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©2005 Prentice Hall Business Publishing, ©2005 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 13/e,13/e, Horngren/Sundem/Stratton Horngren/Sundem/Stratton 10 - 10 - 11

Management ControlManagement Controlin Decentralized in Decentralized OrganizationsOrganizations

Chapter 10Chapter 10

From 1986 companies revenues increased from $1 From 1986 companies revenues increased from $1 billion to over $10 billionbillion to over $10 billion

During same period foreign earnings increased During same period foreign earnings increased from 25% to 50%from 25% to 50%

What are the keys to success when a company goes What are the keys to success when a company goes global?global?

Nike decided to delegate decision making to the Nike decided to delegate decision making to the local market levellocal market level

One result of this decision was the signing of race One result of this decision was the signing of race car driver Michael Schumacher in Germanycar driver Michael Schumacher in Germany

Chapter focuses on management control systems in Chapter focuses on management control systems in decentralized organizationsdecentralized organizations

Learning Objective 1Learning Objective 1

Define decentralizationDefine decentralization

and identify its expectedand identify its expected

benefits and costs.benefits and costs.

DecentralizationDecentralization

The delegation of freedom to makeThe delegation of freedom to makedecisions is called decisions is called decentralizationdecentralization..The delegation of freedom to makeThe delegation of freedom to makedecisions is called decisions is called decentralizationdecentralization..

The lower in the organization thatThe lower in the organization thatthis freedom exists, the greaterthis freedom exists, the greater

the decentralization.the decentralization.

The lower in the organization thatThe lower in the organization thatthis freedom exists, the greaterthis freedom exists, the greater

the decentralization.the decentralization.

Costs and BenefitsCosts and Benefits

Benefits of decentralization:Benefits of decentralization:Benefits of decentralization:Benefits of decentralization:

Lower-level managers have the bestLower-level managers have the bestinformation concerning local conditions.information concerning local conditions.

Lower-level managers have the bestLower-level managers have the bestinformation concerning local conditions.information concerning local conditions.

It promotes management skills which,It promotes management skills which,in turn, helps ensure leadership continuity.in turn, helps ensure leadership continuity.

It promotes management skills which,It promotes management skills which,in turn, helps ensure leadership continuity.in turn, helps ensure leadership continuity.

Managers enjoy higher status from beingManagers enjoy higher status from beingindependent and thus are better motivated.independent and thus are better motivated.

Managers enjoy higher status from beingManagers enjoy higher status from beingindependent and thus are better motivated.independent and thus are better motivated.


Costs of decentralization:Costs of decentralization:Costs of decentralization:Costs of decentralization:

Managers may make decisions that areManagers may make decisions that arenot in the organization’s best interests.not in the organization’s best interests.Managers may make decisions that areManagers may make decisions that arenot in the organization’s best interests.not in the organization’s best interests.

Managers also tend to duplicate servicesManagers also tend to duplicate servicesthat might be less expensive if centralized.that might be less expensive if centralized.Managers also tend to duplicate servicesManagers also tend to duplicate services

that might be less expensive if centralized.that might be less expensive if centralized.

Costs of accumulating and processingCosts of accumulating and processinginformation frequently rise.information frequently rise.

Costs of accumulating and processingCosts of accumulating and processinginformation frequently rise.information frequently rise.


Managers in decentralized units may wasteManagers in decentralized units may wastetime negotiating with other units about goodstime negotiating with other units about goods

or services one unit provides to the other.or services one unit provides to the other.

Managers in decentralized units may wasteManagers in decentralized units may wastetime negotiating with other units about goodstime negotiating with other units about goods

or services one unit provides to the other.or services one unit provides to the other.

Middle GroundMiddle Ground

Many companies find that decentralizationMany companies find that decentralizationworks best in part of the company, whileworks best in part of the company, whilecentralization works better in other parts.centralization works better in other parts.

Many companies find that decentralizationMany companies find that decentralizationworks best in part of the company, whileworks best in part of the company, whilecentralization works better in other parts.centralization works better in other parts.

