Summaries: book " Management Accounting and Control

Systems," Norman B. Macintosh; Paolo Quattrone

Chapter 1

Management control: the systematic process by which the organization's higher level managers
influence the org. lower level managers to implement the org. strategies.

Management control systems consist of the various ways in which the org. top management team attempt
to enhance the org. performance in line with strategic objectives.
Control elements: strategic planning, budgeting, resource allocation, performance
measurement, evaluation and reward, responsibility center allocation and transfer pricing.

Top down role of management is to help decentralized managers to decide:

- What decisions to make
- What results to achieve
- Where to lead their employees and how to use their resources

Bottom up role of management control systems is to help decentralized managers to decide:

- What decisions will be taken or have been taken
- What results will be achieved or have been achieved
- Where employees will be led or have been led
- Which resources will be used or have been used

Why difficulties with automatic org. goal achievement?

Dec. managers do not automatically understand goals. -> First function of man control is its
-
top down function: provide managers with clear sense of direction to take their actions.
Bottom up: man control must inform senior managers about the progress of decentralized
managers etc.

- Dec. Managers do not agree with org. goals and strategies. Second function of man control is
top down function to motivate. Bottom-up: man control should facilitate higher level
managers to benefit from the specialized skills and knowledge of dec. managers

- Dec. managers do not have resources directly available. (personal, physical, or monetary
resources) Third function of man control is its top down function to ensure that dec.
managers have the skills to perform in line with org objectives. Bottom-up: management
control should enable lower level managers to acquire the support to develop their skills
as well as the org. resource.

Management control is not only individual, it is also about managers who work together
at different levels:
- Higher level managers influence the lower level managers -> help org to realize its
strategies
- Mc is about different layers in the org. hierarchy.
- Mc is not just managerial decisions and actions -> it's about tools and techniques that
managers apply in their execution of MC.
Management accounting = the process of preparation, interpretation, and communication of performance
information to management. Financial info is important:
- Overall measure of org. performance
- Info for stakeholders.

Reasons for a strong connection between management accounting and management control:
1. The importance of money as the overall measure of organizational performance in for- profit
organizations
2. The general importance of the organization's overall accounting system to satisfy the
Information needs of the organization's stakeholders
3. The general importance of management accounting information for internal decision-
making and control

Goal congruence: streamlining strategies to achieve a goal. Individual goal can never be the same as
organizational goal.

Managerial motivation:
1 Motivation= effort (time and
energy) Direction
Persistence = how long to use effort

2 motivation by rewards
3 motivated by social context (internal and external factors)
Cultural norms: norms of desirable behavior that exist in the society in which the org. is a part. Culture
standards are created.

Management control – human behavior

- Management control is about inducing desired behaviors by decentralized managers
- So understanding of the behavior of people needed:
1. relationship between motivation of managers and goals that they are asked to achieve
2. relationship between rewards and managers' efforts
3. relationship between managers' motivation and the social context (ethics in society, works
ethics, national and organizational culture, management style, tone-at-the-top, etc) in which
they work

Results, action, personnel, cultural controls (zie Merchant/Van der Stede, 2007; Sandelin, 2008)

Results controls: control of employees on the basis of certain specified results/

performances to inform employees as to what result areas are important (e.g., financial
budget, customersatisfaction, effective development of employees)
Action controls: ensuring that employees perform (or: do not perform) certain actions known to be beneficial
(harmful) to the organization (manager X is allowed to approve expenditures up to € 5,000; separation of
duties, etc)

Personnel controls: controls which make it more likely that employees will perform the desired task
satisfactorily on their own (selection of employees, job design, etc)

Cultural controls: controls which shape organizational behavioral norms and encourage
employees to monitor and influence each other's behaviors (codes of conduct, mission
statement, etc)

Controls include objective + subjective judgments, financial + non-financial elements, quantitative

+ qualitative elements
Chapter 2

Objects of control
- control of the individual manager
- control of the management team the manager is part of
- control of the unit that the management team supervises
- control of all units with management teams
- control of the whole organization

Elements of controlled system:

- Detector or sensor = what is happening
- Assessor = compare with desired state
- Effector = corrective action
- Comm. Network = tells managers what is happening and how that compares to desired state.
- Predictive model

Man control process -> managers check whether the people they supervise implement their
strategies.
Desired state is not preset -> continuous planning. Man control is not automated. It is not clear in
advance which actions the manager will take.

