KU Leuven – Faculty of Economics and Business
Management Control
& Cost Management
Course Summary
Michael Scott
Academic Year 2025–2026
,Contents
1 Introduction: Management Control and Accounting 7
1.1 Module 1: Introduction to Management Control . . . . . . . . . . . . . . . 7
1.1.1 What Is Management Control? . . . . . . . . . . . . . . . . . . . . 7
1.1.2 Causes of Control Problems . . . . . . . . . . . . . . . . . . . . . . 8
1.1.3 Agency Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.1.4 Types of Agency Problems . . . . . . . . . . . . . . . . . . . . . . . 9
1.1.5 Control Failure in Practice . . . . . . . . . . . . . . . . . . . . . . . 11
1.1.6 Avoiding Control Problems . . . . . . . . . . . . . . . . . . . . . . . 11
1.2 Module 2: Introduction to Accounting and Costing . . . . . . . . . . . . . 11
1.2.1 What Is Accounting? . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.2.2 Two Purposes of an Accounting System . . . . . . . . . . . . . . . . 12
1.2.3 Two Key Roles of Managerial Accounting . . . . . . . . . . . . . . . 13
1.2.4 Cost Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2 Control Frameworks and Alternatives 15
2.1 Module 3: Control Frameworks and Alternatives . . . . . . . . . . . . . . . 15
2.1.1 Zimmerman’s Framework: The Three-Legged Stool . . . . . . . . . 15
2.1.2 The M&VdS Framework: Control Types . . . . . . . . . . . . . . . 16
2.1.3 Simon’s Levers of Control . . . . . . . . . . . . . . . . . . . . . . . 20
3 Control Costs, Effective Design, and Incentive Systems 22
3.1 Module 4: The Cost of Control Systems . . . . . . . . . . . . . . . . . . . 22
3.1.1 Direct Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.1.2 Indirect Costs (Side Effects) . . . . . . . . . . . . . . . . . . . . . . 22
3.1.3 Adaptation Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.2 Module 5: Maintaining Effective Control . . . . . . . . . . . . . . . . . . . 24
3.2.1 Enabling vs. Coercive Controls . . . . . . . . . . . . . . . . . . . . 24
3.2.2 Five Design Traps . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.2.3 Case: Repro Corporation . . . . . . . . . . . . . . . . . . . . . . . . 25
3.3 Module 6: Incentive Systems . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.3.1 Types of Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.3.2 Purposes of Incentive Systems . . . . . . . . . . . . . . . . . . . . . 26
3.3.3 Short-Term vs. Long-Term Incentives . . . . . . . . . . . . . . . . . 26
3.3.4 Why Pay-for-Performance Does Not Prevail Everywhere . . . . . . 26
3.3.5 Crowding-Out of Intrinsic Motivation . . . . . . . . . . . . . . . . . 27
1
, 3.3.6 Practical Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4 Performance Measurement and Financial Measures 29
4.1 Module 7: Performance Measurement . . . . . . . . . . . . . . . . . . . . . 29
4.1.1 Two Criteria for a Good Measure . . . . . . . . . . . . . . . . . . . 29
4.1.2 Challenges with Performance Measures . . . . . . . . . . . . . . . . 30
4.1.3 Solutions to Incomplete Measures . . . . . . . . . . . . . . . . . . . 30
4.2 Module 8: Financial Performance Measures . . . . . . . . . . . . . . . . . . 32
4.2.1 Classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.2.2 Market Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.2.3 Accounting Measures . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.2.4 Economic Measures: Residual Income and EVA . . . . . . . . . . . 34
4.2.5 Case: Performance Technologies — ROA vs. Residual Income . . . 35
5 Balanced Scorecard and Responsibility Centers 36
5.1 Module 9: The Balanced Scorecard . . . . . . . . . . . . . . . . . . . . . . 36
5.1.1 Motivation: Why Go Beyond Financial Measures? . . . . . . . . . . 36
5.1.2 BSC Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.1.3 The Strategy Map . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.1.4 BSC Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.1.5 Global Oil M&R Case . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.1.6 Fiedler/Lush Case — Evaluation Biases in Practice . . . . . . . . . 39
5.1.7 BSC Cautions: Ittner & Larcker (2003) . . . . . . . . . . . . . . . . 40
5.1.8 Weight Determination . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.1.9 Evaluation Biases in BSC . . . . . . . . . . . . . . . . . . . . . . . 40
5.2 Module 10: Financial Responsibility Centers . . . . . . . . . . . . . . . . . 41
5.2.1 Responsibility Accounting . . . . . . . . . . . . . . . . . . . . . . . 41
5.2.2 The Four Types of Responsibility Center . . . . . . . . . . . . . . . 42
