1043502
Description
Flashcards by Jan Frederik, updated more than 1 year ago
|
Created by Jan Frederik
over 11 years ago
|
|
| Question | Answer |
| Primary function of management control | to influence employee behaviours in desirable ways |
| benefit of management control | increased probability that organization's objectives will be achieved |
| management control | devices/systems managers use to ensure that behavior/decisions of employees are consistens with organizations objectives/strategies |
| disadvantages of management control | suppress initiative, creativity & innovation |
| strategic control vs management control | SC: is our strategy valid or do we need to change it? (focus on external) MC: are employees likely to behave accordingly? do they understand what is expected? (focus on internal) |
| why is management control necessary? | 1. lack of direction 2. motivational problems 3. personal limitations |
| lack of direction | employees perform poorly bc they dont know what orga wants from them. management control involves informing employees then. |
| motivational problems | employees have other goals than orga -> motivational problems occur. management control involves providing of incentives then. |
| personal limitations | employees lack intelligence, training or experience to perform well. management control involves training then. |
| good control | management can be reasonably sure that no major unpleasant surpirses will occur |
| trade-off | costs of implementing management control vs control loss costs (cost benefit analysis for optimal control) |
| avoidance of control problems | activity limitation, automation, centralization, risk sharing |
| results control (RC) | - RC influences action bc employees are concerned about consequences then - employees are empowered to take those actions they believe will best produce desired outsomes - RC particularly dominant as means of controlling behaviour of professional employees with decision authority - involves rewarding employees for generating good results. e.g. pay for performance, job security, promotions...) |
| disadvantage results control | creates meritocracies - only the BEST is rewarded |
| management by exception approach | intervening and investigating only when performance is lagging (typical for RC) |
| implementation of results control (4 steps) | 1. define performance dimensions on which results are desired (what you measure is what you get) 2. define measurements of performance 3. setting performance targets 4. providing rewards/incentives (extrinsic vs intrinsic rewards) |
| conditions determining effectiveness of RC | 1. knowledge of desired results: what results are required in areas they wish to control 2. ability to influence desirable results 3. ability to measure controllable results effectively |
| result measures should be | 1. precise 2. accurate 3. congruent 4. objective 5. understandable 6. timely |
| controllability principle | employees are held accountable only for results they were able to influence |
| action control | ensuring that employees perform certain actions known to be beneficial for orga |
| 4 types of action control | 1. behavioral constraints 2. pre-action reviews 3. action accountability 4. redundancy |
| behavioral constraints | 1. physical constraints: limiting access like locks, PC passwords... 2. administrative constraints: restriction on decision making authority or seperation of duties 3. or combination of both |
| pre-action reviews | action plans of employees must be approved by reviewers or modified |
| action accountability | holding employees accountable for actions they take: 1. define acceptable actions 2. communicate them to employees 3. track/observe actions (mystery shopper e.g.) 4. reward good actions and punish bad ones 5. evaluate |
| redundancy | assign more employees/machines to particular task than strictly necessary |
| control problems addressed by RC | 1. lack of direction 2. motivational problems 3. personal limitations |
| control problems addressed by behavioral constraints | 1. motivational problems |
| control problems addressed by redundancy | 1. motivational problems 2. personal limitations |
| control problems addressed by pre-action reviews | 1. lack of direction 2. motivational problems 3. personal limitations |
| control problems addressed by action accountability | 1. lack of direction 2. motivational problems 3. personal limitations |
| preventive controls | most powerful form of control bc none of the costs of undesirable behavior will be incurred. they are designed to prevent problems before orga suffers any adverse effects on performance. e.g. planning processes, segregation of duties, approval loops, passwords...) |
| detective controls | reconciliations, analytical reviews etc |
| effectiveness of action controls depend on | 1. knowledge of desired results (analyze past actions and identify undesired ones) 2. ability to ensure that undesired actions are not taken |
| cultural control | indirect control. shape organizational behavioral norms and encourage employees to monitor and influence each other's behavior. works like group pressure. cultures are built on shared believes, norms, values... |
| personnel control | motivate ppl to control their own behavior |
| personnel controls serve 3 basic purposes: | 1. clarify expectations from orga 2. ensure that employees are able to do good job 3. increase likelihood that employees engage in self-monitoring |
| how to implement personnel controls | 1. selection & placement 2. job design & provision of necessary resources 3. training |
