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Exam Prep (MCS) Flashcards

1
Q

Are control proactive or reactive?

A

Proactive - Designed to prevent control problems before negative effects on performance.

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2
Q

Name three non-measured performance control.

A
  1. Direct supervision.
  2. Employee Hiring Standards.
  3. Codes of conduct.
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3
Q

What can an organization’s objectives be?

A
  • Financial/Non-financial.
  • Explicit/Implicit.
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4
Q

What are the two control purposes in an organization?

A
  1. Strategic control:

Evaluates whether the organization’s strategy is valid and aligned with its long-term goals and objectives.

  1. Management control:

Encouraging people to take desirable actions (Behavioural orientation).

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5
Q

What are the 3 basic control issues of MCS?

A
  1. Lack of direction.
  2. Lack of motivation.
  3. Personal limitations.
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6
Q

Explain the control issue “Lack of direction”.

A

Employees do not know what the organization wants from them.

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7
Q

How do we address the issue “lack of direction”?

A

Communication:

Clear and consistent communication.

Reinforcement (Code-of-Conduct):

Acknowledge and appreciate employees who demonstrate desired behaviors, reinforcing the importance of alignment with organizational objectives.

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8
Q

Explain the control issue “Motivational problems”.

A

Lack of goal congruence:

Individuals’ goals do not align with organizational goals.

Self-interested behavior:

Individuals’ prioritize personal comfort/convenience rather than organizational priorities.

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9
Q

Explain the control issue “Personal Limitations”

A

Sometimes, people are “unable” to do a good job because of certain personal limitations such as:

  • Lack of knowledge, training, and experience.
  • Promoted above their level of competence.
  • Jobs not designed properly (Training, Job assignment/promotion).
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10
Q

What are 2 the control alternatives?

A
  1. Control problem avoidance.
  2. Management control systems.
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11
Q

Explain control problem avoidance.

A
  1. Activity Elimination:

Removing certain tasks or functions from the organization’s operations to mitigate control problems to external parties.

  1. Automation:

Use of technology to perform tasks.

  1. Centralization:

Centralization can help maintain tighter control over critical functions.

  1. Risk Sharing:

Transferring or distributing risks to external parties.

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12
Q

What are the 3 management control systems?

A
  1. Action controls.
  2. Results controls.
  3. Personnel/cultural controls.
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13
Q

Explain “results controls”

A

Rewarding or punishing individuals based on the outcomes they achieve.

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14
Q

What are the 3 conditions for effective result control?

A
  1. Congruence in Understanding Desired Results:

Superiors or managers must clearly understand and communicate what results are desired in the areas being controlled to the employees.

  1. Significant Influence of Individuals on Results:

The individuals whose behaviors are being controlled must have a significant influence on the results in the desired performance dimensions.

  1. Effective Measurement of Results:

Superiors or managers must be able to measure the results effectively to assess performance accurately.

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15
Q

What are the criterias for effective results control?

A
  1. Precise and Reliable: Results measurement should be accurate and dependable.
  2. Objective: Unbiased measurements achieved by involving third parties or verification processes.
  3. Well-Timed: Determining the frequency of informing employees about their performance.
  4. Understandable: Employees should comprehend the measurements and their implications.
  5. Cost-Efficient: The cost of measurement should not exceed the benefits derived from the results.
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16
Q

What is the “controllability principle” about?

A
  1. Managers should be held responsible only for the aspects they can actually control to a significant extent.
  2. Results controls are ineffective when significant uncontrollable factors influence result measures.
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17
Q

What is “action control” ?

A

Prevention/Detection:

Ensure employees behave in a way that helps the organization and avoid behavior that harms it by setting up rules to prevent cheating, ensuring that individuals are accountable for their performance.

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18
Q

When are “action controls” effective?

A

When managers:

  • Know what actions are desirable.
  • Have the capability to ensure that these desirable actions actually take place.
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19
Q

What are the 2 types of “behavioral constraints” in relation to action controls?