Decentralization is most successfulDecentralization is most successfulwhen an organization’s segments arewhen an organization’s segments arerelatively independent of one another.relatively independent of one another.

Decentralization is most successfulDecentralization is most successfulwhen an organization’s segments arewhen an organization’s segments arerelatively independent of one another.relatively independent of one another.

Segment AutonomySegment Autonomy

If management has decided in favorIf management has decided in favorof heavy decentralization, of heavy decentralization, segmentsegment

autonomyautonomy, the delegation of decision-, the delegation of decision-making power to managers of segmentsmaking power to managers of segments

of an organization, is also crucial.of an organization, is also crucial.

If management has decided in favorIf management has decided in favorof heavy decentralization, of heavy decentralization, segmentsegment

autonomyautonomy, the delegation of decision-, the delegation of decision-making power to managers of segmentsmaking power to managers of segments

of an organization, is also crucial.of an organization, is also crucial.


Distinguish between profitDistinguish between profit

centers and decentralization.centers and decentralization.

Responsibility Centers and Responsibility Centers and DecentralizationDecentralization

Design of a management control system shouldDesign of a management control system shouldconsider two separate dimensions of control:consider two separate dimensions of control:

Design of a management control system shouldDesign of a management control system shouldconsider two separate dimensions of control:consider two separate dimensions of control:

ResponsibilitiesResponsibilities

11

AutonomyAutonomy

22


Profit centersProfit centersProfit centersProfit centers DecentralizationDecentralizationDecentralizationDecentralization

These are entirely separate conceptsThese are entirely separate conceptsand one can exist without the other.and one can exist without the other.These are entirely separate conceptsThese are entirely separate conceptsand one can exist without the other.and one can exist without the other.


All control systems are imperfect.All control systems are imperfect.All control systems are imperfect.All control systems are imperfect.

The choice among systems should beThe choice among systems should bebased on which one will bring morebased on which one will bring more

of the actions top management seeks.of the actions top management seeks.

The choice among systems should beThe choice among systems should bebased on which one will bring morebased on which one will bring more

of the actions top management seeks.of the actions top management seeks.


Explain how the linking of rewardsExplain how the linking of rewards

to responsibility center resultsto responsibility center results

affects incentives and risk.affects incentives and risk.

Motivation, Performance,Motivation, Performance,and Rewardsand RewardsCriteria and Choices when DesigningCriteria and Choices when Designing

a Management Control Systema Management Control System

Motivational criteria:Motivational criteria:Goal congruenceGoal congruenceand managerialand managerial

efforteffort

Motivational criteria:Motivational criteria:Goal congruenceGoal congruenceand managerialand managerial

efforteffort

ManagementManagementactionsactions

ManagementManagementactionsactions

PerformancePerformancemeasuresmeasures

PerformancePerformancemeasuresmeasures

RewardsRewardsRewardsRewards

Feedback

Motivation, Performance,Motivation, Performance,and Rewardsand Rewards

You get what you measure!You get what you measure!You get what you measure!You get what you measure!

Therefore, accounting measures,Therefore, accounting measures,which provide relatively objectivewhich provide relatively objective

evaluations of performance,evaluations of performance,are important.are important.

Therefore, accounting measures,Therefore, accounting measures,which provide relatively objectivewhich provide relatively objective

evaluations of performance,evaluations of performance,are important.are important.

Agency Theory, Agency Theory, Performance, Rewards, and Performance, Rewards, and RisksRisks

Agency theoryAgency theory deals with contracting between deals with contracting betweenan organization and the managers that it hires.an organization and the managers that it hires.Agency theoryAgency theory deals with contracting between deals with contracting betweenan organization and the managers that it hires.an organization and the managers that it hires.

IncentiveIncentiveIncentiveIncentive RiskRiskRiskRiskCost of measuringCost of measuring

performanceperformanceCost of measuringCost of measuring

performanceperformance


Compute ROI, residual income,Compute ROI, residual income,

and economic value added (EVA)and economic value added (EVA)

and contrast them as criteria forand contrast them as criteria for

judging the performance ofjudging the performance of

organization segments.organization segments.