5.2.3 Revenue Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.2.4 Cost Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.2.5 Profit Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.2.6 Investment Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.2.7 Selecting the Right Responsibility Center . . . . . . . . . . . . . . . 43
5.2.8 Cases: Bookworm and RMM . . . . . . . . . . . . . . . . . . . . . . 44
6 Budgeting 46
6.1 Module 11: Introduction to Budgeting . . . . . . . . . . . . . . . . . . . . 46
6.1.1 Definition and Structure . . . . . . . . . . . . . . . . . . . . . . . . 46
6.1.2 Four Functions of Budgeting . . . . . . . . . . . . . . . . . . . . . . 47
6.1.3 Six Criticisms of Budgeting . . . . . . . . . . . . . . . . . . . . . . 48
6.1.4 Jensen (2001): Why Budgets Create Gaming . . . . . . . . . . . . . 49
6.1.5 Should Budgeting Be Abandoned? . . . . . . . . . . . . . . . . . . 50
6.2 Module 12: Characteristics of Budgeting Systems . . . . . . . . . . . . . . 51
6.2.1 Four Key Design Dimensions . . . . . . . . . . . . . . . . . . . . . . 51
6.2.2 Who Sets the Budget? . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.2.3 Target Ratcheting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
6.2.4 Target Difficulty . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
6.2.5 Target Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
6.2.6 Budget Types and Characteristics . . . . . . . . . . . . . . . . . . . 54
2
, 6.2.7 Case Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
7 Transfer Pricing 56
7.1 Module 13: Introduction to Transfer Pricing . . . . . . . . . . . . . . . . . 56
7.1.1 Definition and Context . . . . . . . . . . . . . . . . . . . . . . . . . 56
7.1.2 Four Purposes of Transfer Pricing . . . . . . . . . . . . . . . . . . . 57
7.1.3 Transfer Pricing and Tax Avoidance . . . . . . . . . . . . . . . . . . 57
7.1.4 The Optimal Transfer Price . . . . . . . . . . . . . . . . . . . . . . 58
7.2 Module 14: Methods of Transfer Pricing . . . . . . . . . . . . . . . . . . . 59
7.2.1 Market-Based Transfer Pricing . . . . . . . . . . . . . . . . . . . . . 59
7.2.2 Variable-Cost Transfer Pricing . . . . . . . . . . . . . . . . . . . . . 60
7.2.3 Full-Cost Transfer Pricing . . . . . . . . . . . . . . . . . . . . . . . 61
7.2.4 Full Cost / Variable Cost + Mark-Up . . . . . . . . . . . . . . . . . 61
7.2.5 Negotiated Transfer Pricing . . . . . . . . . . . . . . . . . . . . . . 61
7.2.6 Dual-Rate Transfer Pricing . . . . . . . . . . . . . . . . . . . . . . . 62
7.2.7 Comparative Case: Cogen . . . . . . . . . . . . . . . . . . . . . . . 63
7.2.8 Comparative Case: MXV / JuJu-LaSalle (Tax TP) . . . . . . . . . 63
7.3 Module 15: The Death Spiral and the Prochim Case . . . . . . . . . . . . . 64
7.3.1 The Death Spiral Mechanism . . . . . . . . . . . . . . . . . . . . . 64
7.3.2 Prochim A — Full Case Analysis . . . . . . . . . . . . . . . . . . . 65
7.3.3 Empirical Evidence: Bouwens & Steens (2016) . . . . . . . . . . . . 66
7.3.4 Comparative Case: Savannah Products . . . . . . . . . . . . . . . . 67
7.3.5 Summary: Choosing a Transfer Pricing Method . . . . . . . . . . . 68
8 Cost Terminology and Cost-Volume-Profit Analysis 69
8.1 Module 1: Cost Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . 69
8.1.1 Foundational Definitions . . . . . . . . . . . . . . . . . . . . . . . . 69
8.1.2 Opportunity Costs vs. Accounting Costs . . . . . . . . . . . . . . . 70
8.1.3 Sunk Costs and Relevance . . . . . . . . . . . . . . . . . . . . . . . 71
8.1.4 Cost Behaviour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
8.1.5 Relevant Range and Linear Approximation . . . . . . . . . . . . . . 72
8.1.6 Marginal Cost and Average Cost . . . . . . . . . . . . . . . . . . . 72
8.1.7 Direct vs. Indirect Costs; Product vs. Period Costs . . . . . . . . . 73
8.2 Module 2: Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . 73
8.2.1 The CVP Framework . . . . . . . . . . . . . . . . . . . . . . . . . . 73
8.2.2 Multi-Product CVP: The Bundle Method . . . . . . . . . . . . . . 73
8.2.3 Operating Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
8.2.4 CVP in Practice: ISP Choice under Uncertainty . . . . . . . . . . . 75
8.2.5 Sunk Costs in Practice: Hybrid Vehicle Break-Even . . . . . . . . . 76
8.2.6 Special Order Decisions . . . . . . . . . . . . . . . . . . . . . . . . 76
8.2.7 Optimising with Scarce Resources . . . . . . . . . . . . . . . . . . . 77
9 Cost Allocation 79
9.1 Module 3: Introduction to Cost Allocation . . . . . . . . . . . . . . . . . . 79
9.1.1 Definition and Purposes . . . . . . . . . . . . . . . . . . . . . . . . 79
9.1.2 The Allocation Base . . . . . . . . . . . . . . . . . . . . . . . . . . 80
