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EKF113 Management Accounting > Book: Management Control Systems > Flashcards

Book: Management Control Systems Flashcards

1
Q

What is the diference between control and controls

A

Controls are the measurements and information that directs the control decisions

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2
Q

What is the management control system

A

The entire array if controls used by an organization

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3
Q

What is the difference between management control and strategic control

A

Strategic control focuses on how a firm can compete with the outside while management control influences employee behavior

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4
Q

What are the three types of controls in an organization

A

Action or behavior control
Personal , social or culture control
Result or output controls

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5
Q

What are action or behavior controls

A

The observation of individuals as they go about their work

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6
Q

What are personnel,social or cultural controls

A

To develop a culture of shared values and to make sure that employees know what is required of them do they can control themselves

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7
Q

What are output or results controls

A

Measuring performance metrics about the outcome of work

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8
Q

How are output controls implemented

A

Select measurements to monitor. Establish targets. Measure performance and implement rewards and punishment

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9
Q

What is feedback control

A

To monitor outputs against targets and taking corrective actions.

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10
Q

What is feed forward control

A

To measure likely outcomes to desired outcomes and to take corrective actions to put them in line

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11
Q

When should feedback and feed forward controls be implemented

A

When the time lag is short feedback and when long feed forward

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12
Q

When is controls considered harmful

A

When they motivate employees to behave in a way that does not benefit the organization, a lack of goal congruence

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13
Q

By what process can a high focus on specific measures be damaging

A

For example if managers disregard corporate interests that are not measured or if they over achieve the measures at the expense of other corporate interests

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14
Q

What is a responsibility center

A

A part of a businesses controls that top management delegates responsibility over to a lower manager

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15
Q

What are the four types of responsibility centers

A
  1. Cost or expense center, 2. Revenue center, 3. Profit center, 4. Investment center
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16
Q

What are standard cost centers

A

A cost center where input and output can be measured and specified. Their difference is called variance.

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17
Q

What are discretionary cost centers

A

A cost center where inputs and outputs cannot be clearly measured. All that can be done is too keep within budget and make sure that the tasks are done

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18
Q

What are revenue centers

A

A responsibility center entailing revenue from a specific source

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19
Q

What are profit centers or business units

A

A responsibility center responsible for both cost and revenue and thus has great autonomy

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20
Q

What is an investment center

A

A profit center with the authority ti make capital investments

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21
Q

What is responsibility accounting

A

To accumulate data on performance and see how and who deviates from the budget

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22
Q

What are performance repports

A

Monthly reports on performance that are compared to the budget

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23
Q

What decisions are involved in management accounting

A

Distinguishing between what managers can control and not, setting appropriately challenging targets and determine how much influence managers should have

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24
Q

What is the controllability principle

A

That it is only appropriate to assign costs to cost centers where managers can influence them

25
Q

How can you remove the distorting affects of uncontrollable factors of management controls

A

Before you can identify and separate the uncontrolled factors and after you may perform variance analysis, use flexible standards, evaluate them relatively and subjectively

26
Q

What is variance analysis

A

Find what costs vary and trace them to accountable individuals

27
Q

What is flexible budgeting

A

To reevaluate the budget to the conditions of the report so called ex post budget adjustments

28
Q

What are relative performance evaluations

A

To compare responsibility venters to similars operating under similar conditions

29
Q

What are the downsides of subjective evaluations

A

They cannot be known to be accurate

30
Q

What if the manager can control the quality but not the price of a service

A

Then only responsible for costs due to usage

31
Q

What is the diference between an expectations budget and an optimal performance budget

A

For optimal performance the budget had to be above expectation but within the realm of possibility

32
Q

Why is a small adverse variance a healthy sign in a budget

A

Because it means that the target is just out of range where it can motivate managers

33
Q

What are the benefits of having managers participate in making their budgets

A

They are more likely to accept it if it is bottom up and they can give insights about their view of the operation and so lessen the information asymmetry

34
Q

When should participation be discouraged in budgeting

A

When managers have created a reward system they should not make it too easy to achieve them. Negotiation takes time so if the situation is controled there is no need

35
Q

What is the budget constrained style to evaluate a budget

A

To rigidly compare against the budget and too see variation as error

36
Q

What is the profit conscious style of evaluating the performance

A

To focus in long term profits focusing on the minimization of long run costs and to look at the budget flexibly

37
Q

What is the non accounting style to evaluate performance

A

To not compare against the budget

38
Q

What is the negative side affect related to the budget constrained approach to measure perfomance

A

Managers may see it as unfair which causes stress and conflict

39
Q

What is contingency theory

A

The idea that management accounting should be adapted to the company’s situation

40
Q

What non economic reasons are there of management accounting

A

It can be used to legitimize already made decisions, to create a base of power and to signal that the company is rational

41
Q

What is a functional organizational structure

A

A structure where all activities of a similar type are structured under one responsible department head

42
Q

What is the advantage if dividing the company into autonomous divisions

A

Speed and quality of decitions

43
Q

What is the main drawback of divisionalization of a firm

A

That departments might compete excessively and take actions for their own gain that hurts the whole

44
Q

Which companies are divisionalization suited for

A

Large companies engaged un many dissimilar activities

45
Q

How do you measure the profit of a division

A

Either check the controllable profit by removing all management cannot influence or you add all costs that would be removed if the division did not exist and arrive at the divisional profit contribution

46
Q

Why allocate administration fees related to a division when comparing to other firms

A

Because different companies might divide work differently

47
Q

Why measure divisional profit before tax

A

To let managers know the total cost of operating their divisions, to make divisional managers know that outside costs related to them exist and that they must justify them and to compare them similar units

48
Q

What is ROI

A

Return on investment, how much you get out relative to you put in

49
Q

Why might it be bad to evaluate managers based in ROI

A

Because they would be reluctant io make profitable investments with relative small return even if they have no alternative

50
Q

What are the pros and cons of using residual income as a base for performance

A

Pro because it is exactly what the principles want but von because it is absolute so you cannot compare departments of different sizes

51
Q

How is economic value added calculated

A

Division profit + - accounting adjustments - cost of capital (opportunity cost) on division assets

52
Q

Does the economic valye added eva method capitalize RnD

A

Yes

53
Q

Why do ROI discourage investing in new assets

A

Because if an asset continue to give but is depreciated it often reflects better on the figures than actually investing in improvements

54
Q

Why is it advantageous ti measure ROI and EVA using the historic cost of an asset

A

Because depreciation makes these numbers artificially high

55
Q

What dangerous effect can performance controls have on decision making

A

Managers might ignore taking the option with the best net present value and instead go for what improves their metrics most

56
Q

What are the pros and cons of short term financial ratios

A

Pro is that they accurately reflect the present but a con is that it encourages risk taking and short term thinking however if the bonuses are far into the future they might be less motivating

57
Q

What is the diference between eva and residual income

A

Residual income uses target ROI while EVA uses weighted average cost of capital

58
Q

Is debt only interestbearing liabilities

A

Yes

EKF113 Management Accounting (10 decks)

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