A

Physical: Locks, passwords, limited access, etc.

Administrative: Restriction of decision-making authority, Separation of duties, etc.

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20
Q

What is “action accountability” in terms på action controls?

A

Holding employees responsible for their actions by:

  • Defining acceptable and unacceptable actions.
  • Communicating these definitions to employees through work rules, policies, procedures, and codes of conduct.
  • Observing or tracking employee actions.
  • Rewarding good actions or punishing deviations from expected behavior.
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21
Q

What does “Redundancy” in relation to action control mean?

A

Assigning more people or resources than necessary to a task, such as having extra personnel or facilities.

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22
Q

What is “personnel” controls?

A
  1. Codes of conduct.
  2. Group reward.
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23
Q

What is “Cultural controls” ?

A

The use of social norms, values, and shared beliefs within an organization or group to influence and regulate behavior.

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24
Q

What are cultural built on?

A
  • Traditions.
  • Norms.
  • Beliefs.
  • Ideologies.
  • Attitudes.
  • Ways of behaving.
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25
Q

What other approaches are there to shape organizational culture?

A

Intra-organizational transfers:

Improve the socialization of individuals within the organization by exposing them to different teams, cultures, and ways of working.

Physical and social arrangements:

Office plans, interior decor, dress codes and vocabulary.

Tone at the top:

Top magmaens statements must be consistent with their behaviors.

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26
Q

What are the 2 types of control system costs?

A
  1. Direct out-of-pocket costs.
  2. Indirect costs (Harmful side-effects).
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27
Q

Explain the cost “Direct out-of-pocket costs”.

A

Quantifiable:

Cash bonuses and cost of maintaining internal staff.

Difficult to quantify:

Time spent on planning, budgeting activities, and pre-action reviews.

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28
Q

Explain the control system cost “indirect costs”, also referred as “Harmful side-effects” .

A

Indirect costs (Harmful side-effects):

  • Behavioral displacement.
  • Gamesmanship.
  • Operating delays.
  • Negative attitudes.
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29
Q

What is behavioral displacement?

A

When the control system encourages behaviors that are not consistent with the organization’s objectives.

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30
Q

What are the causes of behavioral displacement with results controls?

A

When the results’ measures are incongruent with the organization’s true objectives, often due to:

  • Poor understanding of the desired results.
  • An over-emphasis on “measured” results.
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31
Q

What are the causes of behavioral displacement with action controls?

A

Means-ends inversion:

Where employees prioritize actions over desired outcomes, losing sight of what they should accomplish.

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32
Q

Certain actions or controls within an organization can also encourage “behavioral displcement” such as…

A

Rigid behavior: Lack of flexibility or openness to change.

Non-adaptive behavior: Resistant to change or unwilling to adjust their approaches.

Bureaucratic behavior: When relying too much on strict rules and hierarchy.

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33
Q

Explain what “gamemanship” is about.

A

Data manipulation:

When managers take to improve their performance indicators without producing any positive economic effects.

Falsification:

Reporting inaccurate data to give a misleading impression of performance.

Creation of slack resources:

Consumption of resources in excess of what is required

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34
Q

Explain “operating delays” and what factors contribute to them?

A

Delays in executing tasks within an organization (Beaucracy/Hierarchy).

Factors:

  1. Lengthy review processes.
  2. Cumbersome authorization layers.
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35
Q

What are some characteristics and consequences of negative attitudes in the workplace?

A

Negative attitudes in the workplace include:

  • Job tension.
  • Conflict.
  • Frustration.
  • Resistance.
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36
Q

What can “negative attitudes” lead to in workplace?

A
  • Harmful behaviors like gaming the system.
  • lack of effort.
  • Absenteeism.
  • Turnover.
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37
Q

What are “adaptation costs” in the context of Management Control Systems (MCSs) ?

A

The expenses associated with adjusting Management Control Systems (MCSs) to suit the specific characteristics of different countries’ environments.

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38
Q

What factors influence “adaption costs” across different countries?

