A Review of the Accounting Cycle

1
Introduction

• We begin with three terms
• Control
• Management
• Systems

Management control is a must in any organization
that practices decentralization
2
Basic Concepts
An organization must be controlled, that is,
devices that ensure it goes where its leaders
want it to go must be operative
Control
3
Basic Concepts
1. Detector/Sensor A device that measures what is
actually happening in the process being controlled
4
Basic Concepts
2. Assessor A device that determines the
significance of what is actually happening by
comparing it with some standard of what should
happen
5
Basic Concepts
3. Effector A device that alters behavior if the
assessor indicates the need to do so
6
Basic Concepts
4. Communication network Devices that transmits
information between the detector and the assessor
and between assessor and the effector
7
Basic Concepts
Elements of the Control Process
2.Assessor, comparison with standar
Control device
1.Detector, observed information about what is
happening
3. Effector, behavior altering communication if
needed
Entity being controlled
8
Basic Concepts
The management control process is the process by
which managers at all levels ensure that the
people they supervise implement their intended
strategies
Management
9
Basic Concepts
A system is a prescribed and usually repetitious
way of carrying out an activity or a set of
activities
Systems
10
Boundaries of Management Control
Management control fits between strategy
formulation and task control in several respects
11
Boundaries of Management Control
General Relationships among Planning and Control
Functions
Activity
Nature of End Product
Goals, Strategies and Policies
Strategy Formulation
Implementation of Strategies
Management Control
Efficient and Effective Performance of Individual
Tasks
Task Control
12
Boundaries of Management Control

• Management control is the process by which
  managers influence other members of the
  organization to implement the organizations
  strategies

13
Boundaries of Management Control

1. Planning, what the organization should do
2. Coordinating, the activities of several parts of
   the organization
3. Communicating, information
4. Evaluating, information
5. Deciding, what, if any, action should be taken
6. Influencing, people to change their behavior

14
Boundaries of Management Control
Goal Congruence Goal congruence means that,
insofar as is feasible, the goals of an
organizations individual members should be
consistent with the goals of the organization
itself. Tool for Implementing Strategy Management
control focuses primarily on strategy
execution. Management control are only one of the
tools managers use in implementing desired
strategies. Strategies are also implemented
through the organizations structure, its
management of human resources and its particular
culture.
15
Basic Concepts
Framework for Strategy Implementation
Implementation Mechanism
Management Controls
Performance
Strategy
Organization Structure
HR Management
Culture
16
Boundaries of Management Control
Strategy formulation is the process of deciding
on the goals of the organization and the
strategies for attaining these goals
Strategy Formulation ?
17
Boundaries of Management Control
Strategy Formulation is the process of deciding
on new strategies Management Control is the
process of implementing those strategies
18
Boundaries of Management Control
Task control is the process of assuring that
specified tasks are carried out effectively and
efficiently
Task Control ?
19
Boundaries of Management Control

• Task Control
• Transaction oriented
• Scientific
• The focus is on specific tasks
• Management Control
• Involves the behavior of managers
• Can never be reduced to science
• The focus is on organizational units
• Concerned with the broadly activities of managers

20
Boundaries of Management Control
Examples of Decisions in Planning and Control
Functions
Strategy Formulation Management Control Task Control
Acquire an unrelated business Introduce new product or brand within product line Coordinate order entry
Enter a new business Expand a plant Schedule production
Add direct mail selling Determine advertising budget Book TV commercials
Change debt/equity ratio Issue new debt Manage cash flows
Devise inventory speculation policy Decide inventory levels Reorder an item
21
Boundaries of Management Control
Impact of the Internet on Management Control

• Instant access
• Multi targeted communication
• Costless communication
• Ability to display images
• Shifting power and control to the individual

22
The Concept of Strategy
Strategy Formulation
Environmental analysis Competitor Supplier Regulat
ory Social/Political
Internal analysis Technology know
how Manufacturing know how Marketing know
how Distribution know how Logistics know how
Opportunities and threats Identify opportunities
Strengths and weaknesses Identify core
competencies
Fix internal competencies
Firms strategies
23
Business Unit Strategies
Business Unit Mission The BCG Model
Cash source
High
Low
Hold Star Build Question mark
Harvest Cash cow Divest Dog
High
High
Market growth rate
Cash use
Low
Low
Relative market share
High
Low
24
Business Unit Strategies
Business Unit Competitive Advantage
Industry Structure Analysis Porters Five
Forces Model
New Entrants
Customers
Industry Competitors
Suppliers
Substitutes
25
Types of Organizations

• A firms strategy has a major influence on its
  structure. Their structures can be grouped into
  three general categories
• A functional structure
• In which each manager is responsible for a
  specified function such as production or
  marketing.
• 2. A business unit structure
• In which business unit managers are responsible
  for most the activities of their particular unit,
  and the business unit functions as a semi
  independent part of the company
• 3. A matrix structure
• In which functional units have dual
  responsibilities

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Types of Organizations
A. Functional Organizations
27
The Types of Organizations

• Disadvantages of a functional structure
• There is no unambiguous way of determining the
  effectiveness of the separate functional managers
• A dispute between managers of different functions
  can be resolved only at the top, even though it
  may have originated at a much lower
  organizational level.
• Functional structures are inadequate for a firm
  with diversified products and markets

The important advantage of a functional structure
is efficiency
28
Types of Organizations
B. Business Unit Organizations
A business unit, also called a division, is
responsible for all the functions involved in
producing and marketing a specified product line.
29
The Types of Organizations