Measures of ProfitabilityMeasures of Profitability

Profitability does not meanProfitability does not meanthe same thing to all people.the same thing to all people.

Profitability does not meanProfitability does not meanthe same thing to all people.the same thing to all people.

Is it net income?Is it net income?Income before taxes?Income before taxes?

Net income percentage based on revenue?Net income percentage based on revenue?Is it an absolute amount?Is it an absolute amount?

A percentage?A percentage?

Is it net income?Is it net income?Income before taxes?Income before taxes?

Net income percentage based on revenue?Net income percentage based on revenue?Is it an absolute amount?Is it an absolute amount?

A percentage?A percentage?

Return on InvestmentReturn on Investment

ROI = Income ÷ InvestmentROI = Income ÷ InvestmentROI = Income ÷ InvestmentROI = Income ÷ Investment

ROIROIROIROI ==IncomeIncome

RevenueRevenueIncomeIncome

RevenueRevenue ××RevenueRevenue

InvestmentInvestmentRevenueRevenue

InvestmentInvestment

Return on InvestmentReturn on Investment

Division A ROI: = Income ÷ InvestmentDivision A ROI: = Income ÷ Investment $200,000 ÷ $500,000 = 40%$200,000 ÷ $500,000 = 40%

Division A ROI: = Income ÷ InvestmentDivision A ROI: = Income ÷ Investment $200,000 ÷ $500,000 = 40%$200,000 ÷ $500,000 = 40%

Division B ROI: = Income ÷ InvestmentDivision B ROI: = Income ÷ Investment $150,000 ÷ $250,000 = 60%$150,000 ÷ $250,000 = 60%

Division B ROI: = Income ÷ InvestmentDivision B ROI: = Income ÷ Investment $150,000 ÷ $250,000 = 60%$150,000 ÷ $250,000 = 60%

Residual IncomeResidual Income

RI is defined as after-tax net operatingRI is defined as after-tax net operatingincome less a capital charge.income less a capital charge.

RI is defined as after-tax net operatingRI is defined as after-tax net operatingincome less a capital charge.income less a capital charge.

Capital charge is the cost of capitalCapital charge is the cost of capitalmultiplied by the amount of investment.multiplied by the amount of investment.

Capital charge is the cost of capitalCapital charge is the cost of capitalmultiplied by the amount of investment.multiplied by the amount of investment.

RI tells you how much a company’sRI tells you how much a company’safter-tax operating income exceedsafter-tax operating income exceeds

what it is paying for capital.what it is paying for capital.

RI tells you how much a company’sRI tells you how much a company’safter-tax operating income exceedsafter-tax operating income exceeds

what it is paying for capital.what it is paying for capital.

Economic Value AddedEconomic Value Added

Economic value addedEconomic value added= Adjusted after-tax operating income= Adjusted after-tax operating income– – Cost of invested capital (%)Cost of invested capital (%)×× Adjusted average invested capitalAdjusted average invested capital

Economic value addedEconomic value added= Adjusted after-tax operating income= Adjusted after-tax operating income– – Cost of invested capital (%)Cost of invested capital (%)×× Adjusted average invested capitalAdjusted average invested capital


Compare the advantages andCompare the advantages and

disadvantages of various basesdisadvantages of various bases

for measuring the invested capitalfor measuring the invested capital

used by organization segments.used by organization segments.

ROI or Residual Income?ROI or Residual Income?

Why do some companies preferWhy do some companies preferresidual income (or EVA) to ROI?residual income (or EVA) to ROI?

Why do some companies preferWhy do some companies preferresidual income (or EVA) to ROI?residual income (or EVA) to ROI?

Under ROI, the message is go forth andUnder ROI, the message is go forth andmaximize your rate of return, a percentage.maximize your rate of return, a percentage.

Under ROI, the message is go forth andUnder ROI, the message is go forth andmaximize your rate of return, a percentage.maximize your rate of return, a percentage.

Under RI, the message is go forth andUnder RI, the message is go forth andmaximize residual income, an absolute amount.maximize residual income, an absolute amount.

