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Transcript of MANAGEMENT CONTROL SYSTEMS © 2012 Pearson Prentice Hall. All rights reserved.
MANAGEMENT CONTROL SYSTEMS
© 2012 Pearson Prentice Hall. All rights reserved.
Class Announcements
Service Learning Assignment: Schedule a meeting with Danika Leblanc (
[email protected]) prior to contacting your organization
Ensure that I am included in your meeting with the client organization
Final Exam 7:00pm April 11, 2014 Leadership Conferences:
1) KPMG Executive Look March 26, 2014 www.kpmgfit.ca
2) Deloitte Leadership Conference Information Session Wednesday, March 5 – 5:00 to 6:00pm Schwartz 205
Class Objectives
1. Understanding management control systems as a mechanism for management and control
2. Modifying behaviour through the management control system
3. Management control systems in a decentralized organization
Management Control Systems
Management control systems are a means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization and to guide the behavior of its managers and other employees.
Well-designed management control systems use information both from with the company (e.g., net income) and from outside of the company (i.e., share price)
Well-designed management control systems use both qualitative and quantitative information.
© 2012 Pearson Prentice Hall. All rights reserved.
Management Control Systems Consist of formal and informal control
systems: Formal systems include explicit rules,
procedures, performance measures, and incentive plans that guide the behavior of its managers and other employees.
Informal systems include shared values, loyalties, and mutual commitments among members of the company, corporate culture, and unwritten norms about acceptable behavior.
© 2012 Pearson Prentice Hall. All rights reserved.
Management Control Systems: Effective To be effective, management control systems
should be closely aligned to the firm’s strategies and goals. be designed to fit the company’s structure and
decision-making responsibility of individual managers. motivate managers and their employees
Motivation is the desire to attain a selected goal (goal-congruence) combined with the resulting pursuit of that goal (effort).
Goal congruence exists when individuals and groups work toward achieving the organization’s goals—managers working in their own best interest take actions that align with the overall goals of top management.
Effort is exertions toward reaching a goal, including both physical and mental actions.
© 2012 Pearson Prentice Hall. All rights reserved.
Management Control Systems: Decentralization
To be effective, management control systems should be closely aligned to the firm’s strategies and goals. be designed to fit the company’s structure and decision-
making responsibility of individual managers. Decentralization is the freedom for managers at lower
levels of the organization to make decisions. Autonomy is the degree of freedom to make decisions.
The greater the freedom, the greater the autonomy. A decentralized organization has additional issues to
consider within the management control system to be effective.
© 2012 Pearson Prentice Hall. All rights reserved.
Management Control Systems: Decentralization vs. Centralization Total decentralization means minimum
constraints and maximum freedom for managers at the lowest levels of an organization to make decisions.
Total centralization means maximum constraints and minimum freedom for managers at the lowest levels of an organization to make decisions.
Companies’ structures generally fall somewhere in between these two extremes, as each has benefits and costs. Structure chosen cost vs. benefit analysis.
© 2012 Pearson Prentice Hall. All rights reserved.
Management Control Systems: Benefits of Decentralization Creates greater responsiveness to
subunit’s customers, suppliers, and employees
Leads to gains from faster decision making Increases motivation of subunit managers Assists management development and
learning Sharpens the focus of subunit managers
© 2012 Pearson Prentice Hall. All rights reserved.
Management Control Systems: Costs of Decentralization Leads to suboptimal decision making,
which arises when a decision’s benefit to one subunit is more than offset by the costs or loss of benefits to the organization as a whole. Also called incongruent decision making or
dysfunctional decision making Focuses manger’s attention on the subunit
rather than the company as a whole Results in duplication of output Results in duplication of activities
© 2012 Pearson Prentice Hall. All rights reserved.
Management Control Systems: Decentralization and Multinational Firms Multinational firms, companies that operate in
multiple countries, are often decentralized because centralized control of a company with subunits around the world is often physically and practically impossible.
