THE MANAGEMENT CONTROL CYCLE
Mission and objectives —> Strategic plans —> Operational plans—> Performance —> Performance evaluation.
Performance evaluation –> Strategic plans
Performance evaluation —> Operational plans
Cost centre - responsibility for costs incurred; least amount of autonomy
E. g. ______ departments, _________ departments
Service
manufacturing
Revenue centre - responsibility for revenue generated
E. g. ________ department
Sales
Profit centre - responsibility for profit
eg. _________ or _________
Subsidiaries
Divisions
Investment centre - responsibility for profit, and invested capital used to
generate profit =>Performance measured on ______ , etc.
eg. Subsidiaries, Divisions
ROI
BENEFITS OF DECENTRALISATION
- Greater _________ to local needs
- Managerial training for future higher-level managers
- Motivation and job satisfaction
- Corporate level managers have more time for strategic decision
- Quicker reaction to opportunities and problems
responsiveness
COSTS to DECENTRALISATION
- May focus narrowly on their own ________ performance rather than the organisation’s overall goals
- Duplication of some tasks or services
- Loss of control
subunit’s
A major weakness of comparing operating incomes alone is ignoring differences in the ________ of the investments in each hotel
size
3 approaches that include investment in the performance measurement:
- Return on investment (ROI)
- Residual income (RI)
- __________________ (EVA)
Economic value added
ROI weaknesses:
- Focused on _________ performance
- Can lead to dysfunctional decision making
- Overall ROI declines - results in reduced assessment for manager may result in reduced bonus/incentive
- Good project rejected
- Higher return would be acceptable: but higher return => higher risk
short-term
The Dupont method:
The Dupont method of profitability analysis recognizes that there are two basis ingredients in profit making
- Using ________ to generate more revenues
- Increasing ________ per dollar of revenues
assets
income
Improve ROI by:
- ___________ profit ( increasing sales, decreasing costs)
- ___________ assets ( Delalying replacement, selling off unproductive assets)
Increasing
Decreasing
ADVANTAGES of ROI
- Relationships between assets, sales and costs are the focus for management decisions
- ________ is an important focus
- _________ of assets is an important focus (build-up of assets discourages)
Cost efficiency
Efficient use
DISADVANTAGES of ROI
- Narrow focus on short run ( current asset base) rather than long run (improved asset base)
- Investment in new assets _______: increased value of assets = lower ROI
- Investment in new assets not adjustment for ______
- Focus on division rather than business as a whole
delayed
risk
Residual income (RI) is an accounting measure of profit minus a required _______ return on an accounting measure of investment.
Residual income (RI) = Income - (Required rate of return x Investment)
dollar
The objective of maximizing ROI may induce managers of highly profitable divisions to reject projects that, from the view point of the organization as a whole, should be accepted
___________ is more likely to be promoted by using residual income rather than ROI
Goal congruence
Economic value added (EVA) is a specific type of residual income calculation that has recently attracted considerable attention
EVA = after tax profit - after tax WACC x assets used
Profit = operating income
WACC = weighted average cost of capital
(note: allow for tax on debt, not on equity)
Assets used = _________
(i.e total assets minus current liabilities) can also be computed as:
Long-term assets + current assets - current liabilities or
Long-term assets + working capital
total capital employed
How to improve EVA
- Earn more after-tax operating income with the _______ capital
- Use less capital to earn the same after-tax operating income
- Invest capital in high-return projects
same