A

National culture:

People’s tastes, norms, values, social attitudes, religions, personal priorities, and responses to interpersonal stimuli.

Local institutions:

Comprising government agencies, banking systems, labor unions, financial markets, accounting rules, regulations, etc.

Local business environments:

Including the stage of economic development, political risk, inflation, labor availability, labor quality, labor mobility, etc.

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39
Q

What are the 3 core elements of Financial Results Controls?

A
  1. Financial Responsibility Centers:

Responsible for financial results within the organization.

  1. Planning and Budgeting Systems (Formal management processes):

Responsible for establishing performance expectations and standards for evaluating performance.

  1. Motivational Contracts:

These define the connections between results and various organizational incentives.

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40
Q

What are Responsibility Centers?

A

Organizational units overseen by managers who hold responsibility for specified inputs and/or outputs.

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41
Q

What are Revenue Centers?

A

A unit that is responsible for generating revenues through sales or services.

Acc. for some expenses (e.g., salespeople’s salaries and commissions)

OBS. DO NOT HAVE CONTROL OVER COSTS OR INVESTMENT DECISIONS.

42
Q

What are Cost Centers?

A

A unit where managers are accountable for expenses.

43
Q

What are the 2 types of “cost centers” ?

A

EEC:

  1. Standard/Engineered Cost Centers.

Precise cost management and performance evaluation based on measurable inputs and outputs.

Example: BMW (Engine assembly - Labor cost)

DCC:

Managed/Discretionary Cost Centers.

Relationship between inputs and outputs is hard to measure.

Example: Novo Nordisk (Data Analysis - Insights gained).

44
Q

How is standard/engineered cost centers controlled?

A

Financial controls:

  1. Comparison of Standard Cost vs. Actual Cost Analysis.

Analysis of the cost of inputs that should have been consumed in producing the
output vs. the cost that was actually incurred.

  1. Additional controls.

Volume produced, quality, etc.

45
Q

How is discretionary cost centers controlled?

A
  1. Personnel controls:
  • Adherence to Budgeted Expenses
  • Subjective, Non-Financial Controls.
46
Q

What are Profit Centers (PCs)?

A

Units that are primarily concerned with generating profits.

47
Q

As a measure of performance, profit is….

A

Comprehensive:

That is, it incorporates many aspects of performance.

Unobtrusive:

The profit center manager has the freedom to make the revenue/cost tradeoffs without interference from higher-level management or other departments within the organization.

48
Q

What are Investment Centers?

A

Units where managers are held accountable for the accounting returns (profits) on the investment made.

Objective = Return om Capital.

They have control over costs, revenue, and investment in operating assets.

49
Q

What are the two performance objectives of managers in investment centers?

A
  1. Generate maximum profits from the resources at their disposal.
  2. Invest in additional resources only when such investments produce an adequate return.
50
Q

What is transfer pricing?

A

The price at which products or services are exchanged between profit centers within the same firm.

51
Q

What is the 3 purposes of transfer pricing?

A
  1. It helps profit center managers make good decisions by giving them accurate economic signals.
  2. It provides information for evaluating profit center performance.
  3. Move profits between company entities or locations due to tax optimization or in joint ventures.
52
Q

What are Market-based transfer prices?

A

Transfer prices that are determined by considering external market conditions.

53
Q

When are market-based transfer prices determined?

A

When a “competitive external market” exists.

54
Q

How is market-based transfer prices determined?

A

Market-based transfer prices are typically determined by looking at:

  1. The price that customers outside the company pay for a similar product.
  2. The price that other companies list for a similar product.
  3. The price offered by competitors for a similar product.
55
Q

What are Marginal Cost Transfer Prices?

A

A pricing method that approximates the variable or direct costs of production.

56
Q

What does Marginal Cost transfer prices exclude?

A
  1. Upstream fixed costs.
  2. Profits.
57
Q

Why does Marginal cost transfer prices provide poor information for evaluation purposes?

A

Because they dont consider fixed costs or profits, which are essential for accurately assessing performance.