Decentralization enables managers in different countries to make decisions that exploit their knowledge of local business and political conditions and to deal with uncertainties in their individual environments.
Biggest drawback to international decentralization: loss or lack of control.
© 2012 Pearson Prentice Hall. All rights reserved.
Belanger & Sequin : Context
A boat and inboard engine manufacturer Three divisions:
Engine – concentrated on diesel single engine for the last 5 years; capacity of 8000 hours per year (2 hours per boat)
Boat –labour intensive operation; operated below planned production last year because sales projections were 950 orders lower; capacity is 200,000 DLH
Sales – sole Canadian distributor for new Fujiama sailboats; want to capture growth in recreational boating with a new 20 ft fiberglass sport boat
Falling profits have reduced ROA to 9.3% overall
Resentment is growing among divisions
Belanger & Sequin : Issues
1) Assess Divisional Profit Transfer price between divisions
2) Impact on Overall Profitability Impact of Fujiama sailboat (1,500) Impact of 20 foot fiberglass sport boat (1,250)
3) Assessment of Management Control System - Evaluation System Responsibility centre designation –Investment
Centre Evaluation metrics – Return on Assets (ROA)
Belanger & Sequin: Transfer Price Options for setting Transfer Price:
Current price - $4,100.00 Market price - $5,000.00
Capacity is 8000 hours/ 2 hours per engine is 4,000
Net market prices - $ 4,490 Selling price $5,000 – commission $510 =
$4,490 Variable cost - $2,200
DM $800 + DL $1,000 + VOH $400 = $2,200
1. Belanger & Sequin : Profit and ROA by Division (Exhibit #1)
Engine Division
Boat Division
Sales Division
Total Divisions*
Sales ........................................................... Cost of goods sold ......................................
$19,280 12,800
$16,800 14,880
$53,112 38,400
$69,112 46,000
Gross margin .............................................. Selling and admin. .....................................
6,480 4,832
1,920 2,400
14,712 13,967
23,112 21,199
Pretax income ............................................. $ 1,648 $ (480) $ 745 $ 1,913
Assets controlled by divisions ................... $10,000 $ 4,500 $ 6,000 $20,500
Pretax divisional return on assets .............. 16.5% (10.7)% 12.4% 9.3%
1. Belanger & Sequin : Engine Division (Exhibit #2)
1. What profit if sell all 4000 to external market? 2. What profit if sell only current level externally?
Per Unit
External Internal Units Total
Sales: External ................................................... Internal ....................................................
$5,000 $4,100
3,200 800
$16,000,000 3,280,000
Total Sales ............................................................ 4,000 $19,280,000
Direct materials .................................................... Direct labor .......................................................... Variable overhead* ............................................... Fixed overhead* ................................................... Sales commissions ............................................... Fixed selling & admin. ........................................
800 1,000
400 1,000
510 800
800 1,000
400 1,000
- 800
4,000 4,000 4,000 4,000 3,200 4,000
3,200,000 4,000,000 1,600,000 4,000,000 1,632,000 3,200,000
Total costs ............................................................ 4,510 4,000 $17,632,000
Pretax income ....................................................... $ 490 $ 100 $ 1,648,000
1.Belanger & Sequin : Engine Division Sensitivity Analysis
Per Unit Per Unit Per UnitExternal Units Total External Units Total External Units Total
Sales: Internal 4,100 800 $3,280,000Sales: External $5,000 3,200 $16,000,000 $5,000 4,000 $20,000,000 $5,000 3,200 $16,000,000
Direct materials 800 4,000 3,200,000 800 4,000 3,200,000 800 3,200 2,560,000Direct labor 1,000 4,000 4,000,000 1,000 4,000 4,000,000 1,000 3,200 3,200,000
Variable overhead* 400 4,000 1,600,000 400 4,000 1,600,000 400 3,200 1,280,000
Fixed overhead* 1,000 4,000 4,000,000 1,000 4,000 4,000,000 1,250 3,200 4,000,000
Sales commissions 510 4,000 1,632,000 510 4,000 2,040,000 510 3,200 1,632,000Fixed selling & admin. 800 4,000 3,200,000 800 4,000 3,200,000 1000 3,200 3,200,000Total costs 4,510 $17,632,000 4,510 $18,040,000 4,960 $15,872,000Pretax income $412 $1,648,000 $490 $1,960,000 $40 $128,000
ROA (status quo) 16.50% 16.50% 16.50%Investments 10,000,000 10,000,000 10,000,000 ROA (revised) 19.60% 1.28%
4000 External Sales 3200 External SalesStatus Quo
1.Belanger & Sequin : Boat Division (Exhibit #3)
1. What profit if transfer price was $2,200 2. What profit if sales level was as anticipated
1,750 (800 actual + 950 expected additional) Use $4,100 transfer price
Per Unit Units Total
Sales: Internal ................................................................................... $21,000 800 $16,800,000
Engines transferred-in ....................................................................... Other direct materials ........................................................................ Direct labor* ...................................................................................... Variable overhead ............................................................................. Fixed overhead .................................................................................. Fixed administration .........................................................................