The inputs etc must be in line with the goal: 3 controls

1 Managerial input = combination of capabilities, characteristics, knowledge and intentions that bring
managers to their function. Three applicable (appropriate) controls:
- Staffing: deploying the right people
- Development: training
- Culture building: showing right kind of behavior.
Tone at top: high level managers set the example they act and the rest should follow them.
Is powerful way to let lower level managers behave in line with the org. objectives.

2 Managerial decisions. Making decisions is an essential part of managers.

- Formal delegation authority to lower level
- Formal delegation responsibility
- Prescription of certain behavior of managers.Formal procedures for do's and don'ts of managers. =
codes of conduct.

3 Managerial output (performance) making managers accounting for results

Rewards, communication of targets, establish a link between performance targets and formal promotion
policies.
Differences task control, man control and strategic control

1 Management control
- planning what the organization should do
- coordinating the activities of several parts of the organization
- communicating information
- deciding what action should be taken
- influencing people to change their behavior

1. Management control = influence of other members of organization. = interactions between

individuals. Find a balance between managers' own interest and org. Interest.
Implementing strategies = management control, organizational structure, HRM and culture.
Interactive control: today's controls -> tomorrow's strategy.

2. Strategy formulation. Process of deciding the goals and strategies to accomplish goals.
Goals: broad overall aims of org.
Objectives: specific steps to accomplish goals.
Difference 1 and 2:
2 = decision new strategies.
1 = implementing the strategies.
2 is not systematic and 1 yes.
2 is more rough estimates and 1 is more based on the number of steps.
When analyzing strategy 2 has only a few people and 1 has a lot of communication between managers and
staff.

3. Task control: certain tasks must be performed effectively and efficiently. = transaction oriented
Difference with 1 (management control)

Task roles are scientific and 1 is not 3: little to no interaction and at 1 yes.
1 focuses on org. Units and 3 focuses on specific tasks of org units.
1 is what to do and many activities or managers.
Task control = specific tasks and little or no judgment to perform.
Chapter 3

Corporate governance deals with shareholders = shareholder view (USA UK) = short term.
CSR is how the firm interacts with other stakeholders (Germany JAPAN) between short and long
term. Has no purpose. The formal corporate goals are formulated by managers and advice of senior
management.

Secondary stakeholders: media and special interest-

groups

CSR – profitability (RIO = profit/interest) and low risk

Environment of organization:
Contingency theory: management control in organization should be designed to be in line with the
environments or contingencies the firm is facing. Better fit between these two leads to better
performance.

2 types of management systems:

 Mechanistic (stable situations) = more vertical
 Organic (changing situations) = more horizontal
Contingency factors: stability, certainty and simplicity (range of products)

Hofstedes culture: power distance, individualism/collectivism, uncertainty avoidance and masculinity

(materialism)/feminity (quality of life)

Low context culture: formal planning and control

systems

High context culture: more informal

Chapter 4

Strategy is link between goals of firm and management control systems.

Design perspective: to fit org in environment and capabilities. SWOT analyze.
Strategy formulation: a process that senior executives use to evaluate company's strength and
weaknesses in light of opportunities and threats -> In line with contingency theory and strategy should be
based on external and internal contingencies.
Strategic planning perspective: goals of organization, strategy and management control tools.
Positioning perspective: more generic strategy than a very specific strategy.

Porters 3 strategy:
 Cost leadership
 Differentiation
 Focus/
segmentation.

The link between strategy and man control: with the design, positioning and strategic planning methods, man
control must be designed to be in line with both external and internal contingencies, corporate goals and
the strategy.

Emerging strategy: separate deliberate strategies from emerging ones. The deliberate strategies are
formulated top down management. Emerging ones emerge out of how problems are dealt with in
practice.

With emerging strategy perspective, management control systems has the role of both evaluation and
strategy formulation.

A strategy can be described as deliberate where the collective vision, goals and / or intention(s) of an
organization (in most cases, as determined by its leadership) is articulated as broadly and in as much
detail as possible, communicated to the actors (i.e. the employees – those responsible for
implementation) within that organization in order to realize a given outcome. On the other hand,
strategy can be described as emergent where consistencies arise in the actions / behavior of an
organization over a period of time, even though the adoption of such behavior / actions was never
explicitly intended; an example of this can occur' when an environment directly imposes a
pattern of action on an organization' (p. 258).

