Chapter 16: Managerial Control

Transfer Price

Price charged by one unit for a good or service provided to another unit within the organization.

Accounting Audits

Procedures used to verify accounting reports and statements.

Market Control

Control based on the use of pricing mechanisms and economic information to regulate activities within organizations.

Balanced Scorecard

Control system combining four sets of performance measures: financial, customer satisfaction, business processes, and learning and growth.

Feedback Control

Control that focuses on the use of information about previous results to correct deviations from the acceptable standard.

Clan Control

Control based on the norms, values, shared goals, and trust among group members.

Discuss the use of clan control in an empowered organization.

1. Approaching control from a centralized, mechanistic viewpoint is increasingly impractical. In today's organizations, it is difficult to program one best way to approach work, and it is often difficult to monitor performance. 2. To be responsive to customers, companies can use clan control to harness the expertise of employees and give them the freedom to act on their own initiative.

Describe the purposes for using budgets as a control device.

1. Budgets combine the benefits of feedforward, concurrent, and feedback controls. They are used as an initial guide for allocating resources, a reference point for using funds, and a feedback mechanism for comparing actual levels of sales and expenses with their expected levels. 2. Recently companies have modified their budgeting processes to allocate costs over basic processes (such as customer service) rather than to functions or departments. 3. By changing the way they prepare budgets, many companies have discovered ways to eliminate waste and improve business processes.

Explain why companies develop control systems.

1. Left to thwir own devices, enployees may act in ways that do not beenfit the organization. 2. Control systems are designed to eliminate idiosyncratic behavior and keep employees directed towards acheiving goals of the firm. 3. Control systems are a steering mechanism for guiding resourcesamd for guiding each individual to act on behalf of the organization.

Identify ways in which organizations use market control mechanisms.

1. Market controls can be used at the level of the corporation, the business unit or department, or the individual. 2. At the corporate level, business units are evaluated against one another based on profitability. At times, less profitable businesses are sold while more profitable businesses receive more resources. 3. Within business units, transfer pricing may be used to approximate market mechanisms to control transactions among departments. 4. At the individual level, market mechanisms control the wage rate of employees and can be used to evaluate the performance of individual managers.

Define basic types of financial statements and financial ratios used as controls.

1. The basic financial statements are the balance sheet and the profit and loss statement. 2. The balance sheet compares the value of company assets to the obligations the company owes to owners and creditors. 3. The profit and loss statement shows company income relative to costs incurred. In addition to these statements, companies look at liquidity ratios (whether the company can pay its short-term debts), leverage ratios (the extent to which the company is funding operations by going into debt), and profitability ratios (profit relative to investment). These ratios provide a goal for managers as well as a standard against which to evaluate performance.

Summarize how to design a basic bureaucratic control system.

1. The design of a basic bureaucratic control system involves four steps: 1) setting performance standards, 2) measuring performance, 3) comparing performance with the standards, and 4) eliminating unfavorable deviations by taking corrective action. 2. Performance standards should be valid and should cover issues such as quantity, quality, time and cost. 3. Once performance is compared with standards, the principle of exception suggests that the manager needs to attend to and take action on the exceptional cases of significant deviations. Then the manager should take the action most likely to solve the problem.

Strategy Map

A depiction of how how an organization plans to convert its various assets into desired outcomes.

After-Action Review

A frank and open-minded discussion of four basic questions aimed at continuous improvement.

Debt-Equity Ratio

A leverage ratio that indicates the company's ability to meet its long-term financial obligations.

Current Ratio

A liquidity ratio that indicates the extent to which short-term assets can decline and still be adequate to pay short-term liabilities.

Principle of Exception

A managerial principle stating that control is enhanced by concentrating on the exceptions to or significant deviations from the expected result or standard.

Activity-Based Costing (ABC)

A method of cost accounting designed to identify streams of activity and then to allocate costs across particular business processes according to the amount of time employees devote to particular activities.

Internal Audit

A periodic assessment of a company's own planning, organizing, leading, and controlling processes.

Return on Investment

A ratio of profit to capital used, or a rate of return from capital.

Balance Sheet

A report that shows the financial picture of a company at a given time and itemizes assets, liabilities, and stockholders' equity.

External Audit

An evaluation conducted by one organization, such as a CPA firm, on another.

Management Audit

An evaluation of the effectiveness and efficiency of various systems within an organization.

Profit and Loss Statement

An itemized financial statement of the income and expenses of a company's operations.

Control

Any process that directs the activities of individuals toward the achievement of organizational goals.

Triple Bottom Line

Economic, social, and environmental performance.

Standard

Expected performance for a given goal: a target that establishes a desired performance level, motivates performance, and serves as a benchmark against which actual performance is assessed.

Management Myopia

Focusing on short-term earnings and profits at the expense of longer-term strategic requirements.

Stockholders' Equity

The amount accruing to the corporation's owners.

Liabilities

The amounts a corporation owes to various creditors.

Feedfoward Control

The control process used before operations begin, including policies, procedures, and rules designed to ensure that planned activities are carried out properly.

Concurrent Control

The control process used while plans are being carried out, including directing, monitoring, and fine-tuning activities as they are performed.

Budgeting

The process of investigating what is being done and comparing the results with the corresponding budget data to verify accomplishments or remedy differences; also called budgetary controlling.

Bureaucratic Control

The use of rules, regulations, and authority to guide performance.

Assets

The values of the various items the corporation owns.

List procedures for implementing effective control systems.

To maximize the effectiveness of controls, managers should 1) establish valid performance standards, 2) provide adequate information to employees, 3) ensure acceptability, 4) maintain open communication, and 5) use multiple approaches (such as bureaucratic, market, and clan control.)