparison of:•Actuals•Budget•ETC•EV
Earned Value(Expense Based)
Earned Value(Expense Based)
Modern Flexible Budgeting
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Moncton Carpet Products Flexible Budget
Product 1 Product 2 Product 3 Product 4 Totals
Units made 295,000 345,000 675,000 950,000 Units per batch 500 2,500 1,500 5,000 Number of batches 590 138 450 190Cost per unit $ 5.40 $ 3.20 $ 4.25 $ 1.45Cost per batch $ 325.00 $ 680.00 $ 400.00 $ 135.00
Unit-related costs $ 1,603,800 $ 1,104,000 $ 2,868,750 $ 1,392,000 $ 6,968,550Batch-related costs $ 193,050 $ 93,840 $ 180,000 $ 25,920 $ 492,810Product-sustaining costs $ 125,000 $ 168,000 $ 256,000 $ 355,000 $ 904,000
$ 1,450,000Facility-sustaining costs$ 9,815,360
12-25 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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FlexibleMaster Planning Flexible Budget ActualBudget Variance Budget Variance Results
Unit-related costsProduct 1 $ 1,323,000 $ 280,800 $ 1,603,800 $ 8,910 $ 1,612,710Product 2 1,232,000 (128,000) 1,104,000 (6,900) 1,097,100 Product 3 2,703,000 165,750 2,868,750 54,000 2,922,750 Product 4 1,812,500 (420,500) 1,392,000 (48,000) 1,344,000 Total $ 7,070,500 $ (101,950) $ 6,968,550 $ 8,010 $ 6,976,560
Batch-related costsProduct 1 $ 159,250 $ 33,800 $ 193,050 $ (27,225) $ 165,825Product 2 104,720 (10,880) 93,840 6,660 100,500 Product 3 169,600 10,400 180,000 (34,875) 145,125 Product 4 33,750 (7,830) 25,920 (2,880) 23,040 Total $ 467,320 $ 25,490 $ 492,810 $ (58,320) $ 434,490
Product-sustaining costsProduct 1 $ 125,000 0 $ 125,000 $ 8,000 $ 133,000Product 2 168,000 0 168,000 (5,000) 163,000 Product 3 256,000 0 256,000 3,000 259,000 Product 4 355,000 0 355,000 7,000 362,000 Total $ 904,000 0 $ 904,000 $ 13,000 $ 917,000
Facility-sustaining costs $ 1,450,000 0 $ 1,450,000 $ 200,000 $ 1,650,000 Total costs $ 9,891,820 $ (76,460) $ 9,815,360 $ 162,690 $ 9,978,050
Moncton Carpet Products Flexible Budget Cost Analysis
12-26 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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Planning Variance
Master Budget
- Flexible Budget
Planning Variance
Reflects the effect of the volume change between the master budget and actual activity level achieved
12-27 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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Exercise #2
Turn to page 596 and work Problem 12-31.
Exercise #2
Turn to page 596 and work Problem 12-31.
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Revenue Center
A responsibility center whose members control revenues but do not control the cost of the product or service they sell or the level of investment in the responsibility center
A responsibility center whose members control revenues but do not control the cost of the product or service they sell or the level of investment in the responsibility center
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Profit CenterProfit Center
A responsibility center whose manager and other employees control both
the revenues and the costs of the product or
service they sell or deliver
A responsibility center whose manager and other employees control both
the revenues and the costs of the product or
service they sell or deliver
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Investment Center
A responsibility center whose manager and other
employees control the revenues, costs and the
level of investment in the responsibility center
A responsibility center whose manager and other
employees control the revenues, costs and the
level of investment in the responsibility center
51
Summary of Responsibility Centers
RevenueCost Profit InvestmentFactorsCenter Center Center Center
Controlled by center management
Costs Revenues Costs, revenues Costs, revenues, and significant control over investment
Not controlled by center management
Revenues, investment in inventory and fixed assets
Costs, investment in inventory and fixed asses
Investment in inventory and fixed assets
Measured by the accounting system
Costs relative to some standard (usually a budget)
Revenue relative to some standard (usually a budget)
Profit relative to some standard (usually a budget)
Return on investment relative to some target level
Not measured by the accounting system
Performance on any critical success factors other than cost
Performance on any critical success factor other than revenue
Performance on any critical success factor other than profit
Performance on any critical success factor other than return on investment
Type of Responsibility Center
12-31 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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Dekke
r, Ltd.ControllabilityControllabilityA principle often used in control that asserts that people should only be held accountable for results that they can control
A principle often used in control that asserts that people should only be held accountable for results that they can control
Problems with ControllabilityProblems with Controllability
• Jointly earned revenues and/or jointly incurred costs
• Intricate, and often arbitrary, accounting procedures
• Jointly earned revenues and/or jointly incurred costs
• Intricate, and often arbitrary, accounting procedures
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Segment MarginSegment Margin
The level of controllable profit reported by an organizational unit or
product line
The level of controllable profit reported by an organizational unit or
product line
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Segment Margin Report
New Car Sales
Used Car Sales Body Shop
Service Department lease Sales Total
Revenue $976,350 $1,235,570 $445,280 $685,210 $635,240 $3,977,650 Variable costs 764,790 954,850 235,450 427,400 517,360 2,899,850 Contribution margin $211,560 $280,720 $209,830 $257,810 $117,880 $1,077,800 Other costs 75,190 58,970 126,480 185,280 46,830 492,750 Segment margin $136,370 $221,750 $83,350 $72,530 $71,050 $585,050 Allocated avoidable costs 69,870 74,650 64,540 65,290 22,490 296,840 Income $66,500 $147,100 $18,810 $7,240 $48,560 $288,210 Unallocated costs 325,000 Organization profit ($36,790)
12-36 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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Limitations of Segment MarginsLimitations of Segment Margins
• Margins can be highly aggregated summaries
• Some segment reports contain arbitrary, or soft, numbers
• Revenue figures often reflect assumptions and allocations that can be misleading
• Margins can be highly aggregated summaries
• Some segment reports contain arbitrary, or soft, numbers
• Revenue figures often reflect assumptions and allocations that can be misleading
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Because of the limitations, interpreting
segment margins should be done
carefully. Other critical success factors should
be used as well to assess performance.