9.1.3 Cost Allocation as Internal Taxation . . . . . . . . . . . . . . . . . 81
9.1.4 When to Allocate: The Average-Cost vs. Marginal-Cost Framework 81
9.1.5 Allocating Multiple Service Department Costs . . . . . . . . . . . . 84
3
, 9.1.6 Allocation Methods; on the case of XWT . . . . . . . . . . . . . . . 86
9.2 Module 4: Insulating vs. Non-insulating Cost Allocation . . . . . . . . . . 87
9.2.1 Definitions and Behavioural Properties . . . . . . . . . . . . . . . . 87
9.2.2 Performance Evaluation: Segment Margin vs. Full Allocation . . . . 89
9.2.3 Case: Hallsite Imaging – Non-insulating Allocation in a Comple-
mentary Business (Z. 7-8) . . . . . . . . . . . . . . . . . . . . . . . 90
9.2.4 Case: Wasley – Death Spiral from Corporate Overhead Allocation
(Z. 7-7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
9.2.5 Case: Grove City Broadcasting – Death Spiral and NRV Allocation
(Z. 8-24) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
10 Absorption Costing, Job-Order Systems, and Joint Cost Allocation 94
10.1 Module 5: Introduction to Absorption Costing . . . . . . . . . . . . . . . . 94
10.1.1 Definition and Purposes . . . . . . . . . . . . . . . . . . . . . . . . 94
10.1.2 Job-Order vs. Process Costing . . . . . . . . . . . . . . . . . . . . . 95
10.1.3 Inventory Valuation Methods and Earnings Management . . . . . . 96
10.2 Module 6: Overhead Rate Design and Job-Order Costing . . . . . . . . . . 97
10.2.1 The Central Problem: Why Not Use Actual Overhead? . . . . . . . 97
10.2.2 Allocation Base Selection . . . . . . . . . . . . . . . . . . . . . . . . 97
10.2.3 Constructing the Nominator: The Flexible Budget Approach . . . . 97
10.2.4 Denominator Volume: Expected vs. Normal . . . . . . . . . . . . . 98
10.2.5 Under- and Over-absorbed Overhead: Causes and Treatments . . . 99
10.2.6 Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
10.2.7 Two-Stage Allocation and Departmental Rates . . . . . . . . . . . . 104
10.2.8 Mandatory Article: Merchant & Shields (1993) . . . . . . . . . . . 105
10.3 Module 7: Joint Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . 106
10.3.1 Definition and Terminology . . . . . . . . . . . . . . . . . . . . . . 106
10.3.2 Allocation Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
10.3.3 The Correct Decision Rule: Net Realizable Value . . . . . . . . . . 108
10.3.4 Case: Carlos Sanguine Winery . . . . . . . . . . . . . . . . . . . . . 109
11 Variable Costing and Activity-Based Costing 112
11.1 Module 8: Variable Costing and the Overproduction Incentive . . . . . . . 112
11.1.1 Limitations of Variable Costing and When to Use Each Method . . 113
11.2 Module 9: Activity-Based Costing . . . . . . . . . . . . . . . . . . . . . . . 116
11.2.1 Rationale behind ABC . . . . . . . . . . . . . . . . . . . . . . . . . 117
11.3 Module 10: ABC Accuracy, Errors, and Extensions . . . . . . . . . . . . . 119
11.3.1 Benefits of ABC and Activity-Based Management (ABM) . . . . . . 119
12 Customer Profitability, Total Cost of Ownership, and Quality Manage-
ment 126
12.1 Module 11: Customer Profitability Analysis . . . . . . . . . . . . . . . . . 126
12.1.1 Why Traditional Methods Fail . . . . . . . . . . . . . . . . . . . . . 126
12.1.2 Customer Cost Heterogeneity and Segmentation . . . . . . . . . . . 127
12.1.3 Factors to consider/change when using CPA . . . . . . . . . . . . . 128
12.1.4 Case: Blue Ridge Manufacturing . . . . . . . . . . . . . . . . . . . 128
12.2 Module 12: Total Cost of Ownership and Supplier Selection . . . . . . . . 130
12.2.1 Traditional Selection vs. TCO . . . . . . . . . . . . . . . . . . . . . 131
12.2.2 Case: HI-Tech Mobile Phone . . . . . . . . . . . . . . . . . . . . . . 131
4
,12.3 Module 13: Total Quality Management . . . . . . . . . . . . . . . . . . . . 132
12.3.1 The Four Costs of Quality . . . . . . . . . . . . . . . . . . . . . . . 133
12.3.2 Case: Tagway 400 (Z.14.4) . . . . . . . . . . . . . . . . . . . . . . . 134
12.4 Target Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Legend of Colored Boxes
Orange box → definitions
Blue box → key insights
Green box → examples
5
,Two Parts of the Course
The course integrates two complementary perspectives on how organisations use information
to manage behaviour and resources.
Part I – Management Control (Sessions 1–6)
How do organisations ensure that employees act in line with organisational strat-
egy? The focus is on behavioural mechanisms: designing and evaluating control
systems, structuring incentives, measuring performance, and understanding the
agency problems that arise when principals delegate tasks to agents.