| forms of cultural controls | 1. code of conduct 2. group rewards 3. job rotation 4. physical & social arrangements 5. tone at top 6. open book management (sharing of information) |
| control problems addressed by selection & placement | 1. lack of direction 2. motivational problems 3. personal limitations |
| control problems addressed by training | 1. lack of direction 2. personal limitations |
| control problems addressed by job design & provision of necessary resources | 1. lack of direction 2. motivational problems 3. personal limitations |
| control problems addressed by job rotation | 1. lack of direction 2. motivational porblems 3. personal limitations |
| control problems addressed by group rewards | 1. lack of direction 2. motivational problems 3. personal limitations |
| control problems addressed by tone at the top | 1. lack of direction |
| control problems addressed by physical & social arrangements | 1. personal limitations |
| control problems addressed by codes of conduct | 1. lack of direction |
| tight control | - almost always involve different kinds of control - provide higher degree of certainty that employees behave like orga wants |
| desired results must be | 1. congruent with orga objectives 2. specific (descirbed in specific terms) 3. timely (described in short incerements of time) 4. communicated & internalized 5. complete |
| performance measures must be | 1. precise 2. objective 3. timely 4. understandable |
| reinforcements/incentives provided must be | 1. directly linked to performance 2. definetly linked to performance 3. in best case: incentives are provided individually, bc different employees react in different ways to monetary/nonmonetary incentives |
| what makes controls tight? | - frequent - detailed - who performes controls? |
| investing in MCS causes | - direct out of pocket costs - indirect, less obvious costs |
| direct out of pocket costs | direct monetary costs |
| indirect costs of implementing MCS | can be greater than direct costs, caused by behavioral displacement |
| behavioral displacement | occurs when MCS encourages behaviors that are not consistent with orga objectives |
| forms of behavioral displacement | 1. gamesmanship 2. operating delays 3. negative attitudes |
| behavioral displacement @ RC | when orga defines set of result measures that are inconsistent with orga objectives |
| behavioral displacement @ AC | means-ends inversion: employees just pay attention to what they do and lose sight of what they should accomplish action incongruence: specified actions doesnt fit to true objectives of orga rigid, non-adaptive behavior: creating consistent behavior, but hindrance of employee s abilities to see change and react to it |
| reasons for incongruence of result measures and true orga objectives | 1. poor understanding of desired results 2. over quantification (concentration on areas that are quantifiable, ignore quality factors) |
| when action controls? | action controls and bureaucracy can be good in stable environments with centralized knowledge about what actions are desired |
| behavioral displacement @ personnel/cultural control | 1. wrong recruiting 2. wrong training 3. culture gives wrong norms 4. implementation in the wrong environment |
| gamesmanship | actions that employees take to improve their performance indicators without producing positive effect for orga |
| 2 forms of gamesmanship | 1. creation of slack resources 2. data manipulation |
| creation of slack resources | - consumption or orga resources in excess what is actually needed - budget slack/resource slack/slack in target setting |
| advantages/disadvantages slack | + can reduce manager tension + can increase organizational resilience to change + can make availabe some resources that can be used for innovation - obscures true underlying performance - distorts the decisions based on the obscured information |
| data manipulation | employee makes himself looking good by changing performance indicators. 1. falsification 2. data management |
| falsification | report errorneous data (fraud, illegal) |
| data management | any action designed to change the reported results like sales, earnings etc... (legal, but lousy) - accounting methods: involves an intervention in measurement process like flexibility in use of accounting standards or methods to manage earnings - operating methods: altering operating decisions (actively push sales or delay expenditures...) |
| operating delays | delays like limiting access to stockroom by requiring a superior signature or sth like that possible solution: decentralization (increases autonomy) decision delays can be very costly, especially in highly competitive markets, it kills entrepreneurial spirit |
| negative attitudes produced by action controls | most ppl react negatively to action controls, annoying to feel being observed 24/7, |
| negative attitudes produced by results control | 1. lack of employee commitment to peformance targets (if targets are unrealistic) 2. problems in measurement system (if measurement system is perceived as being unfair) 3. low rewards (not valued high) 4. no participation in target setting |
| result controls and possible harmful side effects | 1. behavioral displacement 2. gamesmanship 3. negative attitudes |
| behavioral constraints and harmful side effects | 1. operating delays 2. negative attitudes |
| pre-action reviews and harmful side effects | 1. operating delays 2. negative attitudes |
| action accountability and harmful side effects | 1. behavioral displacement 2. gamesmanship 3. negative attitudes |
