Topic 1 Introduction to managerial control systems
Management accounting:
the process of gathering, summarising and reporting financial and nonfinancial information used
internally by managers to make decisions (i.e. internal control and risk management)
=> managing the organisation to improve performance
Managerial Control Systems:
=> ensure organisation achieve its objectives and goals; impact behaviour in a positive way
Flamholtz (1996) Organisational Control System
Components of Control
● Core control system -> organisational structure -> organisational culture ->
organisational environment
Levels of Control
● Planning -> Operations -> Measurements -> Feedback -> Evaluation Rewards
Simons (1995) Levers of Control
Business Strategy
● Core values: Belief systems; Risks to be avoided: Boundary systems => Organisational
structure
● Strategic Uncertainties: Interactive control systems; Critical performance variables:
Diagnostic control systems => Use of accounting information to manage organisations
Risk Management
Strategic risks Operational risks Legal and Financial risks (use
(use internal control) regulatory risks financial control)
Change in market Control systems Change in law and FOREX
forces regulations
Reputation Cyber security Inappropriate or Interest rates
unexpected
enforcement
Impairment of Corruption Credit risk
physical assets
Public liability Impairment of
financial assets
Solvency
,Cowmilka Case
Workshop 1: Netflix Case
Organisational control: a process of controlling or influencing the behaviour of people as
members of a formal organisation to increase the probability that they will achieve
organisational goals. -> Contribute to managerial decision making
Functions of organisational control:
1. Goal emphasis
2. Organisational integration
3. Autonomy with control
4. Implementation of strategic planning
Topic 2 Organisational Structure
Responsibility accounting, structure and the organisational sub-unit
Actual organisational structure ≠ Intended organisational structure
Centralised vs Decentralised entities (Advantages and Disadvantages)
● Centralised - :) efficient decisions benefit the overall entity; :( employees less motivated;
poor quality of decision making
● Decentralised - :) timely decision making; decision making authority combined with
reward systems -> employees more motivated at sub-unit level; :( decisions may not
meet organisational goals as a whole, less effective decision making, conflicts between
sub-units
Responsibility centres: Work units are held responsible for the decisions they make when they
are assigned roles, responsibilities and decision-rights
The Controllability Principle: evaluation of manager’s performance should be based on the
factors that are under the manager’s control (i.e. revenue, costs, investment decisions, ROA)
Span of attention (a key driver of behaviour) is influenced by:
● Work-unit design
● Span of control (how many subordinates a manager can realistically supervise)
● Span of accountability
Structural options of an organisation
1. Functional (R&D, design, operations, sales, marketing)
2. Divisional (key markets, products, services, regions)
3. Matrix (two dimensions -> regions by product)
4. Hybrid (mix of different structures -> functional and divisional)
, Functional (focus Divisional (focus Hybrid (seeks Matrix (respond to
around functions or around regions, balance between needs of particular
processes) products, customers) market market segment,
responsiveness and reserve some EOM)
economies of scale) => dual hierarchy
Advantages :) Advantages :) Advantages :) Advantages :)
- Specialisation - Attention to - Tailored to particular - Enhance
(economies of scale) marketplace results needs and communication,
- Clear accountability - Greater circumstances of org. learning, cooperation,
and chain of responsiveness to - front end (market collaboration (across
command market demands of oriented units, focus functions and market
specific products on need of market segments)
- Divisional managers segment) - Effective use of its
held accountable for - back end specialists
results (CP) (centralised
functional units-EOS)
Limitations :( Limitations :( Limitations :( Limitations :(
- Problematic - Decentralised - Tensions arise - Unresolved tensions
Information flow functions duplicated (sharing/ compete for between unit
(vertical & horizontal) - Problematic resources) managers (confusing,
- Top management horizontal information - Functional units conflicting directives)
overloaded with flows (Competition may not understand
operational decisions between divisions) the specific needs of
(coordination and each market segment
integration) -> tension between
- Hard to measure front end and back
performance end
- Managers tend to => trade off
see a homogeneous
market