Under RI, the message is go forth andUnder RI, the message is go forth andmaximize residual income, an absolute amount.maximize residual income, an absolute amount.

Do P 10-38Do P 10-38

Invested CapitalInvested Capital

To apply either ROI or residual income,To apply either ROI or residual income,both income and invested capitalboth income and invested capitalmust be measured and defined.must be measured and defined.

To apply either ROI or residual income,To apply either ROI or residual income,both income and invested capitalboth income and invested capitalmust be measured and defined.must be measured and defined.

Total assetsTotal assets Total assets employedTotal assets employed Total assets less current liabilitiesTotal assets less current liabilities Stockholders’ equityStockholders’ equity

Total assetsTotal assets Total assets employedTotal assets employed Total assets less current liabilitiesTotal assets less current liabilities Stockholders’ equityStockholders’ equity

POSSIBILITIESPOSSIBILITIES

Asset Allocation to Asset Allocation to DivisionsDivisions

Commonly used bases for allocation, when assets areCommonly used bases for allocation, when assets arenot directly identifiable with a specific division, include:not directly identifiable with a specific division, include:Commonly used bases for allocation, when assets areCommonly used bases for allocation, when assets arenot directly identifiable with a specific division, include:not directly identifiable with a specific division, include:

Asset ClassAsset ClassCorporate cashCorporate cash

ReceivablesReceivablesInventoriesInventories

Plant and equipmentPlant and equipment

Asset ClassAsset ClassCorporate cashCorporate cash

ReceivablesReceivablesInventoriesInventories

Plant and equipmentPlant and equipment

Possible Allocation BasePossible Allocation BaseBudgeted cash needsBudgeted cash needs

Sales weighted by termsSales weighted by termsBudgeted sales or usageBudgeted sales or usage

Usage of servicesUsage of services

Possible Allocation BasePossible Allocation BaseBudgeted cash needsBudgeted cash needs

Sales weighted by termsSales weighted by termsBudgeted sales or usageBudgeted sales or usage

Usage of servicesUsage of services

Valuation of AssetsValuation of Assets

Should values be based on historical costShould values be based on historical costor some version of current value?or some version of current value?

Should values be based on historical costShould values be based on historical costor some version of current value?or some version of current value?

Practice is overwhelmingly in favor of usingPractice is overwhelmingly in favor of usingnet book value based on historical cost.net book value based on historical cost.

Practice is overwhelmingly in favor of usingPractice is overwhelmingly in favor of usingnet book value based on historical cost.net book value based on historical cost.

Most companies use net book value inMost companies use net book value incalculating their investment base.calculating their investment base.

Most companies use net book value inMost companies use net book value incalculating their investment base.calculating their investment base.


Define transfer prices andDefine transfer prices and

identify their purpose.identify their purpose.

Transfer PricesTransfer Prices

The price that one segment charges anotherThe price that one segment charges anothersegment of the same organization for asegment of the same organization for a

product or service is a transfer price.product or service is a transfer price.

The price that one segment charges anotherThe price that one segment charges anothersegment of the same organization for asegment of the same organization for a

product or service is a transfer price.product or service is a transfer price.

Purpose of Transfer PricingPurpose of Transfer Pricing

Why do transfer-pricing systems exist?Why do transfer-pricing systems exist?Why do transfer-pricing systems exist?Why do transfer-pricing systems exist?

Management wants to createManagement wants to createperformance measurement systems.performance measurement systems.

Management wants to createManagement wants to createperformance measurement systems.performance measurement systems.

Decisions that maximize a segment’sDecisions that maximize a segment’sprofit should also maximize theprofit should also maximize theprofits of the entire company.profits of the entire company.

Decisions that maximize a segment’sDecisions that maximize a segment’sprofit should also maximize theprofit should also maximize theprofits of the entire company.profits of the entire company.

Purpose of Transfer PricingPurpose of Transfer Pricing

Multinational companies use transferMultinational companies use transferpricing to minimize their worldwidepricing to minimize their worldwide

taxes, duties, and tariffs.taxes, duties, and tariffs.