Strategic frameworks:
Corporate: where to compete
1 Business unit strategy: how to
compete
Corporate strategies:
Single industry = one line of business.
Related diversification: number of industries and connected to each other -> synergy: ability to share
common resources and ability to share common core competencies. CEO must make resource
allocation decisions.
Unrelated diversification: firm operates in business which are not related.

2 prospector vs defender strategies ( miles and snow)

Entrepreneurial problem: choosing specific products or service and market to focus on.
Engineering problem: the creation of a system that places the solution to the entrepreneurial
problem into operation
Administrative problem: rationalization of current processes and innovation in new
areas. Four archetypes:
Defenders, prospector, analyzers and reactors.

3 differentiation versus low cost strategy -> five competitive forces. Identify opportunities and threats in
external environment.
- Intensity of rivalry
- Bargaining power ofcustomers
- Bargaining power suppliers
- Threat from substitutes
- Threat of new entry

Strategy and management control systems

1. Corporate and business unit level

Small business units: non financial
measures
Large … : financial measures.
Hinge understands both financially and
operationally and can translate one into
another and vice versa

2. Differentiation (organic) versus low cost strategy (mechanistic)

Differentiation is more uncertain, customers can become less loyal and designing new products
leads to uncertainty -> unproven products.

Diff: strong coordination with regard to R&D, more difficult to set up fixed targets and attracting
good staff (creative etc).

3. Defender, prospector, analyzer and reactor

Dynamic markets: HRM model ( prospector,
defender) Stable markets: traditional (defender
analyzer)
Reactor: needs of firm and management model are in conflict.
4. Mechanic (work for money, narrow specialized tasks and well defined
responsibilities) versus organic (people want to contribute)
Strategic management accounting:

o Target costing: which price is normal. Target price - profit margin = target cost.

o Value chain analysis: dividing the chain from raw materials to end customers.

o Balanced scorecard: linking performance measurement to strategy: (inward, outward and

forward looking focus. (financial, customer, process and innovation perspective. Difference
with maps = how factors lead to other factors. The designing of map becomes the
formulation of strate
Chapter 5 decentralization, control and incentives

Goal of management control systems is to implement org. strategies.

Decentralization includes:
 Delegation of decisionmaking
 Provision of sufficient material and formal resources
 Assignment of accountability and responsibility.

Advantages of decentralization:
 Improved quality of decision making at higher level managers -> more long-term
activities than day-to-day operational issues
 Improves quality of decisionmaking at lower management levels -> no need for
approval from higher management.
 Increase of economies of scale
 Supporting management development. -> earlier in contact with decision making and leads to
more freedom to innovate -> motivation and organizational commitment increase.

Formal control of decentralized management

1. Organizational structure:
Functional structure: manager is responsible for a certain function.
Advantage: efficiency
Disadvantage: disagreement between different managers of functions. Headquarters have to solve it and
takes a lot of time.

Business unit structure: every manager has his own business unit. -> profitability.
Advantage: managers can make better decisions because they are closer to the business unit.
Disadvantage: duplicate work is done by other functions.

Matrix structure: functional units have dual responsibilities.

2. the org. Set of rules:

- Physical controls: passwords
- Manuals: centralized firms have more than decentralized
- System safeguards: cross checking -> combating fraud
- Task control systems: tasks performed efficient and effective?

3. The org. formal planning and control cycle.

Combination of procedures that companies follow to implement strategies. Continuous cycle of
developing strategy -> converting strategy plans into an annual budget that focuses on the planned
revenues and expenses for individual units -> outcomes are measured andreported -> actual results are
compared to budget -> feedback reward or punishment
System should fit to firm and not other way around. -> structure is given, then design the control
system.
Decentralizing too expensive? Deprive activities or outsource

Tight control over loose control: managers are not unnecessary and managers are constantly stimulated to
perform better and find better solutions.
Disadvantage: short-term goals are achieved that have nothing to do with long-term. -> fraud to make
things better.

Baird, Harrison, and Reeve (2004): tight versus loose control relates to the emphasis on control
of activities and costs. Hofstede (1998, p. 4) described units that have a tight control culture as
being extremely cost conscious. Tight control is also seen as involving extensive and continuous
flows of information and "an extremely detailed planning, budgeting and reporting system"
(Merchant and Van der Stede, 2003, p. 133).