| redundancy and harmful side effects | 1. negative attitude |
| selection & placement and harmful side effects | 1. behavioral displacement |
| training and harmful side effects | 1. behavioral displacement |
| creation of strong organizational culture and harmful side effects | 1. behavioral dusplacement |
| group based rewards and harmful side effects | behavioral displacement |
| how to design an MCS? | 1. answer two basis questions: a) what is desired b) what is likely to happen? 2. answer next two questions: a) what controls should be used and b) how tight |
| understanding desired actions & results | 1. key actions: what actions need to be performed to achieve highest probability of success 2. key results: key areas wherein things must go right in order for business to succeed |
| choice of controls | set of MC selected from feasible alternatives should provide greatest net benefits (benefits-costs) first look at cultural/personnel control (its cheaper), then check costs of AC or RC |
| avantages AC | - most direct form of control - leads to documentation (organizational memory) - actions become predictable, leads to coordination |
| disadvantages AC | - feasibility limitation (excellent knowledge about required actions to take is needed) - behavioral displacement (ppl tend to focus on actions they know best and are easier to control instead of most important ones) - can lead to rigid behavior, non adaption - discourage creativity and innovation - sloppiness (employees could become too familiar with certain tasks -> careless and rushed work) - cause negative attitudes (no self-actualization) - may be costly |
| advantages RC | - feasibilty (perfect knowledge about actions not neccessary) - employees are granted autonomy - provide on-the-job training - less costly than AC |
| disadvantages RC | - provide less than perfect indications whether good actions have been taken bc measures fail to meet all qualities of good measures: congruence, precision, timeliness, objectivity, understandability - risk is shifted from owners to employees (when results affected by sth else than employee skills) - competing control functions for performance targets: motivation to achieve vs coordination - not all employees want autonomy |
| choice of control tightness | depends on 3 factors: a) what are potential benefits of tight control b) what are costs of implementing tight controls c) what are potential harmful side effect |
| tight controls most beneficial | in areas most critical to orga success tight or not depends on cost-benefit analysis |
| usually when firm grows | also number of AC and RC will grow everything becomes more fomalized |
| optimal form of control | there is no optimal form of control. behavior of employees is unpredictable. best to use is mix of tigth & lose controls to create autonomy and influence on same time. tight control for important areas, for other areas lose control if possible let culture do the work, creates value sharing and avoid harmful side effects |
| opportunity cost of capital | - a dollar today is more worth than a dollar tmrrw - economic and accounting profits differ (accounting profts dont include opportunity costs of money tied up in project) - all cash flows have to be converted to equivalent flows (occured at same time) |
| future value (FV) | X * (1 + interest rate) 100€ * 1,05 = 105€ (end-of-year euros) over several (3) years: 100€ * 1,05³ |
| present value (PV) | discount amount of money / (1+interest rate) 105/1.05 = 100 |
| perpetuity | infinite streams of equal payment PV = FV/r |
| annuity | stream of equal cash flows for defined period of time PV = FV / r * (1-(1/(1+r)^n)) |
| monthly interest rate | annual interest rate = 6% monthly = (1+r)^1/12-1 1.06^1/12 - 1 = 0,0048 |
| capital budgeting | process of deciding how much to invest in projects that yield cash flows over several years all costs of projetcs are opportunity costs once project is built the opp costs become fixed costs |
| discount cash flows, not accounting earnings | focus on cash flows bc accounting earnings contain accounting accruals sales are recorded when legal liability arises, not when cash is collected earnings do not contain money spent until economic benefits of investment is received therefor dollars earned do not reflect dollars received (accounting earnings) |
| working capital | current assets (cash, inventory, accounts receivable) - current liabilities (acc payable, notes payable, long term debt) |
| sunk costs | incurred prior to investment decison and are forgone, not include in analysis BUT include opportunity costs |
| financing costs | costs of fincancing project are implicitly included when future cash flows are discounted therefor do not include interest charges on debt! |
| payback | number of years or months it takes to return initial investment initial investment/cash inflow every year e.g. 700000/200000 = 3.5 years |
| decison making (7 steps) | 1. clarify problems 2. define criterion upon decision should be based (e.g. market share, profit) 3. identify alternatives 4. develope decision model (simplified representation of problem) 5. collect data 6. select alternative 7. evaluate |
| usefulness of data | 3 characteristics define usefulness of data 1. relevance 2. accuracy 3. timeliness |
| primary role of managerial accountant | a) decide what information is releavnt in order to solve problem b) provide accurate and timely data |
| relevant information | two criteria: 1) cost or benefit information must involve future event 2) costs differ among competing alternatives |