The Silo Effect (a lack of communication and common goals between departments in an
organisation)
Overcome Silo with informal methods -> Bootcamps, 150 threshold
Overcome Silo with formal methods -> Performance measure system, Rewards system,
Change of organisational structure (Matrix: enhance communication)
Workshop 2: EcoTripp Case
● Organisational structure influences cost accumulation decisions and cost management
initiatives (performance outcomes of the organisation)
● Classification of responsibility centres impacts performance metric selection and
decision making
● Degree of decentralisation influence accountability and performance metric selection
● Strategy influences structure
, Topic 3 Pricing Internal Transfer
Internal transfer price influences:
● Performance evaluation
● Facilitation of decision making
● Motivation
● Goal congruence
Transfer pricing policies is usually a function of:
● Transfer pricing method
● Extent of sourcing autonomy (where managers are able to source or sell internally or
externally)
=> extent to which sourcing autonomy is allowed will impact the nature of transfer price disputes
within the organisation
Transfer pricing methods:
Cost-based (Variable Market-based Negotiated Dual price
cost; full cost; cost (external market
plus mark up) price)
Used when: - transfer recorded at - autonomy is - use two separate
- Market data not external market price encouraged transfer pricing
available (products - selling division Used when: methods
transferred internally records normal sale - ensure equity - use if vertical
not identical); - purchasing division between divisions integration
manager’s sourcing records at - market price
autonomy is limited “arms-length” unavailable or
purchase production cost
- some concessions unstable
for savings from
internal sale
Limitations :( Usually a price Difference between
- reduces incentives between the ceiling the two transfer price
for supplying division (external market is recorded in a
to manage costs price) and floor (cost corporate cost
effectively based) account and borne by
- Unfair distribution of company
profits between
divisions
The issue of idle capacity
● Relevant cost = appropriate internal transfer price = opportunity cost
● If supply division (upstream) has NO idle capacity, relevant cost = market price
● If supply division (upstream) HAS idle capacity, relevant cost = variable cost
● Opportunity cost = forgone contribution margin
Management accounting:
the process of gathering, summarising and reporting financial and nonfinancial information used
internally by managers to make decisions (i.e. internal control and risk management)
=> managing the organisation to improve performance
Managerial Control Systems:
=> ensure organisation achieve its objectives and goals; impact behaviour in a positive way
Flamholtz (1996) Organisational Control System
Components of Control
● Core control system -> organisational structure -> organisational culture ->
organisational environment
Levels of Control
● Planning -> Operations -> Measurements -> Feedback -> Evaluation Rewards
Simons (1995) Levers of Control
Business Strategy
● Core values: Belief systems; Risks to be avoided: Boundary systems => Organisational
structure
● Strategic Uncertainties: Interactive control systems; Critical performance variables:
Diagnostic control systems => Use of accounting information to manage organisations
Risk Management
Strategic risks Operational risks Legal and Financial risks (use
(use internal control) regulatory risks financial control)
Change in market Control systems Change in law and FOREX
forces regulations
Reputation Cyber security Inappropriate or Interest rates
unexpected
enforcement
Impairment of Corruption Credit risk
physical assets
Public liability Impairment of
financial assets
Solvency
,Cowmilka Case
Workshop 1: Netflix Case
Organisational control: a process of controlling or influencing the behaviour of people as
members of a formal organisation to increase the probability that they will achieve
organisational goals. -> Contribute to managerial decision making
Functions of organisational control:
1. Goal emphasis
2. Organisational integration
3. Autonomy with control
4. Implementation of strategic planning
Topic 2 Organisational Structure
Responsibility accounting, structure and the organisational sub-unit
Actual organisational structure ≠ Intended organisational structure
Centralised vs Decentralised entities (Advantages and Disadvantages)
● Centralised - :) efficient decisions benefit the overall entity; :( employees less motivated;
poor quality of decision making
● Decentralised - :) timely decision making; decision making authority combined with
reward systems -> employees more motivated at sub-unit level; :( decisions may not
meet organisational goals as a whole, less effective decision making, conflicts between
