chapter 11 atkinson kaplan 2012 ppt

2012 Pearson Prentice Hall. All rights reserved.What Is Financial Control?Financial control involves the use of financial measures to assess organization and management performanceThe focus of attention could be a product, a product line, an organization department, a division, or the entire organizationFinancial control provides a counterpoint to the Balanced Scorecard view that links financial results to its presumed driversFocuses only on financial results


2012 Pearson Prentice Hall. All rights reserved.Financial ControlThis chapter focuses on broader issues in financial control, including the evaluation of organization units and of the entire organizationManagers use and consider:Internal financial controlsInformation used internally and not distributed to outsidersExternal financial controlsDeveloped by outside analysts to assess organization performance


2012 Pearson Prentice Hall. All rights reserved.Decentralization vs Centralization Decentralization is the process of delegating decision-making authority to frontline decision makersCentralization is best suited to organizations that:

Are well adapted to stable environments

Have no major information differences between the corporate headquarters and the employees

Have no changes in the organizations environment that require adaptation by the organization


2012 Pearson Prentice Hall. All rights reserved.Changing EnvironmentIn response to increasing competitive pressures and the opening up of former monopolies to competition, many organizations are changing the way they are organized and the way they do business

This is necessary because they must be able to change quickly in a world where technology, customer tastes, and competitors strategies are constantly changing


2012 Pearson Prentice Hall. All rights reserved.Becoming More AdaptiveBeing adaptive generally requires that the organizations senior management delegate or decentralize decision-making responsibility to more people in the organization

Decentralization:Allows motivated and well-trained organization members to identify changing customer tastes quicklyGives front-line employees the authority and responsibility to develop plans to react to these changes


2012 Pearson Prentice Hall. All rights reserved.From Task to Results ControlIn decentralization, control moves from task control to results control

From where people are told what to doTo where people are told to use their skill, knowledge, and creativity to achieve organization objectives


2012 Pearson Prentice Hall. All rights reserved.Responsibility CentersA responsibility center is an organization unit for which a manager is held accountable

A responsibility center is like a small business

But it is not completely autonomousIts manager is asked to run that small business to achieve the objectives of the larger organizationThe manager and supervisor establish goals for their responsibility center


2012 Pearson Prentice Hall. All rights reserved.Coordinating Responsibility CentersFor an organization to be successful, the activities of its responsibility units must be coordinated

Sales, manufacturing, and customer service activities are often very disjointed in large organizations, resulting in diminished performanceIn general, nonfinancial performance measures detect coordination problems better than financial measures


2012 Pearson Prentice Hall. All rights reserved.Responsibility Centersand Financial ControlOrganizations use financial control to provide a summary measure of how well their systems of operations control are working

When organizations use a single index to provide a broad assessment of operations, they frequently use a financial number because these are measures that their shareholders use to evaluate the companys overall performance


2012 Pearson Prentice Hall. All rights reserved.Responsibility Center TypesThe accounting report prepared for a responsibility center reflects the degree to which the responsibility center manager controls revenue, cost, profit, or return on investment

Four types of responsibility centers:Cost centers - Accountable for costs onlyRevenue centers - Accountable for revenues onlyProfit centers - Accountable for revenues and costsInvestment centers - Accountable for investments, revenues, and costs


2012 Pearson Prentice Hall. All rights reserved.Cost Center

Organizations evaluate the performance of cost center employees by comparing the centers actual costs with budgeted cost levels for the amount and type of work doneOther critical performance measures may include:QualityResponse timeMeeting production schedulesEmployee motivationEmployee safetyRespect for the organizations ethical and environmental commitments


2012 Pearson Prentice Hall. All rights reserved.Revenue CenterA responsibility center whose members control revenues but do not control either the manufacturing or acquisition cost of the product or service they sell or the level of investment made in the responsibility center

Some revenue centers control price, the mix of stock on hand, and promotional activities


2012 Pearson Prentice Hall. All rights reserved.Costs Incurred byRevenue CentersMost revenue centers incur sales and marketing costs and have varying degrees of control over those costs

It is common in such situations to deduct the responsibility centers traceable costs from its sales revenue to compute the centers net revenueTraceable costs may include salaries, advertising costs, and selling costs


2012 Pearson Prentice Hall. All rights reserved.Profit CenterA responsibility center where managers and other employees control both the revenues and the costs of the products or services they deliver

A profit center is like an independent business, except that senior management, not the responsibility center manager, controls the level of investment in the responsibility center