| joint prodction process | results in 2 or more products (joint products) example of cocoa beans, after joint production process two products: cocoa butter and cocoa powder |
| split-off-point | point in production process where joint products are identifiable as two seperate products |
| theory of constraints | identify bottlenecks and find ways to relax them |
| managing constraints | - outsourcing bottleneck operation - employ parallel processing, products can undergo productionprocess simultanously then - working overtime at bottleneck operation - retrain employees and shift them to bottleneck - eliminate any non-value added activities at bottleneck |
| sensitivity analysis | technique to find out what would happen if data varies beneficial for dealing with uncertainty |
| purposes of incentives | 1. motivational (effort-inducing) 2. informational (effort-directing) 3. attraction & retention (attract & retain empoyees) 4. non-control purposes (when performance of orga is poor then cash outlays for compensation packages is lower as well) |
| monetary incentives | 1. salary increase 2. short-term incentives (bonuses, piece-rate payments, comissions) 3. long-term incentives (based on performance measures over periods greater than 1 year) |
| stock option plans | give employees the right to purchase a set number of shares of company stock at a set price during a specified period of time |
| advantages stock option plans | - motivates employees to increase stock price - employees only benefit when stock price rises - some of employees wealth is tied to company - lead to longterm focus - incentive compensation without cash outlay |
| disadvantages stock option plans | - no penalty for losses -> managers will act more risky - generates windfall compensation when stock prices improve marketwide instead bc of firm performance - morale & retention problems when stock price decreases dramatically |
| restricted stock plans | employees are given stocks for free but they just may sell it after they have been in company for specific period of time |
| evaluate incentive systems | rewards should be 1. valued by employees 2. large enough to have impact 3. understandable 4. timely 5. generating durable feelings 6. reversible, in case evaluators make mistakes 7. cost efficient |
| group rewards | lead to cultural control can also lead to free riders |
| investment myopia | holding managers accountable for short term profits may induce them to reduce or postpone investments that promise payoffs in future measurement periods |
| operating myopia | managers can destroy goodwill by forcing employees to work overtime at end of measurement period in order to book earnings faster |
| channel stuffing | boosting near term sales by talking buyers in purchasing greater amounts while grant discounts or lower prices to boost sales |
| divisonalization | huge companies with different division and different responsibilty centers |
| ROI | return on investment accounting profits earned by division divided by investments tied in division |
| disadvantages ROI | - numerator is accounting profits -> myopia - tendency for measures to induce suboptimization - difficulties in measuring fixed assets portion |
| suboptimization | managers make investments that make division look good even though these investments are not in best interest of orga example: cost of capital 15%, investment opportunity offers 20% return, its good for comoany but manager with performance target 30% wouldnt do it |
| remedies to myopia problem | 1. reduce pressure for short term performance - increase long term indicator weighting - make short term goals easier to achieve, so managers can focus on long term performance 2. pre-action reviews to control devlopmental long term investments 3. lengthen horizon on which performance is measured 4. change what is measured (shareholder value creation instead of accounting income) 5. combine different measurement systems (BSC and market and accounting measurement systems) |
| hedgehog concept | orgas are more likely to succeed when they focus on single, simple, big purpose above all else |
| financial intermediaries | used to provide independent certification venture capital firms, banks, collective investment funds, pension funds... analyze different investment oportunities to make investment decision |
| information intermediaries | used to provide independent certification auditors, financial analysts, credit rating agencies, financial press provide information for investors on quality and various business investment opportunities |
| role of financial reporting in capital markets | critical challenge: allocation of savings to investment opportunities |
| matching savings to business is complicated bc | 1. entrepreneurs have better information than savers on the value of the investment opportunity 2. investors know that entrepreneurs have incentive to inflate value of their businesses 3. savers lack financial sophistication |
| goal of financial analysis | assess performance of orga in context of stated goals and strategy |
| ratio analysis | how line items in financial statements relate to each other |
| cash flow analysis | examine firms liquidity and how it manages operating, investment and financing cash flows |
| time-series compariosn | compare ratios for orga over several years |
| cross-sectional comparison | compare ratios of different orgas |
| ROE | net profit/shareholder's equity provides indication of how well managers employ the funds invested by shareholders to generate returns |
| ROA | net profit/assets how much profit an orga is able to generate for every dollar of assets invested |