Part II – Cost Management (Sessions 7–13)
How do organisations measure, allocate, and manage costs? The focus shifts to the
technical side of managerial accounting: financial responsibility centres, budgeting,
transfer pricing, activity-based costing, and target costing.
A key thread running through both parts is the tension between the decision-
facilitating and decision-influencing roles of accounting information—introduced in
Session 1 and revisited throughout the course.
———-
Course Objectives
1. Understand the foundations of management control: explain what MCS are,
why they matter, and the key roles of management accounting in organisational
decision-making and performance.
2. Design and evaluate control systems: understand control frameworks and
alternatives; assess factors that affect MCS design; evaluate strengths and weaknesses
of specific control choices.
3. Identify challenges in control systems: recognise common pitfalls, understand
what makes a control system effective, and explore how systems can fail.
4. Develop performance measurement and incentive systems: analyse key
challenges in measuring performance and understand why incentives may fail to
deliver desired results.
5. Evaluate financial performance measures: explore EVA and other measures
and how they are used in performance evaluation; understand the myopia problem.
6. Master responsibility centres and strategic control: understand the Bal-
anced Scorecard and strategy map as tools integrating financial and non-financial
performance.
7. Apply budgeting and cost management techniques: examine the functions of
budgeting, explore cost allocation methods (ABC), and understand target costing.
6
,Chapter 1
Introduction: Management Control
and Accounting
Session 1 – 10 February 2026
This session introduces the two foundational pillars of the course. Module 1 builds
intuition for what management control is and why it is difficult. Module 2 establishes
how accounting systems support—and sometimes tension with—that control function.
1.1 Module 1: Introduction to Management Control
1.1.1 What Is Management Control?
Imagine you are responsible for 100 McDonald’s outlets in Belgium—but you do not run
them yourself. You must ask: How do you make sure each manager does the “right” thing?
How do you incentivise, evaluate, and report? Whose decisions are whose? Blablabla, all
this is management control.
Management Control
Management control is the process of influencing employees to make decisions
that allow for the implementation of organisational strategies and the achievement
of organisational goals.
Why does management control matter?
Strategy execution is the number-one challenge for CEOs worldwide (Sull,
Homkes & Sull 2015, HBR). Approximately 2/3 to 3/4 of large organisations
struggle to implement their strategies—because execution is fundamentally a people
problem (Bregman 2017). “Execution is the result of thousands of decisions made
every day by employees acting according to the information they have and their
own self-interest” (Neilson et al. 2008).
7
, Management Control Systems (MCS)
All tools, devices, and systems that managers put in place to influence employees’
behaviours and align them with organisational goals and strategies.
Examples: budgeting systems, performance measurement and compensation systems,
planning systems, reporting systems.
Management control is one of three core management functions:
1. Objective setting: What does the organisation want to achieve?
2. Strategy formulation: How should resources be used to meet those objectives?
3. Management control: Strategy execution—with a behavioural focus. Do employees
act in line with the organisational strategy?
These three functions are interrelated: what employees do daily—shaped by MCS—can
itself influence how strategy evolves over time.
1.1.2 Causes of Control Problems
Three root causes prevent employees from acting in line with organisational goals:
1. Lack of direction: Employees do not know or understand what the organisation
wants from them.
2. Motivational problems: Employees’ interests are not aligned with organisational
ones (goal incongruence or conflict of interests).
3. Personal limitations: Lack of ability or cognitive capacity to process information
properly (bounded rationality).
1.1.3 Agency Theory
Agency theory is the dominant theoretical lens for understanding motivational problems
in organisations.
Principal–Agent Relationship
A setting in which one party (the principal) hires another party (the agent) to
perform a task on the principal’s behalf. The principal delegates authority; the
agent acts and makes decisions.
Key assumptions of agency theory:
• Agency problem: The agent pursues her/his own self-interest rather than the
principal’s.
• Information asymmetry: The principal cannot perfectly observe the agent’s
ability, effort, or environment.
• Bounded rationality: Both parties have cognitive limits.
8
, Figure 1.1: The principal–agent relationship: roots of conflict
• Differential risk aversion: Principal and agent may differ in their tolerance for
risk.
Agency relationships are nested: shareholders → Board → CEO → business unit man-
agers → employees. Agency problems exist at every level, in every organisation—firms,
universities, cooperatives, government bodies, and unions.
Figure 1.2: Nested agency relationships in a typical corporation
Agency Costs
All costs the principal bears by delegating a task to an agent:
1. Costs of managing the principal–agent relationship: monitoring, contracting,
information gathering, incentives, . . .
2. Value lost when the agent uses the principal’s resources in the agent’s own
interest.
1.1.4 Types of Agency Problems
Adverse Selection (hidden information, before contracting)
Agents have better private information than principals prior to contracting. The principal
may end up hiring the wrong agent or agreeing to the wrong terms.
Solutions: pre-contract investigation, post-contract penalties, screening mechanisms.