4,100 3,800 4,200 2,000 4,500 3,000
800 800 800 800 800 800
3,280,000 3,040,000 3,360,000 1,600,000 3,600,000 2,400,000
Total costs ......................................................................................... $21,600 $17,280,000
Pretax income .................................................................................... $ (600) $ (480,000)
1.Belanger & Sequin : Boat Division Sensitivity Analysis
Per Unit
Units Total Per Unit
Units Total Per Unit
Units Total
Sales: Internal $21,000 800 $16,800,000 $21,000 800 $16,800,000 $21,000 1750 $36,750,000Engines transferred-in 4,100 800 $3,280,000 2,200 800 $1,760,000 4,100 1750 $7,175,000Other direct materials 3,800 800 $3,040,000 3,800 800 $3,040,000 3,800 1750 $6,650,000
Direct labor* 4,200 800 $3,360,000 4,200 800 $3,360,000 4,200 1750 $7,350,000
Variable overhead 2,000 800 $1,600,000 2,000 800 $1,600,000 2,000 1750 $3,500,000Fixed overhead 4,500 800 3,600,000 4,500 800 3,600,000 2,057 1750 3,600,000Fixed administration 3,000 800 2,400,000 3,000 800 2,400,000 1,371 1750 2,400,000Total costs $21,600 $17,280,000 $19,700 $15,760,000 $17,529 $30,675,000Pretax income -$600 -$480,000 $1,300 $1,040,000 $3,471 $6,075,000
ROA (status quo) -10.70% -10.70% -10.70%Investments 4,500,000 4,500,000 4,500,000 ROA (revised) 23.11% 135.00%
Actual Sales - Engines at $4,100 Expected SalesActual Sales - Engines at $2,200
1.Belanger & Sequin : Sales Division (Exhibit #4)
1. What profit if redirected sale to BSL at 1,750 (keep total boat sales @ 2,000 in total)
Fujiama Sailboat
BSL Inboard
Total
Sales price per unit .............................................................. $ 25,260 $28,500
Sales volume (units) ............................................................ 1,200 800 2,000
Total sales ...........................................................................
$30,312,000
$22,800,000
$53,112,000
Boats (including engines) ................................................... Commissions (15% sales) ............................................... Fixed selling & admin. .......................................................