Most units of chain operations are treated as profit centers


2012 Pearson Prentice Hall. All rights reserved.Investment CenterA responsibility center in which the manager and other employees control revenues, costs, and the level of investment in the responsibility centerFor example, General Electric has diverse business unitsIncluding Energy, Technology Infrastructure, GE Capital, Home & Business Solutions, and NBC UniversalSenior executives at General Electric developed a management system that evaluated these businesses as independent operationsin effect as investment centers


2012 Pearson Prentice Hall. All rights reserved. Using Segment Margin ReportsDespite the problems of responsibility center accounting, the profit measure is so comprehensive and pervasive that organizations prefer to treat many of their organization units as profit centers

Because most organizations are integrated operations, the first problem designers of profit center accounting systems must confront is the interactions between the various profit center units


2012 Pearson Prentice Hall. All rights reserved.The Segment Margin ReportA common form of the Segment Margin Report for an organization that is divided into responsibility centers includes one column for each profit center


2012 Pearson Prentice Hall. All rights reserved.Evaluating the SegmentMargin ReportWhat can we learn from the segment margin report?The contribution margin for each responsibility center is the value added by the manufacturing or service-creating process before considering costs that are not proportional to volumeA units segment margin is an estimate of the long-term effect of the responsibility centers shutdown on the organization after fixed capacity is redeployed or sold off


2012 Pearson Prentice Hall. All rights reserved.Evaluating the SegmentMargin Report The units income is the long-term effect on corporate income after corporate-level fixed capacity is allowed to adjust

The difference between the units segment margin and income reflects the effect of adjusting for business-sustaining costs


2012 Pearson Prentice Hall. All rights reserved.Good or Bad NumbersOrganizations use different approaches to evaluate whether the segment margin numbers are good or badTwo sources of comparative information are:Past performanceComparable organizationsEvaluations include comparisons of:Absolute amountsRelative amounts


2012 Pearson Prentice Hall. All rights reserved.The DuPont SystemThe DuPont system of financial control focuses on ROI and breaks that measure into two components:A return measure that assesses efficiencyA turnover measure that assesses productivity

It is possible to compare these individual and group efficiency measures with those of similar organization units or competitors


2012 Pearson Prentice Hall. All rights reserved.The DuPont SystemThe productivity ratio of sales to investment allows development of separate turnover measures for the key items of investmentThe elements of working capitalInventories, accounts receivable, cashThe elements of permanent investmentEquipment and buildingsComparisons of these turnover ratios with those of similar units or those of competitors suggest where improvements are required


2012 Pearson Prentice Hall. All rights reserved.Assessing Productivity UsingFinancial Control The most widely accepted definition of productivity is the ratio of output over input

Organizations develop productivity measures for all factors of production, including people, raw materials, and equipment


2012 Pearson Prentice Hall. All rights reserved.Questioning the ROI ApproachDespite its popularity, ROI has been criticized as a means of financial control:

Too narrow for effective control

Profit-seeking organizations should make investments in order of declining profitability until the marginal cost of capital of the last dollar invested equals the marginal return generated by that dollar


Calculating Residual Income()This computation differs from ROI. ROI measures operating income earned relative to the investment in average operating assets. Residual income measures operating income earned less the minimum required return on average operating assets.

Sheet1

Pipe Products

9-Inch12-Inch18-InchTotal

Warehouse sq. ft.1,0004,0005,00010,000

Lease price per sq. ft.$4$4$4$4

Total lease cost$4,000$16,000$20,000$40,000

Acquisition cost

Less: Accumulated depreciation

Net book value

Residual income=Operating income-Average operating assetsMinimum required rate of return

Sheet2

Sheet3

2012 Pearson Prentice Hall. All rights reserved.Using Residual IncomeResidual income equals income less the economic cost of the investment used to generate that incomeIf a divisions income is $13.5 million and the division uses $100 million of capital, which has an average cost of 10%:Residual Income = Income Cost of capitalResidual Income = $13.5m ($100m x 10%)Residual Income = $3.5m


2012 Pearson Prentice Hall. All rights reserved.Using Residual IncomeLike ROI, residual income evaluates income relative to the level of investment required to earn that income

Unlike ROI, residual income does not motivate managers to turn down investments that are expected to earn more than their cost of capital

Stern Stewart developed Economic Value Added (EVA), which is a refinement of the residual income data


************

*************11-****

chapter 11 atkinson kaplan 2012 ppt

Documents

pearson prentice hall

financial controlchapter

links financial results

use of financial measures

organization performance

organization objectives

organization department

financial controlthis