Tight and loose control

 The choice of tight versus loose controls, affects both the choice of controls and the seriousness by
which they affect managerial behavior.
 Managers should have sufficient discretion
 Managers should have sufficient influence on required performance
 Uncertainty should not be too high
 Effects of actions should
be timely

Control tightness
 The level of detail in target setting
 The intensity of communication
 The level of detail in measurement
 The frequency of measurement
 The strength of the link between control mechanism and incentives and rewards

Controllership: person who is responsible for designing and operating the management control
system.
- Design and operate information and control systems
- Prepare financial statements, financial reports and performance reports.
- Supervise internal audit and accounting control procedures to ensure validity of info.
- Development personnel
- Does not make managers' decisions but does have an important role in preparing strategic
plans and budgets.

Dotted line: business unit controller reports directly to business unit manager and has a
dotted line relationship with the corporate controller. Solid line: business unit controller
reports directly to corporate controller which is a solid line relationship.
What is responsibility accounting?
- "The process of recognizing sub-units within the organization, assigning
decision rights to managers in those sub-units, and evaluating the
performance of those managers." (source: Hilton, Maher and Selto,
2003, page 916)
- "Identifying what parts of the organization have primary responsibility
for each objective, developing measures and targets to achieve, and
creating reports of these measures by organization subunits."
Chapter 6 responsibility centers: revenue and expense centers.

Responsibility center: an organ. Unit that is headed by a manager who is responsible for its
activities. They receive: inputs, work capital and outputs. And has the task of implementing
strategies.

Efficiency: comparing actual expenses with standard.

2 disadvantages: the recorded expenses are not precise measures of the resources actually
consumed And standard is merely approx. or what ideally should have happening.
Effectiveness: comparing output with objective.

Revenue center: output is measured. Costs are not looked at, which is disadvantageous. Measured by
customer satisfaction and loyalty and growth in market share.

Expense center: input (monetary just like revenue and output not)
Engineered expenses
Output in physical terms. Output * standard cost = what finished cost should have cost. Calculate
variance differences.
Discretionary expenses (as desired).

As the budget of the discretionary expense center serves as the reference point, companies put a lot of
efforts into budget preparation for these units.
1. Incremental budgeting
2. Zero-based budgeting

- The financial performance report is not a means of evaluating the efficiency of the manager
- Control is often achieved primarily through non-financial performance measure

Output cannot be measured in monetary terms. Management determines the expenses. When
revenues go down or when new management takes over expenses change.

- Incremental budgeting: expense is set and that is also based on inflation, anticipated
changes in special job and the cost of comparable jobs in similar units.
- Zero based budgeting: make an analysis of each expense center

Engineered: cost competitive, measure actual expenses and compare to standard,

Variability expenses are strongly effected by short run volume changes, Measurement of
performance: financial performance

Discretionary: allow managers to participate and which tasks must be done and how much must be done
for them. Variability: not sensitive to short term fluctuations. Measurement: non-financial performance
Chapter 7

Advantages of profit centers:

- Quality decisions improve -> decisions made by managers closest to point of decision
- Excellent training ground for general management -> center is similar to independent company
- Trying to increase profit

Cons
- Lose of control: starting from reports instead of personal knowledge
- Friction about the correct transfer price between business units
- Extra costs after divisionalization -> extra costs for staff, among others
- Competent general managers are not available
- Too much short run profit at the expense or long run profit

Business units as profit centers

Business unit managers are able to influence revenues and costs and can be held accountable for bottom
line.
Business unit manager must make the following decisions:
Product decision: what to make and sell
Marketing ..: how, where and for how much are these goods or services sold Procurement or sourcing
decision: how to obtain or manufacture the goods or services.

These 3 can be divided over business units. It will be harder to

measure and distribute profit.

Other profit centers:

- Functional units: subunits with business units
- Marketing: charge the cost of the products sold.
- Manufacturing: manufac. Activities as an expense center.
- Service and support units: control costs in order to prevent customers from going elsewhere while
managing the receiving units are motivated to make decisions about whether using the services is worth
the price.
- Other organizations: geographical location: hotel
Measuring profitability:
Five forms:

o Contribution margin: spread between rev and variable expenses. Fixed expenses are outside
managers' area, while they are actually partly attributable to him.
Contribution margin ratio: contribution margin / revenues

o Direct profit: a profit center's contribution to the general overhead and profit of the firm

o Controllable profit: profit will be what remains after the deduction or all expenses that may be
influenced by the profit center manager.

o Earnings before interest expenses and taxes: all corporate overhead costs are allocated to profit
centers based on the relative amount or expense each profit center has.
Disadvantage: costs of corporate staff departments do not fall under the responsibility of the
manager. It's hard to allocate corporate staff services costs.

o Net income: interest usually falls under headquarter and after tax income is usually percentage of
pre tax income, so it doesn't make much difference.

