Management control
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Questions and Answers

What is the widely used definition of management controls, as stated in the text?

Those systems, rules, practices, values, and other activities management put in place to direct employee behavior.

What are the three key components of management control?

  • Cost Centers, Revenue Centers, Profit Centers
  • Budgeting, Forecasting, Variance Analysis
  • Planning, Decision-Making, Controlling (correct)
  • Financial Accounting, Cost Accounting, Management Control

    • What is the purpose of plans in terms of organizational execution?

    They outline the required resources, enabling processes, and monitoring mechanisms for converting resources into valuable outputs and achieving targets.

    What is the goal of data planning?

    <p>To source, assemble, refine, and present data that will be used for evaluation, prioritization, target setting, outcome prediction, and measuring the execution of plans.</p> Signup and view all the answers

    Good management accounting improves decision-making because it extracts value from information.

    <p>True</p> Signup and view all the answers

    Which of the following is NOT a level of the organization where management accountants proactively control performance?

    <p>Marketing Strategies</p> Signup and view all the answers

    Financial accounting is used primarily for internal reporting.

    <p>False</p> Signup and view all the answers

    What is the primary purpose of management control?

    <p>To support decision-making for future activities, focusing on relevance and speed over precision.</p> Signup and view all the answers

    What does cost accounting produce?

    <p>Cost structure data essential for decision-making, including full, partial, and variable costs, as well as break-even points.</p> Signup and view all the answers

    Management control integrates financial and cost accounting information to create a comprehensive system for performance evaluation.

    <p>True</p> Signup and view all the answers

    What is the primary focus of cost centers?

    <p>Managing costs within a department or unit.</p> Signup and view all the answers

    What is the primary function of revenue centers?

    <p>Generating and managing revenue, while lacking control over associated costs.</p> Signup and view all the answers

    Profit centers are responsible for managing both revenues and costs.

    <p>True</p> Signup and view all the answers

    What is the responsibility of investment centers?

    <p>To manage revenue, costs, and capital investments, holding managers accountable for profit generated and the capital employed.</p> Signup and view all the answers

    The Controllability Principle suggests that managers should be held accountable for elements they can control.

    <p>True</p> Signup and view all the answers

    Which of the following is NOT a benefit of decentralization?

    <p>Increased bureaucracy</p> Signup and view all the answers

    Decentralized structures may suffer from lack of coordination, potential goal conflicts, and difficulty in spreading innovative practices across the organization.

    <p>True</p> Signup and view all the answers

    What are the five essential steps in designing accounting-based performance measures?

    <p>Selecting financial goals, defining measurement items, deciding on valuation methods, setting performance targets, and determining feedback timing.</p> Signup and view all the answers

    What is the primary purpose of Return on Investment (ROI) as a performance measure?

    <p>To combine profitability and investment, using operating profit or net profit in the numerator and total assets or capital employed in the denominator.</p> Signup and view all the answers

    Residual Income (RI) measures the absolute profit exceeding a company's required rate of return.

    <p>True</p> Signup and view all the answers

    What is the primary purpose of Return on Sales (ROS)?

    <p>To indicate profit margin on sales revenue, commonly used within DuPont analysis to support ROI.</p> Signup and view all the answers

    Which of the following is NOT a definition of investment used in accounting-based performance measures?

    <p>Net Income</p> Signup and view all the answers

    What is the primary purpose of coordinating operational plans and corporate strategy in budgeting?

    <p>To ensure alignment between operational plans and corporate strategy, facilitating inter-departmental communication and strategic cohesion.</p> Signup and view all the answers

    What is the role of delegation in budgeting?

    <p>To assign specific goals to managers, enhancing empowerment and partial delegation, which fosters accountability.</p> Signup and view all the answers

    How does budgeting serve as a performance management tool?

    <p>It acts as a benchmark, comparing actual results against budgeted expectations and allowing for corrective measures.</p> Signup and view all the answers

    Strategic planning focuses on the major orientations of the company over a long-term horizon.

    <p>True</p> Signup and view all the answers

    Which of the following is NOT a criticism of traditional budgeting?

    <p>Flexibility</p> Signup and view all the answers

    Beyond budgeting advocates for shifting from fixed performance contracts to relative performance targets.

    <p>True</p> Signup and view all the answers

    What is the primary purpose of the sales forecast to purchases exercise?

    <p>To illustrate the link between sales predictions and procurement planning, highlighting the need for integrated planning across departments.</p> Signup and view all the answers

    Free cash flow is calculated by subtracting cash disbursements from cash collection.

    <p>True</p> Signup and view all the answers

    Which of the following is NOT a component of variance analysis?

    <p>Financial statement analysis</p> Signup and view all the answers

    A positive revenue variance is favorable, while a positive cost variance is unfavorable.

    <p>True</p> Signup and view all the answers

    What is the purpose of volume variance?

    <p>To assess whether the company achieved its budgeted sales quantity.</p> Signup and view all the answers

    Direct cost variances focus on raw materials and direct labor variances, allowing companies to identify areas where budget deviations occur.

    <p>True</p> Signup and view all the answers

    The Sustainable Development Goals (SDGs) were adopted by the UN in 2015 as part of the 2030 Agenda.

    <p>True</p> Signup and view all the answers

    What is the core concept of sustainable development?

    <p>Meeting the needs of the present without compromising the ability of future generations to meet their own needs, while preserving Earth's life-support systems.</p> Signup and view all the answers

    Which of the following is NOT a key theme of sustainability?

    <p>Technology</p> Signup and view all the answers

    Sustainability indicators are proposed by the World Economic Forum (WEF) via common metrics.

    <p>True</p> Signup and view all the answers

    Traditional systems of management control typically focused on economic objectives.

    <p>True</p> Signup and view all the answers

    Which of the following is NOT a component of sustainable management controls?

    <p>Financial controls</p> Signup and view all the answers

    Rewards and compensations for sustainability are often used extensively for all levels of employees in organizations.

    <p>False</p> Signup and view all the answers

    Cultural controls play a significant role in promoting sustainable practices within organizations.

    <p>True</p> Signup and view all the answers

    Double materiality refers to the impact of sustainability on the company and the company's influence on the environment and society.

    <p>True</p> Signup and view all the answers

    Integrated systems for sustainable management involve merging traditional and sustainable systems to support sustainable strategies.

    <p>True</p> Signup and view all the answers

    Study Notes

    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.

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