Multinational companies use transferMultinational companies use transferpricing to minimize their worldwidepricing to minimize their worldwide

taxes, duties, and tariffs.taxes, duties, and tariffs.


State the general rule for transferState the general rule for transfer

pricing and use it to assesspricing and use it to assess

transfer prices based ontransfer prices based on

total costs, variable costs,total costs, variable costs,

and market prices.and market prices.

General RuleGeneral Rule

Transfer price = Outlay cost + Opportunity costTransfer price = Outlay cost + Opportunity costTransfer price = Outlay cost + Opportunity costTransfer price = Outlay cost + Opportunity cost

Selling division outlay cost = $6; Opportunity cost = $4Selling division outlay cost = $6; Opportunity cost = $4Selling division outlay cost = $6; Opportunity cost = $4Selling division outlay cost = $6; Opportunity cost = $4

Buying division cost = Transfer price + Other costsBuying division cost = Transfer price + Other costs$10 + $12 = $22; Selling price = $25$10 + $12 = $22; Selling price = $25

Buying division cost = Transfer price + Other costsBuying division cost = Transfer price + Other costs$10 + $12 = $22; Selling price = $25$10 + $12 = $22; Selling price = $25

Subcomponent transfer price = $10Subcomponent transfer price = $10

Transfers at CostTransfers at Cost

What are some definitions of cost?What are some definitions of cost?What are some definitions of cost?What are some definitions of cost?

Variable costVariable costVariable costVariable cost

Full cost plus a profit markupFull cost plus a profit markupFull cost plus a profit markupFull cost plus a profit markup

Standard costsStandard costsStandard costsStandard costs

Full costFull costFull costFull cost

Actual costsActual costsActual costsActual costs

Variable-Cost PricingVariable-Cost Pricing

Companies that transfer itemsCompanies that transfer itemsat variable cost assume thatat variable cost assume that

the selling division hasthe selling division hasno opportunity cost.no opportunity cost.

Companies that transfer itemsCompanies that transfer itemsat variable cost assume thatat variable cost assume that

the selling division hasthe selling division hasno opportunity cost.no opportunity cost.

Because the outlay costBecause the outlay costequals the variable cost.equals the variable cost.Because the outlay costBecause the outlay costequals the variable cost.equals the variable cost.

Variable-Cost PricingVariable-Cost Pricing

This transfer pricing system isThis transfer pricing system ismost appropriate when themost appropriate when theselling division forgoes noselling division forgoes no

opportunity when it transfersopportunity when it transfersthe item internally.the item internally.

This transfer pricing system isThis transfer pricing system ismost appropriate when themost appropriate when theselling division forgoes noselling division forgoes no

opportunity when it transfersopportunity when it transfersthe item internally.the item internally.

Full-Cost PricingFull-Cost Pricing

This transfer pricing system includes not onlyThis transfer pricing system includes not onlyvariable cost but also an allocation of fixedvariable cost but also an allocation of fixedcosts (and, if included, the profit mark-up.)costs (and, if included, the profit mark-up.)

This transfer pricing system includes not onlyThis transfer pricing system includes not onlyvariable cost but also an allocation of fixedvariable cost but also an allocation of fixedcosts (and, if included, the profit mark-up.)costs (and, if included, the profit mark-up.)

Market-Based Transfer Market-Based Transfer PricesPrices

If there is a competitive market for the productIf there is a competitive market for the productor service being transferred internally, usingor service being transferred internally, using

the market price as a transfer price willthe market price as a transfer price willgenerally lead to the desired goalgenerally lead to the desired goalcongruence and managerial effort.congruence and managerial effort.

If there is a competitive market for the productIf there is a competitive market for the productor service being transferred internally, usingor service being transferred internally, using

the market price as a transfer price willthe market price as a transfer price willgenerally lead to the desired goalgenerally lead to the desired goalcongruence and managerial effort.congruence and managerial effort.

In this case, the market price is equal toIn this case, the market price is equal tothe variable cost plus opportunity cost.the variable cost plus opportunity cost.In this case, the market price is equal toIn this case, the market price is equal tothe variable cost plus opportunity cost.the variable cost plus opportunity cost.