Because of the limitations, interpreting
segment margins should be done
carefully. Other critical success factors should
be used as well to assess performance.
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Transfer PricingTransfer Pricing
A set of tools and methods used to attribute revenues earned by the organization to organization
sub-units
A set of tools and methods used to attribute revenues earned by the organization to organization
sub-units
Transfer pricing can be very arbitrary, especially if there is a
high degree of interaction among the various responsibility centers
Transfer pricing can be very arbitrary, especially if there is a
high degree of interaction among the various responsibility centers
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Approaches toTransfer PricingApproaches to
Transfer Pricing
Market-Based
Cost-Based
Negotiated
Administered
Market-Based
Cost-Based
Negotiated
Administered
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Market-Based Transfer PricesMarket-Based Transfer Prices
• If a good external market exists for the transferred product or service, then market prices are the most appropriate basis for pricing
• Unfortunately, these markets with well-defined prices seldom exist
• If a good external market exists for the transferred product or service, then market prices are the most appropriate basis for pricing
• Unfortunately, these markets with well-defined prices seldom exist
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Cost-Based Transfer Prices
Cost-Based Transfer Prices
Variable cost plus a markup
Full cost
Full cost plus a markup
Variable cost plus a markup
Full cost
Full cost plus a markup
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Cost-Based Transfer Concerns
Cost-Based Transfer Concerns
Economists argue that only marginal cost transfer prices are optimal
They do not focus on the intent of the system, which is to allow calculation of unit incomes
They do not provide the appropriate economic guidance when operations are capacity constrained
Economists argue that only marginal cost transfer prices are optimal
They do not focus on the intent of the system, which is to allow calculation of unit incomes
They do not provide the appropriate economic guidance when operations are capacity constrained
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NegotiatedTransfer Prices
NegotiatedTransfer Prices
• Supplying and receiving responsibility centers negotiate prices
• Prices reflect both negotiating skills and economic considerations
• Optimal transfer price is the net realizable value of the last unit supplied for all units supplied
• Supplying and receiving responsibility centers negotiate prices
• Prices reflect both negotiating skills and economic considerations
• Optimal transfer price is the net realizable value of the last unit supplied for all units supplied
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NegotiatedTransfer Prices
NegotiatedTransfer Prices
• Reflect the accountability and controllability principles underlying responsibility centers
• Can easily lead to decisions that do not provide the greatest economic benefits
• Reflect the accountability and controllability principles underlying responsibility centers
• Can easily lead to decisions that do not provide the greatest economic benefits
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AdministeredTransfer PricesAdministered
Transfer Prices
• Prices set by a rule, policy or an arbitrator
• Easy to administer
• Arbitrary
• Tend to violate the spirit of the responsibility approach
• Prices set by a rule, policy or an arbitrator
• Easy to administer
• Arbitrary
• Tend to violate the spirit of the responsibility approach
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Return on Investment (ROI)
Return on Investment (ROI)
ROI = Operating Income/Investment
= Operating Income * Sales Sales Investment
= Return on Sales * Asset Turnover
= Efficiency * Productivity
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EfficiencyEfficiency
A measure of an organization’s ability to
control costs
A measure of an organization’s ability to
control costs
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Operations Efficiency Calculation
Operations Efficiency Calculation
Operations Efficiency = Standard CostActual Cost
12-52 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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ProductivityProductivity
A ratio of output to input. In financial control, this is the ratio of
sales to investment.
A ratio of output to input. In financial control, this is the ratio of
sales to investment.
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Assessing ROIAssessing ROI
• Analyze trends
• Comparison to competitors
• Decompose and compare to competitors
• Points to where problem analysis should begin
• View as a method to evaluate the desirability of long-term investments
• Analyze trends
• Comparison to competitors
• Decompose and compare to competitors
• Points to where problem analysis should begin
• View as a method to evaluate the desirability of long-term investments
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Economic Value Added
Economic Value Added
Accounting Income - Cost of Capital Economic Value Added
12-55 1996 Prentice Hall Business Publishing Management Accounting, 2nd ed., Atkinson, Banker, Kaplan, and Young
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Evaluates income relative to the level of investment required to earn that income. It motivates managers to do what they think is necessary to make economic value added as large as possible.
Evaluates income relative to the level of investment required to earn that income. It motivates managers to do what they think is necessary to make economic value added as large as possible.
Economic Value Added
Economic Value Added
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Criticisms of Financial Control
Criticisms of Financial Control
Information is delayed
Information is highly aggregated
Its measures are narrow and do not evaluate how well the organization is doing in meeting stakeholders’ requirements
It is too focused on short-term results
Information is delayed
Information is highly aggregated
Its measures are narrow and do not evaluate how well the organization is doing in meeting stakeholders’ requirements
It is too focused on short-term results
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Financial control is an important tool in the
process of control. If used properly, financial results
provide crucial help in assessing the organization’s
long-term viability and in identifying processes that
need improvement.
Financial control is an important tool in the
process of control. If used properly, financial results
provide crucial help in assessing the organization’s
long-term viability and in identifying processes that
need improvement.