9
Management Control
& Cost Management
Course Summary
Michael Scott
Academic Year 2025–2026
,Contents
1 Introduction: Management Control and Accounting 7
1.1 Module 1: Introduction to Management Control . . . . . . . . . . . . . . . 7
1.1.1 What Is Management Control? . . . . . . . . . . . . . . . . . . . . 7
1.1.2 Causes of Control Problems . . . . . . . . . . . . . . . . . . . . . . 8
1.1.3 Agency Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.1.4 Types of Agency Problems . . . . . . . . . . . . . . . . . . . . . . . 9
1.1.5 Control Failure in Practice . . . . . . . . . . . . . . . . . . . . . . . 11
1.1.6 Avoiding Control Problems . . . . . . . . . . . . . . . . . . . . . . . 11
1.2 Module 2: Introduction to Accounting and Costing . . . . . . . . . . . . . 11
1.2.1 What Is Accounting? . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.2.2 Two Purposes of an Accounting System . . . . . . . . . . . . . . . . 12
1.2.3 Two Key Roles of Managerial Accounting . . . . . . . . . . . . . . . 13
1.2.4 Cost Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2 Control Frameworks and Alternatives 15
2.1 Module 3: Control Frameworks and Alternatives . . . . . . . . . . . . . . . 15
2.1.1 Zimmerman’s Framework: The Three-Legged Stool . . . . . . . . . 15
2.1.2 The M&VdS Framework: Control Types . . . . . . . . . . . . . . . 16
2.1.3 Simon’s Levers of Control . . . . . . . . . . . . . . . . . . . . . . . 20
3 Control Costs, Effective Design, and Incentive Systems 22
3.1 Module 4: The Cost of Control Systems . . . . . . . . . . . . . . . . . . . 22
3.1.1 Direct Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.1.2 Indirect Costs (Side Effects) . . . . . . . . . . . . . . . . . . . . . . 22
3.1.3 Adaptation Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.2 Module 5: Maintaining Effective Control . . . . . . . . . . . . . . . . . . . 24
3.2.1 Enabling vs. Coercive Controls . . . . . . . . . . . . . . . . . . . . 24
3.2.2 Five Design Traps . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.2.3 Case: Repro Corporation . . . . . . . . . . . . . . . . . . . . . . . . 25
3.3 Module 6: Incentive Systems . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.3.1 Types of Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3.3.2 Purposes of Incentive Systems . . . . . . . . . . . . . . . . . . . . . 26
3.3.3 Short-Term vs. Long-Term Incentives . . . . . . . . . . . . . . . . . 26
3.3.4 Why Pay-for-Performance Does Not Prevail Everywhere . . . . . . 26
3.3.5 Crowding-Out of Intrinsic Motivation . . . . . . . . . . . . . . . . . 27
1
, 3.3.6 Practical Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4 Performance Measurement and Financial Measures 29
4.1 Module 7: Performance Measurement . . . . . . . . . . . . . . . . . . . . . 29
4.1.1 Two Criteria for a Good Measure . . . . . . . . . . . . . . . . . . . 29
4.1.2 Challenges with Performance Measures . . . . . . . . . . . . . . . . 30
4.1.3 Solutions to Incomplete Measures . . . . . . . . . . . . . . . . . . . 30
4.2 Module 8: Financial Performance Measures . . . . . . . . . . . . . . . . . . 32
4.2.1 Classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.2.2 Market Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.2.3 Accounting Measures . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.2.4 Economic Measures: Residual Income and EVA . . . . . . . . . . . 34
4.2.5 Case: Performance Technologies — ROA vs. Residual Income . . . 35
5 Balanced Scorecard and Responsibility Centers 36
5.1 Module 9: The Balanced Scorecard . . . . . . . . . . . . . . . . . . . . . . 36
5.1.1 Motivation: Why Go Beyond Financial Measures? . . . . . . . . . . 36
5.1.2 BSC Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.1.3 The Strategy Map . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.1.4 BSC Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.1.5 Global Oil M&R Case . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.1.6 Fiedler/Lush Case — Evaluation Biases in Practice . . . . . . . . . 39
5.1.7 BSC Cautions: Ittner & Larcker (2003) . . . . . . . . . . . . . . . . 40
5.1.8 Weight Determination . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.1.9 Evaluation Biases in BSC . . . . . . . . . . . . . . . . . . . . . . . 40
5.2 Module 10: Financial Responsibility Centers . . . . . . . . . . . . . . . . . 41
5.2.1 Responsibility Accounting . . . . . . . . . . . . . . . . . . . . . . . 41
5.2.2 The Four Types of Responsibility Center . . . . . . . . . . . . . . . 42