58
Q

How can the selling PC recover its fixed cost and a gain a profit margin?

A

Through the lump-sum fee so that: Marginal cost + lump-sum fee

59
Q

What are Full Cost Transfer Prices?

A

A pricing method where the transfer price is based on the total cost of production, including both variable and fixed costs.

60
Q

What is Full Cost Plus Markup?

A

A pricing method that allows the selling profit center to earn a profit on internally transferred products or services.

61
Q

How are full Cost transfer prices determined?

A

Determined by a rough estimate of the market price when there is no competitive external market price available.

62
Q

What are Negotiated Transfer Prices?

A

Transfer prices are negotiated between the selling and buying PC managers themselves.

63
Q

Who has the bargaining power om terms of negotiated transfer prices?

A

Both managers should have some bargaining power, meaning they have alternatives to buying or selling outside the organization.

64
Q

What is Myopia?

A

A short-sighted focus on immediate gains or short-term objectives at the expense of long-term goals or sustainability.

65
Q

What is the primary goal of organizations?

A

To maximize shareholder value.

66
Q

How to cope with myopia?

A

Get long-term orientation:

  1. Reduce pressure for short-term profit.
  2. Control investments with preaction reviews.
  3. Extend the measurement horizon.
  4. Measure changes in value directly.
  5. Improve the accounting measures.
  6. Measure a set of value drivers (BSC)
67
Q

What is a Balanced Scorecard (BSC)?

A

A strategic management tool that incorporates financial measures reflecting past actions, alongside operational measures focusing on customer satisfaction, internal processes, and the firm’s innovation and improvement activities.

68
Q

What is a Strategy Map?

A

A visual representation that outlines a company’s strategic objectives and the cause-and-effect relationships between them.

69
Q

What are the 4 measurement components in BSC reflecting the organization’s vision and strategy?

A
  1. Learning and growth perspective.
  2. Process Perspective.
  3. Customer perspective.
  4. Financial perspective.
70
Q

What is the idea of a “Variance analysis” ?

A

To compare a planned/budgeted number with the actual number.

71
Q

What is Corporate Governance?

A

Structures and processes:

  • Ensuring companies create value for owners while meeting obligations to stakeholders.
  • Involves managing top management behaviors.
72
Q

What is the relationship between Corporate Governance and Management Control?

A

MCS:

Ensure proper employee behaviors from a top management perspective.

Corporate governance:

Controlling the behaviors of top management.

73
Q

To whom does the shareholders delegate authority to in an organization?

A
  1. Shareholders delegate control authority to the board.
  2. The board exercises ultimate control over management.
74
Q

What are the two main control responsibilities of the board regarding stakeholders?

A
  1. The board safeguards the equity investors’ interests by ensuring that management seeks to maximize shareholder value.
  2. Protect the interests of other corporate stakeholders by ensuring that the employees in the corporation act in a legally and socially responsible manner.
75
Q

What are the selected duties of directors and how are they defined and enforced?

A
  1. Duty of care:

Making or delegating decisions in an informed manner.

  1. Duty of loyalty:

Prioritizing corporate interests over personal ones.

  1. Duty of good faith:

Being devoted to the interests of the corporation and its shareholder.

  1. Duty not to waste:

Avoiding deliberate dissipation of shareholder value.

OBS. These duties are defined by and enforced through the legal system.

76
Q

What is the importance of board independence?

A
  1. Ensuring boards can fulfill their responsibilities effectively.
  2. Make unbiased decisions and be accountable to shareholders.
  3. Ensure continuity of executive leadership by overseeing proper vision and value alignment.
77
Q

What is meant by “interlocking directorates”?

A

A situation where directors of one company also serve as directors of another company, potentially raising concerns about conflicts of interest and lack of independence.

78
Q

What responsibilities do boards have regarding board competence?

A
  1. Boards have ultimate control over management.
  2. They are responsible for selecting and evaluating the corporation’s CEO.
  3. Boards ensure the quality of senior management.
  4. Boards review and approve the corporation’s long-term strategy and important management decisions, such as equity and compensation policies.
79
Q

What is the role of audit committees in corporate governance?