• Advantages of a business unit organizations
• Provides a training ground in general management.
  The business unit manager should demonstrate the
  same entrepreneurial spirit that characterizes
  the CEO of an independent company.
• Its manager may make sounder production and
  marketing decisions than headquarters might, and
  unit as a whole can react to new threats or
  opportunities more quickly

Disadvantage of a business unit organizations are
1. Each business unit staff may duplicate some
work that in a functional organization is done at
headquarters. 2. The disputes between functional
specialists in a functional organization may be
replaced by disputes between business units in a
business unit organization.
30
Types of Organizations
C. Matrix Organizations
CEO
Staff
Function A Manager
Project X Manager
Project Y Manager
Function B Manager
Project Z Manager
Function C Manager
31
The Types of Organizations
Implications for System Design Once management
has decided that a given structure is best, all
things considered, then the system designer must
take that structure as given
32
Responsibility Centers

• Nature of Responsibility Centers
• A responsibility center exists to accomplish one
  or more purposes, these purposes are its
  objectives.
• The objectives of responsibility centers are to
  help implement the strategies.
• The goods and services produced by a
  responsibility centers may be furnished either to
  another responsibility centers or to the outside
  marketplace

33
Responsibility Centers
The Core Operation of Responsibility Center
Work
Output
Input
Goods or services
Resources used, measured by cost
Capital
The products produced by a responsibility center
may be furnished either to another responsibility
center (as input) or to the outside marketplace
(as output)
34
Responsibility Centers
Types of Responsibility Centers Engineered
Expense Centers
Examples
Optimal relationship can be establish
Work
Outputs
Inputs
Manufacturing function
(Dollar)
(Physical)
35
Responsibility Centers
Types of Responsibility Centers Discretionary
Expense Centers
Examples

Optimal relationship cannot be establish
..
. . . . . .
. . . . . .
Work
Outputs
Inputs
RD function
(Dollar)
(Physical)
36
Responsibility Centers
Types of Responsibility Centers Revenue Centers
Examples

Input do not related to outputs
..
. . . . . .
. . . . . .
Work
Outputs
Inputs
Marketing function
(Dollar revenue)
(Dollar only for costs directly incurred
37
Responsibility Centers
Types of Responsibility Centers Profit Centers
Examples

Input are related to outputs
..
. . . . . .
. . . . . .
Work
Outputs
Inputs
Business unit
(Dollar costs)
(Dollar profits)
38
Responsibility Centers
Types of Responsibility Centers Investment Centers
Examples

Profits are related to capital employed
..
. . . . . .
. . . . . .
Capital Employed
Outputs
Inputs
Business unit
(Dollar costs)
(Dollar profits)
39
Transfer Pricing Methods
Transfer Price is to refer to the amount used in
accounting for any transfer of goods and services
between responsibility centers.
40
Transfer Pricing Methods

• Fundamental Principles
• The fundamental principle is that the transfer
  price should be similar to the price that would
  be charged if the product were sold to outside
  customers or purchased from outside vendors
• When profit centers of a company buy products
  from, and sell to, one another, two decisions
  must be made periodically for each product
• Should the company produce the product inside the
  company or purchase it from an outside vendor ?.
  This is the sourcing decision.
• If produced inside, at what price should the
  product be transferred between profit centers ?.
  This is the transfer price decision.

41
Transfer Pricing Methods
Upstream Fixed Costs and Profits a. Agreement
Among Business Units Some companies establish a
formal mechanism whereby representatives from the
buying and selling units meet periodically to
decide on outside selling prices and the sharing
of profits for products with significant upstream
fixed costs and profit
42
Transfer Pricing Methods

• Upstream Fixed Costs and Profits
• b. Two Step Pricing
• Establish a transfer price that includes two
  charges
• For each unit sold, a charge is made that is
  equal to the standard variable cost of
  production.
• A periodic charge is made that is equal to the
  fixed costs associated with the facilities
  reserved for the buying unit.

43
Transfer Pricing Methods
Business Unit X (manufacturer)
Product A Expected monthly sales to business unit
Y 5,000 units Variable cost per unit

5 Monthly fixed costs assigned to product
20,000 Investment in working capital and
facilities 1,200,000 Competitive return on
investment per year 10 One way to
transfer product A to business unit Y is at price
per unit, calculated as follows
Transfer price for
product A Variable cost per unit
5 Plus fixed cost per unit
4 Pus profit
per unit
2 Transfer price per unit
11
44
Transfer Pricing Methods
Correction by two step pricing Transfer price
for product A 5 20,000/month fixed cost
10,000 per month for profit 1,200,000 x
0.10 10,000 12 Unit Y will pay the
variable cost of (5,000 unit x 5/unit)
25,000 Plus fixed cost and profit
30,000 Total
55,000 Unit X will pay
11/unit (5.000 unit x 11 55,000) If
transfers in another month were 4,000 units, Unit
Y would pay 50,000 (4,000 unit x )
30,000, under two step pricing, compared with
44,000 ( 11 x 4,000 unit). The difference is
penalty for not using a portion of unit Xs
capacity that it has reserved.
45
Transfer Pricing Methods

• Upstream Fixed Costs and Profits
• c. Profit Sharing
• The system operates as follows
• The product is transferred to the marketing unit
  at standard variable cost
• After the product is sold, the business units
  share the contribution earned, which is the
  selling price minus the variable manufacturing
  and marketing costs.

46
Transfer Pricing Methods
Upstream Fixed Costs and Profits d. Two Sets of
Prices The manufacturing units revenue is
credited at the outside sales price and the
buying unit is charged the total standard costs.
The difference is charged to a headquarters
account and eliminated when the business unit
statements are consolidated.