Management control

Management Control

• Management control is a broad framework encompassing systems, rules, practices, values, and activities to direct employee behavior.
• It includes accounting and measurement systems, organizational structure, administrative processes, and cultural controls.
• Management control aims to control costs, coordinate decentralized decision-making, and maintain efficiency and dynamism.

Planning

• Planning is formulating the direction for future operations through statements of intent.
• Organizations need resources, processes, and monitoring to execute plans, converting resources into valuable outputs.

Decision-Making

• Management accounting improves decision-making through communicating relevant insights and analysis to all decision-makers.
• Good accounting places the best available evidence and forecasts at the center of the decision-making process, achieving objective insights.
• Decision-makers should consider their organizations' social and environmental duties.

Controlling

• Management accountants proactively control performance against predetermined targets.
• This involves monitoring projects, people, processes, sales, revenue, resources, assets, liabilities, cash flow, and other non-financial measures.
• Performance reports support the control process.

Financial Accounting vs. Management Control

• Financial Accounting: A compulsory, standardized system for external reporting, focusing on the consequences of past activities (objectivity, verifiability, precision).
• Management Control: An internal, non-mandatory system for decision-making about future activities, focusing on relevance and speed (performance and non-performance).

Accounting Systems Overview

• Financial Accounting: Generates financial statements like balance sheets, income statements, and cash flow statements, complying with standards (PCG, US GAAP, IFRS).
• Cost Accounting: Provides cost structure data for decision-making, including full, partial, and variable costs, and break-even points.
• Management Control: Integrates financial and cost accounting to create a performance evaluative system using budgets, variance analysis, and scorecards.

Fundamentals of Profit and Cash Flow

• Profit and cash flow analysis assesses the impact of receivables, expenses, and assets.
• This analysis considers cash availability, financial structure balance, and operational profitability to evaluate overall financial health.

Responsibility Centers

• Cost Centers: Manage costs within a department or unit (e.g., manufacturing).
• Revenue Centers: Generate revenue but don't control associated costs.
• Profit Centers: Manage both revenue and costs (e.g., retail stores).
• Investment Centers: Manage revenue, costs, and capital investment (e.g., company divisions).

Performance Measurement

• Performance measurement involves defining goals (e.g., operating profit), identifying measurement items (e.g., asset definition), using valuation methods (e.g., current vs. historical costs), and setting targets (e.g., required rate of return).

Key Performance Indicators (KPIs)

• Return on Investment (ROI): Combines profitability and investment (operating profit/net profit, total assets/capital employed).
• Residual Income (RI): Measures profit exceeding a company's required rate of return.
• Return on Sales (ROS): Profit margin on sales revenue.

Asset Measurement Methods

• Current Cost vs. Historical Cost: Current cost reflects fair market value, while historical cost is original acquisition cost.
• Gross vs. Net Book Value: Gross book value is the original cost; net book value is more common, consistent with the balance sheet and net profit computations (including depreciation).

Budgeting and Forecasting Processes

• Budgeting aligns operational plans with corporate strategy, using delegation and performance management to ensure accountability.
• Traditional Budgeting can be criticized for potential gaming, myopia, and rigidity.
• Beyond Budgeting advocates for relative performance targets and flexibility.
• Sales Forecasts show the relationship between sales predictions and procurement planning.
• Free cash flow is calculated as cash collections minus cash disbursements.

Budgetary Control and Variance Analysis

• Variance analysis identifies differences between actual and budgeted figures (positive revenue variance is favorable, positive cost variance is unfavorable).
• Revenue variances include volume and price variances.
• Direct cost variances involve raw materials and direct labor variances.

Sustainability & Management Control

• Sustainable Development Goals (SDGs): Established in 2015 by the UN as part of the 2030 Agenda, emphasizing actions that meet present needs without compromising future generations.
• Companies are increasingly motivated to integrate sustainability, often due to external factors (e.g., laws, regulations) and internal factors (economic opportunities).
• Sustainability Indicators are based on environmental, social, and governance factors, and can be used in management controls and systems.

Governance, Rewards & Compensation, and Control Typologies

• Governance: Concerns transparency and anti-corruption.
• Sustainability Indicators: metrics for environmental, social, and governance factors.
• Control Typologies: involve complete packages of formal and informal mechanisms, advanced formal controls (planning and advanced indicators), and dominant informal controls (values, symbols).
• Rewards and compensations are rarely used for sustainability (mostly for senior managers).

Strategic Integration and Materiality

• Double Materiality: Financially and impact materiality (company's influence on environment and society).
• Integration: Traditional and sustainable systems are merged to support sustainable strategies.