A
  1. Provide independent oversight over companies’ financial reporting processes, internal controls, and independent auditors.
  2. Enhance a board’s ability to focus intensively and relatively inexpensively on the corporation’s financial reporting-related functions.
  3. In publicly-held corporations, audit committees must be comprised of financially-literate outside (non-employee or independent) directors.
80
Q

What are the 3 major responsibilities of controllers within organizations?

A

Corporate and division controllers serve two key roles:

  1. Management-service responsibility.
  • Controllers aid business unit management in the decision-making process.
  1. Oversight and fiduciary
  • Involves ensuring that the actions of everyone in the organization are in the best interest of the organization.
  1. The primary goal of controllers is to ensure the organization’s financial health and integrity.
81
Q

What are the key responsibilities encompassed by the treasury function within an organization?

A
  1. Control of corporate funds.
  2. Provision of capital and financing.
  3. Cash planning and management.
  4. Managing relationships with investors and creditors.
  5. Overseeing banking activities, including cash and deposits.
  6. Handling accounts receivable (A/R), accounts payable (A/P), collections, and disbursements.
  7. Managing loans, investments, and securities.
  8. Capital risk management, including insurance and employee benefits.
82
Q

What are the two major responsibilities of the business unit controller, and what does each entail?

A
  1. Management-service responsibility:
  • Involves aiding business unit management in the decision-making process.
  • Requires active involvement in local decision-making to provide support and guidance.
  1. Financial reporting and internal control responsibility:
  • Ensures the accuracy of financial information from the business unit.
  • Ensures that internal control practices align with corporate policy and procedures.
  • Requires acting as a “policeman” or local guardian for the corporate office, maintaining independence in overseeing financial matters.
83
Q

How does the role of the business unit controller change with different reporting structures?

A
  1. Under centralization:
  • Report solid-line to the corporate controller and dotted-line (staff-relationship) to the business unit manager.
  • Focus is on financial control responsibility.
  • Role is perceived as a “corporate spy” or HQ representative ensuring compliance.
  1. Under decentralization:

Business unit controller reports dotted-line to the corporate controller and solid-line to the business unit manager.

Emphasis is on management-service responsibility.

Role is perceived as a “business unit ally” providing support to local decision-making.

84
Q

What are the factors that influence the decision for centralization or decentralization within a corporation?

A
  1. Corporate’s desire to exercise tight control.
  2. Implement uniform control systems across business units or divisions.
  3. Achieve economies of scale in control.
  4. Speed up the introduction of control changes or procedures.
85
Q

How can the controller function be controlled?

A

Internal auditors and audit committees oversee the controller function.

86
Q

What measures can be taken to ensure integrity and accuracy in financial reporting?

A
  1. Personnel and cultural controls establish a culture of integrity and transparency.
  2. Incentive systems tied to the accuracy of financial reports discourage manipulation.
  3. Solid line reporting ensures structured reporting to the central finance function, enhancing control and accuracy.
87
Q

What is an audit and what does it entail?

A
  • A systematic process of objectively obtaining and evaluating evidence regarding objects of importance.
  • Judging the degree of correspondence between these objects and certain criteria.
  • Communicating results to relevant users.
88
Q

What roles do auditors play within an organization?

A

Operates as staff and reports to high levels in the organization, often to the controller or VP Finance, serving as the “eyes and ears” of management.

89
Q

What types of audits do auditors conduct?

A
  1. Financial audits.
  2. compliance audits.
  3. Performance audits.

Each focusing on different aspects of the organization’s operations and compliance requirements.

90
Q

What are the benefits of conducting audits within an organization?

A
  1. Enhance credibility:

Audits add credibility to the information provided to user groups, such as investors, regulators, and stakeholders, by ensuring accuracy and reliability.

2 Risk avoidance:

Audits help in avoiding costly and harmful outcomes by identifying potential issues, errors, or irregularities early on, allowing for timely corrective action.

