Crib Final double sided ch.11-14

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Financial Accounting
Prof.Jan Klakurka

Ch. 10 Using Diagnostic and Interactive Control Systems Contingencies Maximize ROM and effective strategy implementation - add contingency buffers to protect key diagnostic targets Diagnostic Control Systems - provide cushion that allows managers to reforecast profits during year, ensuring key targets not jeopardized - monthly statements -> find deviations, initiate actions Return on Mgmt Diagnostic control systems: formal info systems managers use to monitor outcome and correct deviations from ROM = Amt of Productive Organizational Energy released Amt of Mgmt Time and Attention Invested - managers must understand what to do personally and delegated to staff preset standards of performance Common diagnostic control systems: bal scorecards, exp centre budgets, project monitoring sys, brand revmkt share Aligning Performance Goals and Incentives monitor sys, HR sys, std cost-acctg sys Purpose of Performance Goals Why Use Control Sys Diagnostically? - communicates bus direction to subordinates Implement Strategy: Variance info about critical performance variables - each measure (rev growth, store openings, exp reduction, price vs comp) communicates diff set of priorities - enhance ROM Conserving Attention: management by exception Using Diagnostic Control Systems Effectively - subordinates infer strategic direction top mngrs wish to follow Sufficient attention to five areas: - frees up top mgmt attention to focus on other things - signal preferences: where ppl should dedicate their time 1. Setting and Negotiating Goals - set infrequently once per year - monitor progress thru quick scan of reports - disciplined approach to mgmt working through others - desired direction and level of achievement - communicate prospects of the business with stockholders and analysts 2. Aligning Performance Measures - span of accountability defined by measures Critical Performance Variables - reflect strategic goals and priorities - factors must be achieved for intended strategy to succeed 1. work deductively to identify performance drivers - balanced scorecard to align measures correctly 3. Designing Incentives - max ROM by motivate goal achievement Performance drivers: variables (1) influence prob of strategy successful implementation (2)provide largest - merit increases contingent upon performance reported in diagnosticotential for marginal gain over time 2. identify critical performance variables from list of performance drivers system - extrinsic so mngrs dont have to watch subordinates working toward Any performance variable that could cause strategy to fail goals Selecting Performance Measures 4. Reviewing Exception Reports - quick, efficient review, increasing ROM Measure: quantitative value that can be scaled and used for purposes of comparison - large sig exceptions -financial measures: monetary terms 5. Following Up Significant Exceptions - remedial steps to rectify problems for subordinates by the time - nonfinancial measures: quantitative data outside formal accounting system managers pick up rpt Three tests to determine if measure is suitable to support performance goal: Risks in Using Diagnostic Control Systems Measuring Wrong Variables 1. Align with strategy: measures tell what important Building Slack into Targets: increase prob of meet goal with easy targets Gaming the System: achieve what measured on, not leading to advancing strategy 2. Measured effectively : obj, complete, responsiveness Smoothing: alter timing and recording of transactions to show better performance Biasing: managers report only good news or downplay bad news 3. Measure Linked with Value: output measures (lagging) show econ value created, input and Illegal acts: violate laws or policies to increase measures and performance process measures valid in managers understand cause-and-effect relationships Interactive Control Systems: predicted chgs adjust action plans for threats Nature of Measures (2) - everyone watches what their boss watches Objective measure: independently verified, little ambiguity Interactive control systems: formal info sys managers use to personally involve themselves in decision activi- subjective measures rely on supervisor supervision of subordinates Complete measure: captures all relevant attributes of achievement i.e. share price Business strategy: reflects how business create value for customer and differentiates gs from competitors Responsive measure: reflect actions manager can directly influence i.e. profit, ROE Strategic uncertainties: mgmt vision for future, how business evolving in mktplace - subordinates suggest action plans that respond to changing circumstances, in anticipation of inevitable questionsease responsiveness, lower-level employees measured on activities within span on control - poor measures bring gaming, smoothing, biasing from bosses How Many Measures for Each Employee: no more than seven to nine performance goals - forces organizational learning, emerging strategy indirect result of bottom-up action plans and experimentation Benchmark Comparisons Emerging patterns of action: employees experiment and replicate small successesin attempt to create value - mngrs must know which firms set standard for most effective utilization of resources; benchmarking Design Features of Interactive Control Systems - with mult productiondistn sites, benchmark best internal practices Examples: profit plan, proj mgmt, brand rev budgets, intelligence sys, HR sys
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