Investment center:
o Make good decisions regarding assets and motivate managers to make good decisions.
o Measuring the performance of the business unit as an economic unit.
o Investment centers
o The sum of assets employed in an investment center is called the investment base
o Two primary methods or related profit to the investment base
 Return on investment (ROI): Earnings before interest expenses and taxes / assets
employed
 Residual Income (RI): Earnings before interest expenses and taxes - cost of capital * assets
employed

Business unit managers have two performance objectives: generating adequate profits from the
resources at their disposal and investing in extra resources if this ensures a positive return.
Sums of assets employed in investment center: investment base:

 ROI (ratio): numerator: EBIT. Denominator: assets employed. EBIT / Assets. Assets employed
= total assets -current liabilities. -> EBIT / Sales * Sales / assets employed. ROI = profit margin
capital turnover

 RI (monetary amount) RI must be positive. Profit higher than costs.

Gross book value: way to reduce fluctuations in ri and roi. Basing investment on gross book value instead
of net book value.
Annuity depreciation: shows correct RI and ROI Disposition of assets: omitting assets.

EVA= adjusted net operating profits after taxes – (cost of capital * adjusted assets
employed)

EVA = economic value added

Economic valued added (EVA)

• Economic value added –an advanced version of residual income

• Considered a problem that ROI and RI normally uses book values

• A number of accounting adjustments need to be performed

• EVA= adjusted net operating profits after taxes – cost of capital*adjusted assets employed

Common EVA adjustments

Often related to intangible non-current assets
o Capitalization of research and development expense
o Capitalization of market-building expenses
o Capitalization of trade-mark
o The adding back of goodwill amortization
Chapter 8 transfer pricing

3 principal challenges in managing decentralized firm:

- Transfer pricing
- Shared service centers: efficiency
- Cross functional management: independent profit centers cooperate

Transfer pricing to work together better to achieve the goal. (giving information, measuring performance
business units and system should be simple to understand and easy to administer. Transferring goods for
the same price as that they would be delivered to outsiders. At least 1 profit center present.

Upstream fixed costs and profit: the ultimate selling party is not aware of the upstream costs and profits. To
divide this well: agreeing between units and two step pricing: standard variable cost or each unit sold and
settled fixed costs over period.

Profit sharing:
Two sets of pricing: manufacturing unit's revenue is credited at outside sales price and buying unit is
charged the total standard costs. -> profits seem to be higher based on units instead of the total profit of the
company. And creates the intention that there is a fight between units

Pricing corporate services

Administration of transfer prices

 Negotiation: negotiate. Business units are best informed of the price.

 Arbitration and conflict resolution: price is determined by executive or committee. This

indicates that there are problems with transfer price

 Product classification: depends on the number of markets and the market price. Can be divided
into two groups: class 1: senior management wants control -> many products, not external
sources. Class 2 products: all the other products (can be produced outside the company. These
products are transferred for market prices.
Shared service centers: standardization that could cause quality to fall.
Shared service center is relatively free and independent and more flexible and can respond faster. -> SSC
operate as an expense or profit center with full responsibility for financial performance and quality of
services.

Top managers are still important: can SSC buy outside company and whether they can sell their service
to outside customers. -> motivate why SSC are implemented (often resistance), what are core and non-
core activities.

Cross functional management

The goal is to integrate more between subunits. Ideas are exchanged. Motivation: adv
measurements demonstrate that integration is good. Bonuses for results.
Creating an atmosphere where the team is at the forefront. Reduce the distance between cross
functional team members. Senior management support is vital.
Chapter 9
Planning and budgeting

Purpose of budget:
- Planning: resource distribution (how much resource per department) and
coordination (all parts of firm follow the same plan)
- Accountability make managers accountable: monitoring (stick to budget) en motivation (goal
setting)
- Process -> reflection (what is important) en communication (talk to others)
- Ritual (habit and legitimacy = no budget is not professional

Strategic planning process:

- Reviewing and updating strategic plan:

- Deciding on assumptions and guidelines:
- First iteration of the strategic plan: using assumption objectives and guidelines, the
business units and other operating units prepare their cut of the strategic plan.
- Analysis: analysis by headquarters -> corporate managers enter into discussion
- Second integration of strategic plan:

Bottom up budget: assumptions -> instructions -> planning -> suggestions -> consolidation -> complete
budget.