21,600,000 4,546,800 3,600,000
16,800,000 3,420,000 2,400,000
38,400,000 7,966,800 6,000,000
Total Costs .......................................................................... $29,746,800 $22,620,000 $52,366,800
Pretax income ..................................................................... $ 565,200 $ 180,000 $ 745,200
1.Belanger & Sequin : Sales Division Sensitivity Analysis
Fujiama BSL Fujiama BSLSailboat Inboard Total Sailboat Inboard Total
Sales price per unit $25,260 $28,500 $25,260 $28,500Sales volume (units) 1,200 800 2,000 250 1750 2,000
Total sales $30,312,000 $22,800,000 $53,112,000 $6,315,000 $49,875,000 $56,190,000Boats (including engines) 21,600,000 16,800,000 $38,400,000 4,500,000 36,750,000 $41,250,000
Commissions (15% ´ sales)
4,546,800 3,420,000 $7,966,800 947,250 7,481,250 $8,428,500
Fixed S&A 3,600,000 2,400,000 $6,000,000 3,600,000 2,400,000 $6,000,000Total Costs $29,746,800 $22,620,000 $52,366,800 $9,047,250 $46,631,250 $55,678,500Pretax income $565,200 $180,000 $745,200 -$2,732,250 $3,243,750 $511,500
ROA (status quo) 12.40% 12.40%Investments 6,000,000 6,000,000 ROA (revised) 8.53%
Planned - 1,750 BSL BoatsActual - 800 BSL Boats
1.Belanger & Sequin : Overall Analysis
BSL BOAT CM and BE AnalysisSale of BSL Boat 28,500
Variable Costs:Engine Direct materials 800
Direct labor 1,000
Variable overhead* 400
Sales commissions - Boat Other direct materials 3,800
Direct labor* 4,200
Variable overhead 2,000 Sales Commission 15% 4,275
16,475
Contribution Margin 12,025
Fixed Costs:
Engine Fixed overhead* 4,000,000
Fixed selling & admin. 3,200,000 Boat Fixed overhead 3,600,000
Fixed administration 2,400,000 Sales Fixed selling & admin. 2,400,000
15,600,000
Break-even 1,297
2. New Boat Profitability Analysis
Fujiama Fibreglass FibreglassSailboat Board Total Board
Sales price per unit $25,260 $15,200 Transfer Price $8,950Sales volume (units) 1,500 1250 2,750 Sales volume (units) 1250
Total sales $37,890,000 $19,000,000 $56,890,000 Total sales $11,187,500Boats (including engines)
27,000,000 11,187,000 $38,187,000 Other direct materials 1,472 1,840,000
Engines 4,375,000 $4,375,000 Direct labor* 3,360 4,200,000
Commissions (15% or 10% sales)
5,683,500 1,900,000 $7,583,500 Variable overhead 1,000 1,250,000
Fixed S&A 3,600,000 2,175,000 $5,775,000 Fixed Overhead 2,500,000Total Costs $36,283,500 $19,637,000 $55,920,500 Fixed S&A 1,250,000Pretax income $1,606,500 -$637,000 $969,500 Total Costs $11,040,000
Pretax income $147,500ROA (sgtatus quo) 12.44%Investments (revised) 9,000,000 ROA (status quo) -10.70%ROA (revised) 10.77% Investments (revised) 3,800,000
ROA (revised) 3.88%
Sales Divsion Boat Divsion
3. Belanger & Sequin: Assessment of Evaluation System
Responsibility centre designation Investment Centre
Any internal transfer of engines and boast is determined by the sales division estimates of the potential market
Evaluation metrics ROA
Pretax divisional income divided by assets controlled by the division
3. Belanger & Sequin: Assessment of Evaluation System
Each division is evaluated on ROA Engine – ROA is 16.5%
Commission ($510/engine) on external sales – 4,200 units
No commission on internal sales – 800 units Transfer pricing – breaking even on internal sales
Boat – ROA is (10.7%) No commission - internal sales only No outside sales – determined by Sales
Sales – ROA is 12.4% Commission on boats, higher commission on
Fujiama Commission on BSL greater than Fujiama
Class Objectives - Revisited
1. Understanding management control systems as a mechanism for management and control
2. Modifying behaviour through the management control system
3. Management control systems in a decentralized organization
Midterm Results
Average: 50.88/70 (73%) Hi: 71.5/70 Lo: 33.5/70 Comments:
Did not answer question(s) Misunderstanding what is being asked Provide evidence or discussion for your
opinions/conclusions; do not assume