5.2.3 Revenue Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.2.4 Cost Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.2.5 Profit Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.2.6 Investment Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.2.7 Selecting the Right Responsibility Center . . . . . . . . . . . . . . . 43
5.2.8 Cases: Bookworm and RMM . . . . . . . . . . . . . . . . . . . . . . 44
6 Budgeting 46
6.1 Module 11: Introduction to Budgeting . . . . . . . . . . . . . . . . . . . . 46
6.1.1 Definition and Structure . . . . . . . . . . . . . . . . . . . . . . . . 46
6.1.2 Four Functions of Budgeting . . . . . . . . . . . . . . . . . . . . . . 47
6.1.3 Six Criticisms of Budgeting . . . . . . . . . . . . . . . . . . . . . . 48
6.1.4 Jensen (2001): Why Budgets Create Gaming . . . . . . . . . . . . . 49
6.1.5 Should Budgeting Be Abandoned? . . . . . . . . . . . . . . . . . . 50
6.2 Module 12: Characteristics of Budgeting Systems . . . . . . . . . . . . . . 51
6.2.1 Four Key Design Dimensions . . . . . . . . . . . . . . . . . . . . . . 51
6.2.2 Who Sets the Budget? . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.2.3 Target Ratcheting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
6.2.4 Target Difficulty . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
6.2.5 Target Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
6.2.6 Budget Types and Characteristics . . . . . . . . . . . . . . . . . . . 54
2
, 6.2.7 Case Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
7 Transfer Pricing 56
7.1 Module 13: Introduction to Transfer Pricing . . . . . . . . . . . . . . . . . 56
7.1.1 Definition and Context . . . . . . . . . . . . . . . . . . . . . . . . . 56
7.1.2 Four Purposes of Transfer Pricing . . . . . . . . . . . . . . . . . . . 57
7.1.3 Transfer Pricing and Tax Avoidance . . . . . . . . . . . . . . . . . . 57
7.1.4 The Optimal Transfer Price . . . . . . . . . . . . . . . . . . . . . . 58
7.2 Module 14: Methods of Transfer Pricing . . . . . . . . . . . . . . . . . . . 59
7.2.1 Market-Based Transfer Pricing . . . . . . . . . . . . . . . . . . . . . 59
7.2.2 Variable-Cost Transfer Pricing . . . . . . . . . . . . . . . . . . . . . 60
7.2.3 Full-Cost Transfer Pricing . . . . . . . . . . . . . . . . . . . . . . . 61
7.2.4 Full Cost / Variable Cost + Mark-Up . . . . . . . . . . . . . . . . . 61
7.2.5 Negotiated Transfer Pricing . . . . . . . . . . . . . . . . . . . . . . 61
7.2.6 Dual-Rate Transfer Pricing . . . . . . . . . . . . . . . . . . . . . . . 62
7.2.7 Comparative Case: Cogen . . . . . . . . . . . . . . . . . . . . . . . 63
7.2.8 Comparative Case: MXV / JuJu-LaSalle (Tax TP) . . . . . . . . . 63
7.3 Module 15: The Death Spiral and the Prochim Case . . . . . . . . . . . . . 64
7.3.1 The Death Spiral Mechanism . . . . . . . . . . . . . . . . . . . . . 64
7.3.2 Prochim A — Full Case Analysis . . . . . . . . . . . . . . . . . . . 65
7.3.3 Empirical Evidence: Bouwens & Steens (2016) . . . . . . . . . . . . 66
7.3.4 Comparative Case: Savannah Products . . . . . . . . . . . . . . . . 67
7.3.5 Summary: Choosing a Transfer Pricing Method . . . . . . . . . . . 68
8 Cost Terminology and Cost-Volume-Profit Analysis 69
8.1 Module 1: Cost Terminology . . . . . . . . . . . . . . . . . . . . . . . . . . 69
8.1.1 Foundational Definitions . . . . . . . . . . . . . . . . . . . . . . . . 69
8.1.2 Opportunity Costs vs. Accounting Costs . . . . . . . . . . . . . . . 70
8.1.3 Sunk Costs and Relevance . . . . . . . . . . . . . . . . . . . . . . . 71
8.1.4 Cost Behaviour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
8.1.5 Relevant Range and Linear Approximation . . . . . . . . . . . . . . 72
8.1.6 Marginal Cost and Average Cost . . . . . . . . . . . . . . . . . . . 72
8.1.7 Direct vs. Indirect Costs; Product vs. Period Costs . . . . . . . . . 73
8.2 Module 2: Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . 73
8.2.1 The CVP Framework . . . . . . . . . . . . . . . . . . . . . . . . . . 73
8.2.2 Multi-Product CVP: The Bundle Method . . . . . . . . . . . . . . 73
8.2.3 Operating Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
8.2.4 CVP in Practice: ISP Choice under Uncertainty . . . . . . . . . . . 75
8.2.5 Sunk Costs in Practice: Hybrid Vehicle Break-Even . . . . . . . . . 76
8.2.6 Special Order Decisions . . . . . . . . . . . . . . . . . . . . . . . . 76
8.2.7 Optimising with Scarce Resources . . . . . . . . . . . . . . . . . . . 77
9 Cost Allocation 79
9.1 Module 3: Introduction to Cost Allocation . . . . . . . . . . . . . . . . . . 79
9.1.1 Definition and Purposes . . . . . . . . . . . . . . . . . . . . . . . . 79
9.1.2 The Allocation Base . . . . . . . . . . . . . . . . . . . . . . . . . . 80
