TOPIC 2: INTRODUCTION TO

MANAGEMENT CONTROL
 INTRODUCTION TO MANAGEMENT CONTROL
1. Management control concepts
2. Behavior in organizations
3. Accountants’ role in the organization and professional ethics
MANAGEMENT CONTROL CONCEPTS
 MANAGEMENT CONTROL CONCEPTS
Management control = managerial accounting:

• “The process of obtaining, creating, and analyzing relevant

information to help achieve organizational goals”.
• “The process by which managers influence other organizational
members to implement organizational strategies” (Anthony and
Govindarajan, 2007).

Mission: overarching objective

Strategy: plan to achieve the mission
Implementation: 90% fail
STRATEGY VS. MANAGEMENT CONTROL
Discount store
Forbes Global list: 16 in 2015. 1st
retailer.
 WAL-MART STRATEGIES
1. Locating firms in isolated rural areas and small towns (5,000-25,000)
WAL-MART STRATEGIES
2. Brand name merchandise for less
Related strategy: cost control
- Trip expenses had to be less than 1% of purchases
- Sharing hotel rooms
- Walking instead of taking taxis
WAL-MART MANAGEMENT CONTROL
1. Information system: traiting (product movement over store
and market traits)
2. Manager: Inventory and sales data
3. Electronic scanning 2 years before competitors
4. Satellite system 1983 (sales analyzed daily)
 STRATEGY & MANAGEMENT CONTROL
• In rapidly changing environments, management control may set the pace
for new strategies
• Strategy: goal setting (unsystematic, few people involved)
 Amazon
 Non-profit organization
 IBM
 Ryanair
 Apple
• Management control: implementing strategies (more systematic, involves
more workers). Controllers: information costs, productivity, efficiency.
 Other book sellers
 HP (functionalities of competitors’ printers)
 Procter and Gamble: acquisition of Gillette
FINANCIAL ACCOUNTING vs MANAGERIAL ACC.
Internal and external users Internal users
General, aggregated Detailed, specialized for a
financial statements specific decision, setting,
Reporting of the past, etc.
historical Designed for future
Guided by principles, decisions
standards, and rules Case-specific; best practices
(GAAP, IFRS)
COST ACCOUNTING vs MANAGERIAL ACC.
Uses financial and non- Uses financial and non-
financial information financial information to
related to costs help management make
Can be used in financial better decisions
accounting and in Information usually
managerial accounting presented in the form
E.g., R&D for launching of budgets
new product
SOME ELEMENTS OF MANAGEMENT CONTROL
Cost-profit approach of actions (e.g., iTunes)
Organizational structure and responsibilities
Develop objectives specific to subunits
Budgets
Communicate information
Evaluate information and performance
Behavioral considerations
 COST-PROFIT APPROACH
Revenues – total variable costs – total fixed costs = Operating profit
Selling Price * Q – (VC per unit * Q) – total FC = Profit

E.g. Company manufactures a microchip

Price = $ 10.15
Direct labor/unit = $ 2
Direct material/unit = $ 1.3
Variable overhead/unit = $ 4.4
Fixed overhead costs for the microchips = $ 450.000

How many microchips do we need to sell to break even?

 COST-PROFIT APPROACH
SP*Q – (VC*Q) – FC = 0
10.15 Q – 7.7 Q – 450,000 = 0

Q = 450,000 / 2.45 = 183,673 microchips

BEHAVIOR IN ORGANIZATIONS
 BEHAVIOR IN ORGANIZATIONS
Goal congruency: individual goals match organizational goals
• Informal factors that influence behavior in
organizations:
• Local work ethics
• Organizational culture
• Management attitudes
• The informal organization
• Perception and communication
• Individual norms
 GOAL CONGRUENCY: FORMAL FACTORS
• Rules
• Physical controls
• Handbooks
• Safeguarding systems
• Boundary systems
• Formal control process: strategic plans  elaborates budget
 measures the performance of the responsibility centers 
compares real and planned values  measures if
performance was satisfactory
REWARDS, …
• Rewards on performance:
• Intrinsic
• Extrinsic
• Motivate
• Respect opinions
• Communicate clearly
“It took me a long while to learn that people do
what you pay them to do, not what you ask them to
do” (Hicks Waldron, ex Avon CEO – Cascio &
Cappelli, 2009)
ACCOUNTANTS ROLE & PROFESSIONAL ETHICS
ACCOUNTANTS ROLE / PROFESSIONAL ETHICS
FUNCTIONS OF THE CONTROLLER (CFO or under the CFO)
 Design and operate the information and control systems
 Prepare financial reports for shareholders & external
groups
 Prepare and analyze performance reports and interpret
them for the general managers
 Integrate and approve budgets related to different
programs into one
 Audit and control theft and other aspects
 Train people in the management control area
It is a support function
 ACCOUNTING CONTROLS
• Accounting controls: protecting assets and ensuring that
financial records and reports are reliable and complete
• Many companies establish an internal audit function
 PROFESSIONAL ETHICS
• WorldCom, Enron, Arthur Andersen
• E.g. WorldCom: Telecommunications; Managers pressured
controllers and accountants to hide expenses (accounted
as investments); Did not account for debt; Bankruptcy in
2002; Managers in prison; Auditors (Arthur Andersen)
associated to this fraud.
• E.g. divisional manager wants to consider the development
of a software as an asset instead of an expense because it
will generate profits. Evidence of those future profits is
scarce.
ASSETS
An asset is a resource that is expected to provide future
economic benefits (i.e. generate future cash inflows or
reduce future cash outflows).

2 criteria to recognize an asset:

1. It is acquired in a past transaction or exchange, and

2. The value of its future benefits can be measured with
a reasonable degree of precision.
 ENRON
• Large natural gas pipeline co. Was doing great until 2000: $
100.8 billions of revenues and $979 millions in earnings.
• Filled bankruptcy in 2001
• They violated several accounting rules
• One of them was to create Special Purpose Entities and
transferred debt to them which did not show on Enron’s
accounts
 LIABILITIES
A liability is a claim on assets by “creditors” (non-owners) that
represents an obligation to make future payments of cash, goods or
services. Criteria to consider a liability:

1. The obligation is based on benefits or services received currently

or in the past
2. The amount and timing of payment is reasonably certain.
 REVENUES
Revenues are recognized when:
1. Are earned (goods or services are provided)
2. It is realized (i.e. payment for goods or services is received
in cash or something that can be converted to a known
amount of cash)

Companies can get aggressive in accounting for revenues (50%

of the enforcement actions of the SEC are for violation of one
of these two criteria).
 EXPENSES
Expenses are recognized when:

• Related revenues are recognized (product costs) or

• Incurred, if difficult to match with revenues (period costs and
unusual events)

Conservatism principle (unusual events): recognize anticipated

losses immediately (e.g. an environmental cleanup, severance
to workers upon restructuring), anticipated gains only when
realized
OTHER MEANS OF BEING UNETHICAL
• Accepting favors from suppliers/clients
• Not recognizing wrong doing
• Providing contracts without following competence rules
• …
• Institute of Management Accountants