  1. Increased motivation:

Motivates individuals involved to act in a legal, ethical manner and in the best interest of the company and its owners, promoting accountability and integrity.

91
Q

What is ethics, and how is it defined?

A
  1. A set of moral principles guiding behavior and decision-making.
  2. Involving discerning between right and wrong.
  3. Understanding moral duties and obligations.
  4. Adhering to principles of integrity, honesty, fairness, and respect for others.
92
Q

What role do ethical principles play in defining behavior for employers and employees?

A
  1. Provide guidance for both employers and employees on behavior.
  2. Help consider the impact of actions on stakeholders such as shareholders, management, competitors, government, and society.
  3. Emphasize the importance of adhering to ethical standards beyond legal requirements, distinguishing ethical issues from legal ones.
93
Q

What are some examples of ethical issues commonly encountered in business?

A
  1. Harassment and discrimination.
  2. Ensuring health and safety in the workplace.
  3. Addressing whistleblowing or social media rants.
  4. Upholding ethical standards in accounting practices.
  5. Dealing with non-disclosure and corporate espionage.
  6. Managing technology and privacy practices.
94
Q

What role do codes of conduct play in organizations?

A
  1. Codes of conduct serve as guidelines for ethical behavior and operating principles within organizations.
  2. They outline expectations for employees regarding their conduct and decision-making processes, providing a framework for ethical decision-making and serving as a cultural control mechanism.
95
Q

What virtues do codes of conduct often emphasize?

A

Codes of conduct often emphasize virtues such as:

  1. Integrity, loyalty, objectivity, confidentiality, and competence.

These virtues serve as guiding principles for employees to uphold ethical standards in their interactions and decision-making processes within the organization.

  1. Additionally, the “tone at the top” reinforces adherence to these virtues, promoting a culture of ethical behavior throughout the organization.
96
Q

What are the implications (positive/negative) of creating budgetary slack for employees?

A

Positive Implications:

  • Exploiting superior knowledge about business possibilities.
  • Increasing the likelihood of meeting budget targets and earning performance-dependent rewards.
  • Protecting themselves from potential downside risks in an uncertain future.

Negative Implications:

  • Distorting resource allocation and performance evaluation decisions based on inflated budget submissions.
  • Protecting employees from evaluation unfairness caused by imperfect performance measures.
  • Following the bandwagon without considering the overall impact.
97
Q

What does budgetary slack depend on?

A
  1. The quality of performance measures in place.
  2. The rigidity of budget targets set for employees.
  3. The intentions of the employees, whether they are driven by self-interest.
  4. Whether superiors are aware of the slack being created.
  5. Whether superiors encourage or discourage slack creation.
  6. Whether the amount of slack created is deemed “material” or significant.
  7. Whether the individual is bound by one or more explicit codes of professional conduct.
98
Q

What is earnings management?

A

Actions taken to make short-term performance appear better than it actually is, even though these actions offer no real economic benefits and may be costly in the long run.

99
Q

What is the characteristics of earning management?

A
  1. Selective choices of accounting policies.
  2. Manipulation of accounting judgments fx. reserves, and timing of financial transactions (sales and expenses).
100
Q

What are the long-term risks associated with earnings management?

A
  1. Reputation damage:

If discovered, the firm may earn a reputation for reporting “low quality” earnings, leading users of the information to discount the firm’s claims.

  1. Hindered problem detection:

Smoothing systems hinder management from detecting problems early, potentially allowing issues to escalate.

  1. Cultivation of a gameplaying culture:

Earnings management can foster a culture where individuals who are adept at managing earnings, rather than those who excel at their roles, may be promoted.

101
Q

What is Dual Rate Transfer Prices?

A

The use of two prices:

  1. One for the selling Profit Center (PC)
  2. One for the buying PC.
102
Q

What is “Personnel” controls?

A
  1. Selection and placement.
  2. Training.
  3. Job design and provision of neccessary resources.

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