Market-Based Transfer Market-Based Transfer PricesPrices

Because the opportunity cost equalsBecause the opportunity cost equalsthe market price less the variable cost.the market price less the variable cost.

Because the opportunity cost equalsBecause the opportunity cost equalsthe market price less the variable cost.the market price less the variable cost.

Transfer priceTransfer price= variable cost + opportunity cost= variable cost + opportunity cost= variable cost + (market price – variable cost)= variable cost + (market price – variable cost)= market price= market price

Transfer priceTransfer price= variable cost + opportunity cost= variable cost + opportunity cost= variable cost + (market price – variable cost)= variable cost + (market price – variable cost)= market price= market price

Market-Based Transfer Market-Based Transfer Prices DrawbacksPrices Drawbacks

1. Market prices are not always available1. Market prices are not always available for items transferred internally.for items transferred internally.

1. Market prices are not always available1. Market prices are not always available for items transferred internally.for items transferred internally.

2. Imperfectly competitive markets exist.2. Imperfectly competitive markets exist.2. Imperfectly competitive markets exist.2. Imperfectly competitive markets exist.

Negotiated Transfer PricesNegotiated Transfer Prices

Companies heavily committed to segmentCompanies heavily committed to segmentautonomy often allow managersautonomy often allow managers

to negotiate transfer prices.to negotiate transfer prices.

Companies heavily committed to segmentCompanies heavily committed to segmentautonomy often allow managersautonomy often allow managers

to negotiate transfer prices.to negotiate transfer prices.

Virtually any type of transfer pricing policyVirtually any type of transfer pricing policycan lead to dysfunctional behavior – actionscan lead to dysfunctional behavior – actionstaken in conflict with organizational goals.taken in conflict with organizational goals.

Virtually any type of transfer pricing policyVirtually any type of transfer pricing policycan lead to dysfunctional behavior – actionscan lead to dysfunctional behavior – actionstaken in conflict with organizational goals.taken in conflict with organizational goals.

The Need for Many Transfer The Need for Many Transfer PricesPrices

The “correct” transfer price depends onThe “correct” transfer price depends onthe economic and legal circumstancesthe economic and legal circumstances

and the decision at hand.and the decision at hand.

The “correct” transfer price depends onThe “correct” transfer price depends onthe economic and legal circumstancesthe economic and legal circumstances

and the decision at hand.and the decision at hand.

Organizations may have to make trade-offsOrganizations may have to make trade-offsbetween pricing for congruence andbetween pricing for congruence and

pricing to spur managerial effort.pricing to spur managerial effort.

Organizations may have to make trade-offsOrganizations may have to make trade-offsbetween pricing for congruence andbetween pricing for congruence and

pricing to spur managerial effort.pricing to spur managerial effort.

State fair-trade laws and national antitrustState fair-trade laws and national antitrustacts can also influence transfer pricing.acts can also influence transfer pricing.

State fair-trade laws and national antitrustState fair-trade laws and national antitrustacts can also influence transfer pricing.acts can also influence transfer pricing.


Identify the factors affectingIdentify the factors affecting

multinational transfer prices.multinational transfer prices.

Multinational Transfer Multinational Transfer Pricing ExamplePricing ExampleAn item is produced by Division S inAn item is produced by Division S ina country with a 8% income tax rate.a country with a 8% income tax rate.An item is produced by Division S inAn item is produced by Division S ina country with a 8% income tax rate.a country with a 8% income tax rate.

It is transferred to Division G in aIt is transferred to Division G in acountry with a 40% income tax rate.country with a 40% income tax rate.

It is transferred to Division G in aIt is transferred to Division G in acountry with a 40% income tax rate.country with a 40% income tax rate.

An import duty equal to 20% ofAn import duty equal to 20% ofthe price of the item is assessed.the price of the item is assessed.

An import duty equal to 20% ofAn import duty equal to 20% ofthe price of the item is assessed.the price of the item is assessed.

Full unit cost is $100, and variable cost isFull unit cost is $100, and variable cost is$60 (either transfer price could be chosen).$60 (either transfer price could be chosen).