| output of planning and budgeting system | written plan that clarifies where orga wishes to go (objectives) and how it intends to get there (strategies) and what results should be expected (performance targtes) |
| 4 main purposes of planning and budgeting | 1. planning - staffing and operational tactics can be adjusted - action control (preaction reviews) - long term thinking 2. coordination - sharing of infos across orga - top down communication of objectives and bottom up communication of opportunities 3. top management oversight - pre-action reviews - management by exception 4. motivation - plans and budgets affect manager motivation |
| strategic planning | broad process of thinking about orga's mission, objective and means involves: - overachieving vison or mission and objectives for the orga as a whole - understanding of current position of orga (SWOT) - agreement about types of businesses or activities orga should pursue - strategy for each of the core businesses |
| capital budgeting (programming) | - identification of specific action progams (investments to be made in next 5 years) - specification of resources each will consume - specification of potential constraints |
| operational budgeting | - preparation of short term financial plan |
| model based targets | performance targets derived from predictions |
| historical targets | performance targets derived directly from performance in prior periods |
| solution to budget gaming problem | adopt a purely linear pay-for-performance system that rewards actual peformance independent of budget targets no cap and no hurdles! |
| internal control (coso definition) | process affected by management, designed to provide reasonable assurance regarding achievement of objectives in folowing categories: - efficiency & effectiveness in operations - reliability of financial reporting - compliance with applicable laws & regulations - safeguarding of orga's assets |
| 5 components of internal control (coso) | 1. control environment 2. risk assessment 3. control activities 4. information & communication 5. monitoring |
| control environment | orga's culture with respect to importance of internal control basis for any internal control system consists of ethic values, integrity, commitment to competence, management philosophy |
| risk assessment | focus on establishing measures that reduce residual risk to acceptable level based on 2 dimensions: likelihood that risk occurs and its impact |
| residual risk | risk that control problems cannot be avoided and both detective and preventive controls are not effective |
| control activities | risks can be controlled by detective and preventive measures |
| information & communication | necessary to facilitate control subject to control and means to control |
| monitoring | ongoing activity of seperate evaluation |
| corporate governance | aims at securing continuity of orga by maintaining good relations to stakeholders |
| steering paradigm | steering & control cannot be seperated by steering an object in certain direction, control of that object is achieved when dealing with managemenbt and control, 4 elements will always be present: 1. control system (management) 2. controlled system (orga) 3. information system (needed to manage) 4. environment (stakeholders) |
| value cycle | model that enables visualization of segregation of duties and helps to describe relationship between positions and events in orgas |
| segregation of duties involves segregation of... | 1. authorization 2. custody (charged with safeguarding goods like money) 3. recording (records date related to purchases, sales, inventory...should be done by unit that does not have any other function than recording) 4. checking (checks realization of plan to norms established to that end) 5. execution (executes tasks assigned by authorization fucntion) |
| reconciliations | segregation of duties is preventive control measure, thats often not enough corrective measures are necessary as well: reconciliations are important e.g. reconcile recording made by 2 different officers within orga |
| direct checks | applied to processes, assigned tasks and procedures (AC) |
| indirect checks | applied to outcomes of processes, assigned tasks and procedures (RC) |
| total checks | e.g. reconciliation between opening account and ending account |
| detailed check | performed on integral basis or by means of partial observations (when only few debitors are examined) |
| 3 steps of mitigating risks | 1. identification, sourcing, sizing 2. risk/reward trade-off (evaluate risk vs reward trade-off -> is risk acceptable or not) 3. monitor risks |
| information reliability | encompasses two types of uncertainty: 1. were stated measurement methods carefully applied (precision) 2. is it a correct portrayal of the results (bias) |
| misstatements | = recorded value - true value |
| MCS feedback loop | - managers measure performance - compare with pre-set standard - take corrective actions |
| more control = better control? | nope. |
| proactive controls | = preventive before orga suffers any negative effects e.g. planning, segregation of duties |
| avoidance | eliminate possibility that control pürblems will occur 4 ways: 1) activity elimination: let third parties do where you have trouble with, licensing, subcontracting... 2) centralization: top management decides! 3) automation: use computers and machines 4) risk sharing: joint ventures |
| poka-yokes | to combine physical and administrative constraints (AC) making a system foolproof |
Want to create your own Flashcards for free with GoConqr? Learn more.