Advantage = more commitment

Top down budget: planning (senior manager) -> suggestions -> check -> changes -> consolidation ->
complete budget (last word = senior manager)

Advantage: fast, and top management can control the end result.

Due to both limitations: iterative budgeting: assumptions -> instructions -> planning -> consolidation
-> proposal -> check -> revision -> new proposal
Looks like bottom up, but will be adjusted until management agrees.

Exposure: showing a better budget. Hedging = showing lower revenues or higher costs.
Criticism against budget:
Takes up too much time, companies become less flexible, a year is too long, budgets create internal gaming
and myopia (sub optimization and short termism) and it is not possible to draw up a reliable budget.

Solution: rolling forecasts (is not tied to calendar year = for 12 months instead of remaining months and
managers not responsible for> 3 months and less detailed preparation)
KPI (critical performance indicators = compare performance subunits with other units or competitors
instead of looking at budget
Decentralization -> budgeting is precondition of decentralization. Budget control confines the
autonomy of subunits and lower level managers.

However, these are solutions that disguise the budget. Too many different ways would become too
complex. Budget indicates the extent to which you are doing well as a company. Rolling forecast, for
example, is simply a prepared budget and cannot be released from the budget.

Management control - Performance Review

 after (a part of) the budget period, performance measurement and performance assessment
can follow (this is how management control comes back in, or 'performance management')
 measure actual results; compare with budget / standard - 'learn'
 performance measurement must contribute to the realization of the strategy; good critical
success factor (s) chosen?
 traditional: many financial performance measures (certainly in profit organizations);
extensive use of difference analysi
Chapter 10

PMS = performance measurement systems. -> objective or PMS = implementation of strategy.

Variance analysis: how to analyze the outcome of financial performance. Is the profit higher or lower
than budget. It doesn't explain why.

Revenue variance: selling price, volume and mix variances.

1. Selling price variance (AP – SV) * AV
2. Mix and volume variance (av – bv) *budgeted unit contribution

Mix variance result from selling a different proportion of products from that assumed in the
budget. Products earn different contributions per unit, the sale of different proportions of
products will result in variance.
Mix variance: AV( of sales ) – (total AV of sales * budgeted proportion) )* budgeted unit
contribution
Volume variance: results from selling more units than budgeted.
Volume variance: ((total AV of sales)* budgeted proportion) – (budgeted sales )) *
budgeted unit contribution.

Market share variance = actual sales – (actual industry volume * budgeted market share )) *
budgeted unit contribution
Industry volume variance ( actual industry volume – budgeted industry volume) * budgeted
market share * budgeted unit contribution

Expense variance: fixed costs and variable costs

Limitations of standards: standard costs set up incorrectly or due to fluctuations the standard costs should
be different.
Limitations of variances: why did variant occur? Is the variance significant? Yes, can he be checked, or
does it make sense to investigate? Performance reports are more important than a variance and can be
misleading. Too little focus on capital invested and focus on company performance. Look more at KPIs.
Positive variances with regard to engineering is positive. With other variances, this would indicate that
the center responsible did a poor job, even if the differences were positive.

Just focusing on financial performance is not enough to be sure that the strategies are properly
implemented.
Non-financial (task control), financial (management control).
Lagging indicators -> result of strategy, leading indicators -> show progress from important
components for the strategy.
Balanced scorecard:
- Financial perspective: how do we look at shareholders
- Customer perspective: how consumers see us
- Internal business perspective: what do we have to surpass
- Innovation and learning perspective: can we continue to
improve and create value.

Cycle time: proc. Time + storage time + movement time + inspection time
JIT: process time/ cycle time -> must be 1.

 BSC instrument for broader performance measurement; financial and non-financial

 Strategy is the basis for the content of the BSC
 'Learning', communication, etc., important in BSC
 Management control based on the BSC should ideally lead to good management attention for the
strategy (and its implementation?)
 Note: development / introduction of BSC not just a matter of 'technology'
 In practice all kinds of pitfalls in the development and use of BSC (e.g too much 'top - down';
insufficient up-to-date; regular reporting on indicators sometimes (too) laborious; strongly linking
rewards to BSC, resulting in 'open discussion' about strategy / BSC easily disappears;
Chapter 11 compensation, incentives and motivation

Compensation and incentives:

Pay

Attracting good staff

Keeping staff (pay and offering interesting work) Commitment: encourage hard work Inspiring:
motivating is also about being inspired, being creative and being smart

Goal congruence: managers and employees must work in one line to achieve the company's goal Flexible
compensation: more in good years, less in bad years

Non-financial incentives: work or employee satisfaction

McGregor's theorie X en theorie Y.