9.1.3 Cost Allocation as Internal Taxation . . . . . . . . . . . . . . . . . 81
9.1.4 When to Allocate: The Average-Cost vs. Marginal-Cost Framework 81
9.1.5 Allocating Multiple Service Department Costs . . . . . . . . . . . . 84
3
, 9.1.6 Allocation Methods; on the case of XWT . . . . . . . . . . . . . . . 86
9.2 Module 4: Insulating vs. Non-insulating Cost Allocation . . . . . . . . . . 87
9.2.1 Definitions and Behavioural Properties . . . . . . . . . . . . . . . . 87
9.2.2 Performance Evaluation: Segment Margin vs. Full Allocation . . . . 89
9.2.3 Case: Hallsite Imaging – Non-insulating Allocation in a Comple-
mentary Business (Z. 7-8) . . . . . . . . . . . . . . . . . . . . . . . 90
9.2.4 Case: Wasley – Death Spiral from Corporate Overhead Allocation
(Z. 7-7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
9.2.5 Case: Grove City Broadcasting – Death Spiral and NRV Allocation
(Z. 8-24) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
10 Absorption Costing, Job-Order Systems, and Joint Cost Allocation 94
10.1 Module 5: Introduction to Absorption Costing . . . . . . . . . . . . . . . . 94
10.1.1 Definition and Purposes . . . . . . . . . . . . . . . . . . . . . . . . 94
10.1.2 Job-Order vs. Process Costing . . . . . . . . . . . . . . . . . . . . . 95
10.1.3 Inventory Valuation Methods and Earnings Management . . . . . . 96
10.2 Module 6: Overhead Rate Design and Job-Order Costing . . . . . . . . . . 97
10.2.1 The Central Problem: Why Not Use Actual Overhead? . . . . . . . 97
10.2.2 Allocation Base Selection . . . . . . . . . . . . . . . . . . . . . . . . 97
10.2.3 Constructing the Nominator: The Flexible Budget Approach . . . . 97
10.2.4 Denominator Volume: Expected vs. Normal . . . . . . . . . . . . . 98
10.2.5 Under- and Over-absorbed Overhead: Causes and Treatments . . . 99
10.2.6 Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
10.2.7 Two-Stage Allocation and Departmental Rates . . . . . . . . . . . . 104
10.2.8 Mandatory Article: Merchant & Shields (1993) . . . . . . . . . . . 105
10.3 Module 7: Joint Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . 106
10.3.1 Definition and Terminology . . . . . . . . . . . . . . . . . . . . . . 106
10.3.2 Allocation Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
10.3.3 The Correct Decision Rule: Net Realizable Value . . . . . . . . . . 108
10.3.4 Case: Carlos Sanguine Winery . . . . . . . . . . . . . . . . . . . . . 109
11 Variable Costing and Activity-Based Costing 112
11.1 Module 8: Variable Costing and the Overproduction Incentive . . . . . . . 112
11.1.1 Limitations of Variable Costing and When to Use Each Method . . 113
11.2 Module 9: Activity-Based Costing . . . . . . . . . . . . . . . . . . . . . . . 116
11.2.1 Rationale behind ABC . . . . . . . . . . . . . . . . . . . . . . . . . 117
11.3 Module 10: ABC Accuracy, Errors, and Extensions . . . . . . . . . . . . . 119
11.3.1 Benefits of ABC and Activity-Based Management (ABM) . . . . . . 119
12 Customer Profitability, Total Cost of Ownership, and Quality Manage-
ment 126
12.1 Module 11: Customer Profitability Analysis . . . . . . . . . . . . . . . . . 126
12.1.1 Why Traditional Methods Fail . . . . . . . . . . . . . . . . . . . . . 126
12.1.2 Customer Cost Heterogeneity and Segmentation . . . . . . . . . . . 127
12.1.3 Factors to consider/change when using CPA . . . . . . . . . . . . . 128
12.1.4 Case: Blue Ridge Manufacturing . . . . . . . . . . . . . . . . . . . 128
12.2 Module 12: Total Cost of Ownership and Supplier Selection . . . . . . . . 130
12.2.1 Traditional Selection vs. TCO . . . . . . . . . . . . . . . . . . . . . 131
12.2.2 Case: HI-Tech Mobile Phone . . . . . . . . . . . . . . . . . . . . . . 131
4
,12.3 Module 13: Total Quality Management . . . . . . . . . . . . . . . . . . . . 132
12.3.1 The Four Costs of Quality . . . . . . . . . . . . . . . . . . . . . . . 133
12.3.2 Case: Tagway 400 (Z.14.4) . . . . . . . . . . . . . . . . . . . . . . . 134
12.4 Target Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Legend of Colored Boxes
Orange box → definitions
Blue box → key insights
Green box → examples
5
,Two Parts of the Course
The course integrates two complementary perspectives on how organisations use information
to manage behaviour and resources.
Part I – Management Control (Sessions 1–6)
How do organisations ensure that employees act in line with organisational strat-
egy? The focus is on behavioural mechanisms: designing and evaluating control
systems, structuring incentives, measuring performance, and understanding the
agency problems that arise when principals delegate tasks to agents.
