Advantages of Financial Results Control Systems: Explained with

Advanced Management Accounting 11219 Week 5 workshop questions and solutions Readings: Textbook chapters 7 & 8; Article by Hummel, Pfaff and Bisig (2019) Chapter 7 Financial responsibility centres - Delegation of responsibility for financial results of their centres or divisions within the organisation. Q1: What are the advantages of financial results control systems? Explain with examples. Financial objectives are paramount in for-profit firms - Objective is to maximise wealth. Financial measures provide a summary measure of performance. - no need to provide different criteria. One measure that can focus on. They are relatively precise and objective. Based on the past data info. But could be problem if accountant can manipulate the figures. The costs of implementing financial results controls are small Q2: What are the different types of financial responsibility centres?Explain with examples. Investment centres - return (profit) on investment. Objective is return on capital Profit centres = Revenue -costs Cost centres or expense centre - input consumed by the centre. 2 types 1. Standard - e.g., cost of good, material - can relate causal relationship between inputs and outputs directly. Control by compared with the actual expenses Discretionary or managed costs - e.g., R&D, marketing - relationship between input and output is difficult to measure. Control by having a cap, budget. Revenue centres- output produced by the centre. No formal attempt to relate inputs to outputs. If there are some costs e.g., sales' salaries, they are relatively small compared to the revenue. Q3: How does transfer pricing creates management control problems? Explain with example. Profit centres often supply products or services to other centres within the same firm.The prices charged by one profit centre to another profit centres (buying centre) becomes costs of the buying centre which ultimates affect the cost structure of the buying centre.The selling profit centre tries to maximise its profit by charging higher price. On the other hand, the buying profit centre tries to minimise buying costs to maximise its profit.As a result, achieving the overall profitability goal of the organisation may be hampered.Some managers may lose motivations. Not all methods of transfer pricing create problems in PC managerial performance evaluations. For example, Market-based transfer price and full cost-plus mark- up transfer prices normally do not create problems with PC managers' performance.On the other hand, marginal cost, full cost and negotiated transfer prices create problems in PC performance evaluations in various ways, for example, (see your textbook and the relevant lecture slides) Chapter 8 - Planning & Budgeting Q1."Effective planning process makes the control system proactive, not just reactive."Do you agree?Explain with examples. Planning is decision making in advance and facilitate forward thinking i.e., thinking about the future.The planning process involves preparing a plan (e.g., a budget) and details on how to implement it.While detailing how to implement a plan, managers also consider various factors that might create problems in achieving planned goals. "Decisions can be adjusted based on predictions of outcomes before the organization suffers major problems.This is feedforward control. They help managersshapethe future, not just respond to the conditions they face and the performance they observe. Example In the early 1980's the price of oil was around $50 per barrel and was generally expected to rise further in the next few years. The UK/Dutch oil company Shell had a major strategy meeting and engaged a facilitator to lead the discussion and assist the senior managers negotiate an agreed strategy. The facilitator asked for the major variable affecting Shell's business over which they had little or no control.Easy: the price of oil. The facilitator announced that the group would consider Shell's strategy under three scenarios:the price of oil was $50 (i.e., unchanged), $150, and $10.The managers happily worked out strategies for the $50 and $150 per barrel scenarios but baulked at the $10 per barrel scenario."A waste of our valuable time", they said.But the facilitator insisted, and the managers worked out a detailed plan as to what they would do if the price was $10 per barrel.