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73 views10 pages

Slides CH09

Uploaded by

Daniel Christandy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Management Control Systems

Chapter 9:
Financial Performance Targets

Wim Van der Stede

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003
Financial results controls ...
 Three core elements:
– Financial responsibility centers
» The apportioning of accountability for financial results
within the organization.

– Formal management processes


» Planning & budgeting to define performance expectations
and standards for evaluating performance.

– Motivational contracts
» To define the links between results and various
organizational incentives.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -2-
Types of financial performance targets ...

 Model-based (engineered) / historical / negotiated


 Internally / externally-derived
Information asymmetry
– Target costing
– Benchmarking
» Best-in-industry / best-in-class
» Unilateral / cooperative

 Fixed / Flexible
– Should managers be held accountable for achieving their
plans regardless of the business conditions they face?
– Relative performance targets.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -3-
Budget target difficulty … (1 )
Motivation / Performance

Easy Goal Difficulty Impossible

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -4-
Budget target difficulty … (2 )

“theory” (lab experiments):


“Good targets” are about 25-40% achievable.
Probability

Target Performance

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -5-
Budget target difficulty … (3 )

“Business practice” (field research):


Targets are about 80-90% achievable.
Probability

Target Performance

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -6-
Budget target difficulty … (4 )

Good vs. lousy management teams


Probability

Target Performance

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -7-
Budget target difficulty … (5 )

Low vs. high uncertainty


Probability

Target Performance
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -8-
Challenging but achievable...
 To minimize dysfunctional management actions
» Myopic behavior, data manipulation

 To increase manager’s commitment to budget targets

 To reduce the cost of organizational interventions


» Management-by-exception

 To protect against the cost of optimistic revenue projections


» Over-commitment of resources

 To create a “winning” atmosphere and positive attitude

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -9-
Budget participation ...
 Top-down / bottom-up budgeting

» The budgetee is both involved and has influence


over setting the budget.

» Leads to better acceptance of budget targets, and hence,


commitment to achieve them.

» Is an effective way of information sharing:


 Corporate priorities and constraints

 lower-level insights about business potentials and risks.

» But, … slack, bias, conservatism, lack of budgeting


experience.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 10 -

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