Management Control Systems : Performance Measurement, Evaluation and Incentives

by Merchant, Kenneth; Van der Stede, Wim

• ISBN13: 9780273655961
• ISBN10: 0273655965
• Edition: 2nd
• Format: Paperback
• Copyright: 2007-01-01
• Publisher: Prentice Hall

Summary

Management control systems (MCSs) is a complex and multidimensional subject, which is comprehensively and clearly addressed by this new book. It assumes a basic level of knowledge of management accounting, but it is suitable for upper level undergraduates who have taken a prior management accounting course, as well as for postgraduates and practising professionals.Features and benefits Combination of an extensive set of case studies, text and real-life examples creates a balanced picture of the concepts, theories and issues surrounding the subject and equips students with the requisite skills to apply them to specific decision-making situations that managers face. Case study selection includes many Harvard Business School cases, as well as a range of original cases covering businesses in Europe, the USA and beyond. Coverage of the latest management control-related tools and techniques, such as EVAtrade; and Balanced Scorecard. Inclusion of findings of empirical research on the effectiveness of MCS design within different organizational settings provides a solid foundation to the subject. Greater emphasis on management control in the context of strategy and planning offers students the opportunity to develop their analytical skills in this area. Focus on the use and effects of 'financial results controls' which dominate at managerial levels in all but the smallest organizations. It also provides a broad treatment of alternative management controls that puts the financially-oriented controls into the proper perspective. The authorsProfessor Kenneth A. Merchant is the current holder of the Deloitte & Touche LLP Chair of Accountancy at the University of Southern California. He is an experienced teacher, consultant and the author of seven books. Professor Wim A. Van der Stede is Assistant Professor of management accounting and control at the University of Southern California. He is an experienced author with his publications appearing in several different journals, and he has taught in many different countries.