Part II – Cost Management (Sessions 7–13)
How do organisations measure, allocate, and manage costs? The focus shifts to the
technical side of managerial accounting: financial responsibility centres, budgeting,
transfer pricing, activity-based costing, and target costing.
A key thread running through both parts is the tension between the decision-
facilitating and decision-influencing roles of accounting information—introduced in
Session 1 and revisited throughout the course.
———-
Course Objectives
1. Understand the foundations of management control: explain what MCS are,
why they matter, and the key roles of management accounting in organisational
decision-making and performance.
2. Design and evaluate control systems: understand control frameworks and
alternatives; assess factors that affect MCS design; evaluate strengths and weaknesses
of specific control choices.
3. Identify challenges in control systems: recognise common pitfalls, understand
what makes a control system effective, and explore how systems can fail.
4. Develop performance measurement and incentive systems: analyse key
challenges in measuring performance and understand why incentives may fail to
deliver desired results.
5. Evaluate financial performance measures: explore EVA and other measures
and how they are used in performance evaluation; understand the myopia problem.
6. Master responsibility centres and strategic control: understand the Bal-
anced Scorecard and strategy map as tools integrating financial and non-financial
performance.
7. Apply budgeting and cost management techniques: examine the functions of
budgeting, explore cost allocation methods (ABC), and understand target costing.
6
,Chapter 1
Introduction: Management Control
and Accounting
Session 1 – 10 February 2026
This session introduces the two foundational pillars of the course. Module 1 builds
intuition for what management control is and why it is difficult. Module 2 establishes
how accounting systems support—and sometimes tension with—that control function.
1.1 Module 1: Introduction to Management Control
1.1.1 What Is Management Control?
Imagine you are responsible for 100 McDonald’s outlets in Belgium—but you do not run
them yourself. You must ask: How do you make sure each manager does the “right” thing?
How do you incentivise, evaluate, and report? Whose decisions are whose? Blablabla, all
this is management control.
Management Control
Management control is the process of influencing employees to make decisions
that allow for the implementation of organisational strategies and the achievement
of organisational goals.
Why does management control matter?
Strategy execution is the number-one challenge for CEOs worldwide (Sull,
Homkes & Sull 2015, HBR). Approximately 2/3 to 3/4 of large organisations
struggle to implement their strategies—because execution is fundamentally a people
problem (Bregman 2017). “Execution is the result of thousands of decisions made
every day by employees acting according to the information they have and their
own self-interest” (Neilson et al. 2008).
7
, Management Control Systems (MCS)
All tools, devices, and systems that managers put in place to influence employees’
behaviours and align them with organisational goals and strategies.
Examples: budgeting systems, performance measurement and compensation systems,
planning systems, reporting systems.
Management control is one of three core management functions:
1. Objective setting: What does the organisation want to achieve?
2. Strategy formulation: How should resources be used to meet those objectives?
3. Management control: Strategy execution—with a behavioural focus. Do employees
act in line with the organisational strategy?
These three functions are interrelated: what employees do daily—shaped by MCS—can
itself influence how strategy evolves over time.
1.1.2 Causes of Control Problems
Three root causes prevent employees from acting in line with organisational goals:
1. Lack of direction: Employees do not know or understand what the organisation
wants from them.
2. Motivational problems: Employees’ interests are not aligned with organisational
ones (goal incongruence or conflict of interests).
3. Personal limitations: Lack of ability or cognitive capacity to process information
properly (bounded rationality).
1.1.3 Agency Theory
Agency theory is the dominant theoretical lens for understanding motivational problems
in organisations.
Principal–Agent Relationship
A setting in which one party (the principal) hires another party (the agent) to
perform a task on the principal’s behalf. The principal delegates authority; the
agent acts and makes decisions.
Key assumptions of agency theory:
• Agency problem: The agent pursues her/his own self-interest rather than the
principal’s.
• Information asymmetry: The principal cannot perfectly observe the agent’s
ability, effort, or environment.
• Bounded rationality: Both parties have cognitive limits.
8
, Figure 1.1: The principal–agent relationship: roots of conflict
• Differential risk aversion: Principal and agent may differ in their tolerance for
risk.
Agency relationships are nested: shareholders → Board → CEO → business unit man-
agers → employees. Agency problems exist at every level, in every organisation—firms,
universities, cooperatives, government bodies, and unions.
Figure 1.2: Nested agency relationships in a typical corporation
Agency Costs
All costs the principal bears by delegating a task to an agent:
1. Costs of managing the principal–agent relationship: monitoring, contracting,
information gathering, incentives, . . .
2. Value lost when the agent uses the principal’s resources in the agent’s own
interest.
1.1.4 Types of Agency Problems
Adverse Selection (hidden information, before contracting)
Agents have better private information than principals prior to contracting. The principal
may end up hiring the wrong agent or agreeing to the wrong terms.
Solutions: pre-contract investigation, post-contract penalties, screening mechanisms.
9