sub-units
Responsibility centres: Work units are held responsible for the decisions they make when they
are assigned roles, responsibilities and decision-rights
The Controllability Principle: evaluation of manager’s performance should be based on the
factors that are under the manager’s control (i.e. revenue, costs, investment decisions, ROA)
Span of attention (a key driver of behaviour) is influenced by:
● Work-unit design
● Span of control (how many subordinates a manager can realistically supervise)
● Span of accountability
Structural options of an organisation
1. Functional (R&D, design, operations, sales, marketing)
2. Divisional (key markets, products, services, regions)
3. Matrix (two dimensions -> regions by product)
4. Hybrid (mix of different structures -> functional and divisional)
, Functional (focus Divisional (focus Hybrid (seeks Matrix (respond to
around functions or around regions, balance between needs of particular
processes) products, customers) market market segment,
responsiveness and reserve some EOM)
economies of scale) => dual hierarchy
Advantages :) Advantages :) Advantages :) Advantages :)
- Specialisation - Attention to - Tailored to particular - Enhance
(economies of scale) marketplace results needs and communication,
- Clear accountability - Greater circumstances of org. learning, cooperation,
and chain of responsiveness to - front end (market collaboration (across
command market demands of oriented units, focus functions and market
specific products on need of market segments)
- Divisional managers segment) - Effective use of its
held accountable for - back end specialists
results (CP) (centralised
functional units-EOS)
Limitations :( Limitations :( Limitations :( Limitations :(
- Problematic - Decentralised - Tensions arise - Unresolved tensions
Information flow functions duplicated (sharing/ compete for between unit
(vertical & horizontal) - Problematic resources) managers (confusing,
- Top management horizontal information - Functional units conflicting directives)
overloaded with flows (Competition may not understand
operational decisions between divisions) the specific needs of
(coordination and each market segment
integration) -> tension between
- Hard to measure front end and back
performance end
- Managers tend to => trade off
see a homogeneous
market
The Silo Effect (a lack of communication and common goals between departments in an
organisation)
Overcome Silo with informal methods -> Bootcamps, 150 threshold
Overcome Silo with formal methods -> Performance measure system, Rewards system,
Change of organisational structure (Matrix: enhance communication)
Workshop 2: EcoTripp Case
● Organisational structure influences cost accumulation decisions and cost management
initiatives (performance outcomes of the organisation)
● Classification of responsibility centres impacts performance metric selection and
decision making
● Degree of decentralisation influence accountability and performance metric selection
● Strategy influences structure
, Topic 3 Pricing Internal Transfer
Internal transfer price influences:
● Performance evaluation
● Facilitation of decision making
● Motivation
● Goal congruence
Transfer pricing policies is usually a function of:
● Transfer pricing method
● Extent of sourcing autonomy (where managers are able to source or sell internally or
externally)
=> extent to which sourcing autonomy is allowed will impact the nature of transfer price disputes
within the organisation
Transfer pricing methods:
Cost-based (Variable Market-based Negotiated Dual price
cost; full cost; cost (external market
plus mark up) price)
Used when: - transfer recorded at - autonomy is - use two separate
- Market data not external market price encouraged transfer pricing
available (products - selling division Used when: methods
transferred internally records normal sale - ensure equity - use if vertical
not identical); - purchasing division between divisions integration
manager’s sourcing records at - market price
autonomy is limited “arms-length” unavailable or
purchase production cost
- some concessions unstable
for savings from
internal sale
Limitations :( Usually a price Difference between
- reduces incentives between the ceiling the two transfer price
for supplying division (external market is recorded in a
to manage costs price) and floor (cost corporate cost
effectively based) account and borne by
- Unfair distribution of company
profits between
divisions
The issue of idle capacity
● Relevant cost = appropriate internal transfer price = opportunity cost
● If supply division (upstream) has NO idle capacity, relevant cost = market price
● If supply division (upstream) HAS idle capacity, relevant cost = variable cost
● Opportunity cost = forgone contribution margin