Table of Contents

Preface	x
Section I THE CONTROL FUNCTION OF MANAGEMENT
Management and Control	3	(20)
Management and control	4	(3)
Effects of management controls on behavior	7	(1)
Causes of management control problems	7	(3)
Characteristics of good management control	10	(1)
Control problem avoidance	11	(3)
Control alternatives	14	(1)
Outline of this book	15	(1)
Notes	16	(7)
Leo's Four-Plex Theater	17	(1)
Wong's Pharmacy	18	(1)
Private Fitness, Inc.	19	(4)
Section II MANAGEMENT CONTROL ALTERNATIVES AND THEIR EFFECTS
Results Controls	23	(44)
Instances of results controls	24	(2)
Results controls and the control problems	26	(1)
Elements of results controls	26	(3)
The effectiveness of results controls	29	(3)
Conclusion	32	(1)
Notes	33	(34)
Industrial Electronics, Inc.	34	(1)
Visionary Design Systems: Are incentives enough?	35	(18)
Armco, Inc.: Midwestern Steel Division	53	(14)
Action, Personnel, and Cultural Controls	67	(57)
Action controls	67	(3)
Action controls and the control problems	70	(1)
Prevention versus detection	71	(1)
The effectiveness of action controls	72	(2)
Personnel controls	74	(3)
Cultural controls	77	(6)
Personnel/cultural controls and the control problems	83	(1)
The effectiveness of personnel/cultural controls	84	(1)
Conclusion	85	(1)
Notes	86	(38)
The Internal Revenue Service: Automated Collection System	88	(11)
Alcon Laboratories, Inc. (A)	99	(11)
Patagonia, Inc.	110	(14)
Control Tightness (or Looseness)	124	(53)
Tight results control	124	(4)
Tight action controls	128	(3)
Tight personnel/cultural controls	131	(2)
Multiple forms of controls	133	(1)
Conclusion	133	(2)
Notes	135	(42)
The Lincoln Electric Company	136	(22)
Controls at the Sands Hotel and Casino	158	(19)
Direct and Indirect Control System Costs	177	(38)
Out-of-pocket costs	177	(1)
Behavioral displacement	178	(5)
Gamesmanship	183	(3)
Operating delays	186	(1)
Negative attitudes	187	(2)
Conclusion	189	(1)
Notes	190	(25)
Sears Auto Centers (A)	192	(15)
Disctech, Inc.	207	(8)
Designing and Evaluating Management Control Systems	215	(38)
What is desired and what is likely	215	(2)
Choice of controls	217	(5)
Choice of control tightness	222	(1)
Adapting to change	223	(1)
Keeping a behavioral focus	224	(1)
Maintaining good control	224	(1)
Notes	225	(28)
Rabobank Nederland	226	(12)
Air Tex Aviation	238	(15)
Section III FINANCIAL RESULTS CONTROL SYSTEMS
Financial Responsibility Centers and The Transfer Pricing Problem	253	(49)
Financial results control systems	253	(1)
Financial responsibility centers	254	(4)
Variety within FRC types	258	(1)
A hierarchy of FRCs	258	(1)
Choosing types of FRCs	259	(2)
Performance measurement: entities vs managers	261	(1)
The transfer pricing problem	262	(6)
Conclusion	268	(1)
Notes	269	(33)
Toyota Motor Sales, U.S.A., Inc.	271	(10)
Zumwald AG	281	(2)
Axeon N.V.	283	(7)
Boise Cascade Corporation	290	(12)
Planning and Budgeting Systems	302	(32)
Purposes of planning and budgeting systems	302	(1)
Planning cycles	303	(3)
Forecasting and contingency planning	306	(1)
Performance review processes	307	(1)
Variations in practice	307	(4)
Criticisms of companies' planning and budgeting processes	311	(1)
Conclusion	312	(1)
Notes	313	(21)
Citibank Indonesia	314	(7)
Amgen Inc.: Planning the unplannable	321	(13)
Financial Performance Targets	334	(33)
Types of financial performance targets	334	(4)
Major financial performance target issues	338	(8)
Conclusion	346	(1)
Notes	346	(21)
HCC Industries	348	(11)
Houston Fearless 76, Inc.	359	(8)
Performance-dependent Rewards (and Punishments)	367	(42)
Benefits of performance-dependent rewards	367	(1)
Forms of rewards and punishments	368	(1)
Monetary rewards	369	(3)
Group rewards	372	(1)
Links between rewards and results	373	(1)
Criteria for evaluating reward systems	374	(1)
Monetary rewards and the evaluation criteria	375	(2)
Designing monetary reward systems	377	(1)
Conclusion	378	(1)
Notes	379	(30)
Catalytic Solutions, Inc.	381	(8)
Loctite Company de Mexico, S.A. de C.V.	389	(6)
GTE Corporation: Long-term incentive plan	395	(14)
Section IV PERFORMANCE MEASUREMENT ISSUES AND THEIR EFFECTS
Accounting Performance Measures and their Effects	409	(28)
Value creation	409	(1)
Indicators of value creation	410	(1)
Advantages of APMs of performance	411	(1)
Limitations of APMs of performance	412	(2)
Investment and operating myopia	414	(1)
ROI measures of performance	415	(1)
Return-on-what?	416	(2)
Problems caused by ROI-type measures of performance	418	(3)
Residual income measures	421	(2)
Conclusion	423	(1)
Notes	423	(14)
Behavioral implications of airline depreciation accounting policy choices	425	(2)
Berkshire Industries PLC	427	(6)
Las Ferreterias de Mexico, S.A. de C.V.	433	(4)
Financial Results Control Remedies to the Myopia Problem	437	(23)
Addressing the myopia problems	437	(2)
Measure changes in shareholder value	439	(1)
Control investments	439	(2)
Improve/adjust accounting profit measures	441	(1)
Extend the measurement horizon	442	(1)
Measure a set of value drivers	443	(3)
Reduce pressure for short-term profit	446	(1)
Conclusion	446	(1)
Notes	447	(13)
Chadwick, Inc.: The Balanced Scorecard	448	(4)
Bank of the Desert (A)	452	(3)
Bank of the Desert (B)	455	(5)
Using Financial Results Controls in the Presence of Uncontrollable Factors	460	(33)
The controllability principle	461	(1)
Types of uncontrollable influences	462	(2)
The distorting effects of uncontrollables	464	(1)
Controlling for uncontrollables before the measurement period	464	(2)
Controlling for uncontrollables after the measurement period	466	(5)
Other uncontrollable factor issues	471	(1)
Adjusting for uncontrollables	471	(1)
Notes	472	(21)
Olympic Car Wash	473	(1)
Hoffman Discount Drugs, Inc.	474	(6)
Formosa Plastics Group	480	(8)
Beifang Chuang Ye Vehicle Group	488	(5)
Section V IMPORTANT MANAGEMENT CONTROL ROLES AND ETHICAL ISSUES
Controllers, Auditors and Boards of Directors	493	(60)
Controllers	493	(3)
Auditors	496	(5)
Boards of directors and audit committees	501	(5)
Conclusion	506	(1)
Notes	506	(47)
ITT Corporation: Control of the controllership function, 1977 versus 1991	508	(16)
Desktop Solutions, Inc. (A): Audit of the St. Louis branch	524	(8)
Desktop Solutions, Inc. (B): Audit of Operations Group Systems	532	(3)
Vector Aeromotive Corporation	535	(7)
Landale PLC	542	(11)
Management Control-related Ethical Issues and Analyses	553	(34)
The importance of good ethical analyses	554	(1)
Analyzing ethical issues	555	(4)
Some common management control-related ethical issues	559	(4)
Spreading good ethics within an organization	563	(2)
Conclusion	565	(1)
Notes	566	(21)
Two budget targets	568	(1)
Conservative accounting in the General Products Division	568	(1)
Education Food Services at Central Maine State University	569	(2)
Don Russell: Experiences of a Controller/CFO	571	(7)
Lernout & Hauspie Speech Products	578	(9)
Section VI SIGNIFICANT SITUATIONAL INFLUENCES ON MANAGEMENT CONTROL SYSTEMS
The Effects of Environmental Uncertainty, Organizational Strategy and Multinationality on Management Control Systems	587	(50)
Environmental uncertainty	588	(2)
Organizational strategy	590	(2)
Multinationality	592	(8)
Conclusion	600	(1)
Notes	601	(36)
Lincoln Electric: Venturing abroad	604	(16)
TECO Electric & Machinery Co. Ltd.	620	(6)
ConAgra Grocery Products Company	626	(11)
Management Control in Not-for-profit Organizations	637	(53)
Differences between for-profit and not-for-profit organizations	637	(1)
Goal ambiguity and conflict	638	(1)
Difficulty in measuring performance	639	(1)
Accounting differences	640	(1)
External scrutiny	641	(2)
Legal constraints	643	(1)
Employee characteristics	643	(1)
Services provided	644	(1)
Conclusion	644	(1)
Notes	645	(45)
Boston Lyric Opera	646	(15)
City of Yorba Linda, California	661	(11)
Waikerie Co-Operative Producers Ltd.	672	(8)
University of Southern California: Revenue Center Management System	680	(10)
Index	690