X: working is not natural. Everything must be instructed and strict control

Y: working is natural. Can control their own work and have responsibility.

X is linked to agency theory. It explains how contracts and incentives can be written to motivate employees.
Worker's preference for leisure time over work is work aversion. Deliberately not working is shirken.

Information that agent (risk averse) has more than principal (risk neutral) can be called private
information.

Agency costs = incentive compensation + monitoring costs + residual loss

There is more relationship between CEO's effort and stock price performance than with a business unit
manager's effort.

Criticism of agency theory:

Basic assumptions are wrong - people are rational and always act on the basis of self-interest. The theory is
only used because it can be used well for mathematical modeling. Financial incentives increase more than
moral hazard decreases.

Y theory in combination with motivation crowding theory.

Extrinsic awards: everything a person receives for performing a task (for example money) Intrinsic awards:
satisfaction for performing a task.
These two influence each other. Ex can influence, but when ex reward becomes much more than motivation,
motivation drops. In motivation falls more than ex motivation? Total motivation is falling. Intrinsic works
better for difficult tasks with a lot of creativity and extrinsic for easy tasks.
= crowding effect
Reason for crowding effect, two processes:
 Impaired self-determination: individuals who feel that their autonomy has decreased due to
external intervention (reward)
 Impaired self esteem: individuals who feel that they are not trusted to do their best without
compensation.

Intrinsic motivation does not relate to bonus, but rather to person.

Difference agency and motivation crowding theory (MCT):

 Agency: economic man, people are rational, make good decisions and only make
decisions on what will offer the greatest outcome.

 MCT: psychological man, little rationalization, not only material but also social and
emotional needs (communication, being involved, being part of something)
Chapter 12 management control challenges in service delivery

MCS = management control challenges. Management control systems are tools to aid
management for steering an organization toward its strategic objectives and competitive
advantage.

Service organizations
No black and white difference between manufacturing and service companies. -> often a
combination of manufacturing control tools with those that can be used by service companies.

Problems that arise due to globalization: companies are going to produce in cheaper
countries, and a constant search to be so efficient and cost-saving in government and
healthcare companies.

Challenges of designing and operating MCS for service delivery :

There is no stock save costs by selling a lot in low season adv marketing Quality can only be tested if it has
been implemented

Work intensively

Multi unit org. -> some units at many different locations Historical development (there is almost none)
Difficult to measure what output is effect is because it can be in between for a long time.

Professional companies (service) have fewer formal strategic plans than manufacturing. It is
easier to make changes in employees than the capacity of assets.

Control of operations: the planning of professionals is the most important. Day planning and
checking to day is difficult because standards for task performance, teamwork and behavior of
professionals can lead to problems.
Chapter 13
Critical path and slack: critical path is the sequence of events that has the shortest total time to
complete the project. X-B activity lasts 4 weeks. Other project 7. Then x-b slack of 3 weeks.

Known unkown costs: know they come but can't estimate them
Unknown unknown costs: Don't know they come and can't estimate them either.

APM = agile project management = faster and more adaptive. And is a solution for normal projects.
External: People change their minds and so long-term plans are of no use. Internal: you are stuck to one
plan and to convert it costs money.

APM: lots of interaction (meetings and face to face contact) and there is no project manager who is above
the rest.

Chapter 14

Inter organizational relationships: collaborate with other companies. (joint ventures, supply chain
initiatives, strategic alliances and outsourcing relationships)
Reasons for inter org. relationships:
Globalization: everything needs to be faster
Technological transformation and technical complexity of products; not everything can be done more
indoors. -> outsource and share fixed costs

Competition between diversified firms does not take place at the corporate level, it takes place
between business units.

Target costing: target price – profit margin = target cost = external starting point in stead of internal
starting point = more strategic than traditional costing.

Balanced score card: financial, customer, process and innovation perspective.

Firms strategy influences structure, structure influences the design of the firm's planning and control
system and its rules.