Full unit cost is $100, and variable cost isFull unit cost is $100, and variable cost is$60 (either transfer price could be chosen).$60 (either transfer price could be chosen).

Multinational Transfer Multinational Transfer Pricing ExamplePricing Example

Which transfer price should be chosen?Which transfer price should be chosen?Which transfer price should be chosen?Which transfer price should be chosen?

Multinational Transfer Multinational Transfer Pricing ExamplePricing Example

Income of S is $40 higher:Income of S is $40 higher:8% × $40 = ($3.20) higher taxes8% × $40 = ($3.20) higher taxes

Income of S is $40 higher:Income of S is $40 higher:8% × $40 = ($3.20) higher taxes8% × $40 = ($3.20) higher taxes

Income of G is $40 lower:Income of G is $40 lower:40% × $40 = $16 lower taxes40% × $40 = $16 lower taxes

Income of G is $40 lower:Income of G is $40 lower:40% × $40 = $16 lower taxes40% × $40 = $16 lower taxes

Import duty paid by G:Import duty paid by G:20% × $40 = ($8)20% × $40 = ($8)

Import duty paid by G:Import duty paid by G:20% × $40 = ($8)20% × $40 = ($8)

Net savings = $4.80Net savings = $4.80Net savings = $4.80Net savings = $4.80


Explain how controllability andExplain how controllability and

management by objectives (MBO)management by objectives (MBO)

aid the implementation ofaid the implementation of

management control systems.management control systems.

Management by Objectives Management by Objectives and Setting Expectationsand Setting Expectations

MBO describes the joint formulation byMBO describes the joint formulation bya manager and his or her superior of aa manager and his or her superior of a

set of goals and plans for achievingset of goals and plans for achievingthe goals for a forthcoming period.the goals for a forthcoming period.

MBO describes the joint formulation byMBO describes the joint formulation bya manager and his or her superior of aa manager and his or her superior of a

set of goals and plans for achievingset of goals and plans for achievingthe goals for a forthcoming period.the goals for a forthcoming period.

The manager’s performance is thenThe manager’s performance is thenevaluated in relation to theseevaluated in relation to these

agreed-upon budgeted objectives.agreed-upon budgeted objectives.

The manager’s performance is thenThe manager’s performance is thenevaluated in relation to theseevaluated in relation to these

agreed-upon budgeted objectives.agreed-upon budgeted objectives.

Budgets, Performance Budgets, Performance Targets, and EthicsTargets, and Ethics

Many of the troublesome motivationalMany of the troublesome motivationaleffects of performance evaluationeffects of performance evaluation

systems can be minimized bysystems can be minimized bythe astute use of budgets.the astute use of budgets.

Many of the troublesome motivationalMany of the troublesome motivationaleffects of performance evaluationeffects of performance evaluation

systems can be minimized bysystems can be minimized bythe astute use of budgets.the astute use of budgets.

The desirability of tailoring a budgetThe desirability of tailoring a budgetto particular managers cannotto particular managers cannot

be overemphasized.be overemphasized.

The desirability of tailoring a budgetThe desirability of tailoring a budgetto particular managers cannotto particular managers cannot

be overemphasized.be overemphasized.

Budgets, Performance Budgets, Performance Targets, and EthicsTargets, and Ethics

Using budgets as performanceUsing budgets as performancetargets also has its danger.targets also has its danger.

Using budgets as performanceUsing budgets as performancetargets also has its danger.targets also has its danger.

Companies that make meetingCompanies that make meetinga budget too important cana budget too important can

motivate unethical behavior.motivate unethical behavior.

Companies that make meetingCompanies that make meetinga budget too important cana budget too important can

motivate unethical behavior.motivate unethical behavior.

Do 10-51Do 10-51

©2005 Prentice Hall Business Publishing, ©2005 Prentice Hall Business Publishing, Introduction to Management AccountingIntroduction to Management Accounting 13/e,13/e, Horngren/Sundem/Stratton Horngren/Sundem/Stratton 10 - 10 - 5252

End of Chapter 10End of Chapter 10

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