Book: Management Control Systems

Question 1

What is the diference between control and controls

Answer 1

Controls are the measurements and information that directs the control decisions

Question 2

What is the management control system

Answer 2

The entire array if controls used by an organization

Question 3

What is the difference between management control and strategic control

Answer 3

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

Question 4

What are the three types of controls in an organization

Answer 4

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

Question 5

What are action or behavior controls

Answer 5

The observation of individuals as they go about their work

Question 6

What are personnel,social or cultural controls

Answer 6

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

Question 7

What are output or results controls

Answer 7

Measuring performance metrics about the outcome of work

Question 8

How are output controls implemented

Answer 8

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

Question 9

What is feedback control

Answer 9

To monitor outputs against targets and taking corrective actions.

Question 10

What is feed forward control

Answer 10

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

Question 11

When should feedback and feed forward controls be implemented

Answer 11

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

Question 12

When is controls considered harmful

Answer 12

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

Question 13

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

Answer 13

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

Question 14

What is a responsibility center

Answer 14

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

Question 15

What are the four types of responsibility centers

Answer 15

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

Question 16

What are standard cost centers

Answer 16

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

Question 17

What are discretionary cost centers

Answer 17

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

Question 18

What are revenue centers

Answer 18

A responsibility center entailing revenue from a specific source

Question 19

What are profit centers or business units

Answer 19

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

Question 20

What is an investment center

Answer 20

A profit center with the authority ti make capital investments

Question 21

What is responsibility accounting

Answer 21

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

Question 22

What are performance repports

Answer 22

Monthly reports on performance that are compared to the budget

Question 23

What decisions are involved in management accounting

Answer 23

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

Question 24

What is the controllability principle

Answer 24

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

Question 25

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

Answer 25

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

Question 26

What is variance analysis

Answer 26

Find what costs vary and trace them to accountable individuals

Question 27

What is flexible budgeting

Answer 27

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

Question 28

What are relative performance evaluations

Answer 28

To compare responsibility venters to similars operating under similar conditions

Question 29

What are the downsides of subjective evaluations

Answer 29

They cannot be known to be accurate

Question 30

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

Answer 30

Then only responsible for costs due to usage

Question 31

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

Answer 31

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

Question 32

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

Answer 32

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

Question 33

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

Answer 33

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

Question 34

When should participation be discouraged in budgeting

Answer 34

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

Question 35

What is the budget constrained style to evaluate a budget

Answer 35

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

Question 36

What is the profit conscious style of evaluating the performance

Answer 36

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

Question 37

What is the non accounting style to evaluate performance

Answer 37

To not compare against the budget

Question 38

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

Answer 38

Managers may see it as unfair which causes stress and conflict

Question 39

What is contingency theory

Answer 39

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

Question 40

What non economic reasons are there of management accounting

Answer 40

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

Question 41

What is a functional organizational structure

Answer 41

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

Question 42

What is the advantage if dividing the company into autonomous divisions

Answer 42

Speed and quality of decitions

Question 43

What is the main drawback of divisionalization of a firm

Answer 43

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

Question 44

Which companies are divisionalization suited for

Answer 44

Large companies engaged un many dissimilar activities

Question 45

How do you measure the profit of a division

Answer 45

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

Question 46

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

Answer 46

Because different companies might divide work differently

Question 47

Why measure divisional profit before tax

Answer 47

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

Question 48

What is ROI

Answer 48

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

Question 49

Why might it be bad to evaluate managers based in ROI

Answer 49

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

Question 50

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

Answer 50

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

Question 51

How is economic value added calculated

Answer 51

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

Question 52

Does the economic valye added eva method capitalize RnD

Answer 52

Yes

Question 53

Why do ROI discourage investing in new assets

Answer 53

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

Question 54

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

Answer 54

Because depreciation makes these numbers artificially high

Question 55

What dangerous effect can performance controls have on decision making

Answer 55

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

Question 56

What are the pros and cons of short term financial ratios

Answer 56

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

Question 57

What is the diference between eva and residual income

Answer 57

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

Question 58

Is debt only interestbearing liabilities

Answer 58

Yes