Chapter 1718: Management Control

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Chapter 17-18 Management Control Performance
Measurement
Joseph Bao Sarah Lehman Stanley Chan Stanley Htun
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What is a Balanced Score Card? Why did this
method evolve?

• A BSC is a comprehensive performance report that
  monitors both financial and nonfinancial critical
  success factors for a firm to ensure that the
  companys overall strategy is achieved.
• Emphasized link between measurements and company
  strategy
• Reflects changing nature of business /
  competitive advantage
• Tangible assets Inventory, PPE
• 1982 Tangible book values represented 62 of
  industrial organizations market values
• End of 1990s Accounted for less than 20!

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How can the balanced scorecard be used to
supplement conventional financial reporting?

• Through the combined use of both the financial
  critical success factors as well as other group
  so critical success factors such as
• Customer perspective Customer satisfaction,
  Quality (customer complaints)
• Internal process perspective Productivity,
  Flexibility (set up and cycle times)
• Learning and innovation. Product innovation,
  employee morale, competence

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Give an example of a nonprofit or governmental
organization that uses the BSC and explain how it
links the scorecard to its overall strategy?

• City of Charlotte, NC
• United Way of Southeastern New England
• In the examples mentioned, these NPGOs chose a
  customer-based strategy in order to create a real
  competitive advantage.
• Two types of customers payers vs. consituents
• Mission Statement vs. Financial/Shareholder
  maximization drives the strategy.

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What is a Key Performance Indicator (KPI)
scorecard and how does it differ from a balanced
scorecard?

• KPI scorecards tend to focus on a diverse group
  of metrics which may, or may not, be critical to
  the overall success of the strategy of the
  company. They are most useful for teams or
  departments when a strategic program already
  exists at a higher level.

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Explain the strategy map and how it is used.
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Case 17-5 Contribution Income Statement(page
17-9)

• Presented by
• Stanley Htun

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Cathys Classic Clothes

• Company is divided into regions, districts, and
  stores
• Management By Objectives (MBO)
• Responsibility Accounting System
• Bonus System to Store Manager Based on Top-line
  or Bottom-line

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Organizational Structure
Regions
Districts
Stores
Store 1
District A
Store 2
Northeast
Store 3
District B
Store 4
South
Store 5
Store 6
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Bonus System

• District A Underperforming
• Store 1 Bonus based on Actual Revenue in excess
  of Budgeted (570,000)
• Store 2 Bonus based on Actual Net Income in
  excess of Budgeted (63,600)
• Store 3 Not Participating

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Data May-2004
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Consequence of Bonus System

• Bonus based on sales ? Lots of spending on
  Advertising to increase Sales
• Bonus based on net income ? Very little
  Advertising and inadequate Maintenance

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Why Contribution Income Statement?

• Separate Controllable and Uncontrollable
• Separate Traceable and Untraceable

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How to measure Performance?

• Must measure managers performance by
  Controllable Margin
• Must measure stores performance by SBU
  Contribution

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Chapter 18 Transfer Pricing with ABS(page 18-13)

• Presented by
• Stanley Chan

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Background

• Teva Pharmacutical Industries Ltd. entered the
  generic drug market in the mid-1980s, and wanted
  to vie globally in the competitive market.
• Teva reorganized its pharmaceutical operations
  into decentralized cost and profit centers
  consisting of one operations division (made up of
  our manufacturing plants) and three marketing
  divisions.
• The manufacturing plants produce to the orders
  place by the marketing divisions.

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• Tevas managers decided to introduce a transfer
  pricing system to enhance profit consciousness
  and improve coordination between operations and
  marketing.

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Why did Teva introduce transfer pricing?

• Transfer Pricing the determination of an
  exchange price for a product or service when
  different business units within a firm exchange
  it.
• Enhance profit consciousness
• Improve coordination between operations and
  marketing
• Concerned with excessive proliferation of the
  product line, acceptance of man low-volume
  orders, and associated large consumption of
  production capacity for changeovers.

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What were the goals of the transfer pricing
system?

• What Top Management Wanted
• The transfer price should not encourage actions
  that improved the profit or cost performance of
  a division at the expense of Tevas overall
  profitability

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• What Division Managers Wanted
• Managers could influence the reported performance
  of their divisions by making business decisions
  within their scope of authority
• Changes in product mix
• Improved efficiency
• Investments in new equipment
• Organizational changes

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• What The Financial Staff Wanted
• The transfer pricing system would be used for
  internal charging of costs from the operations
  division to the marketing divisions

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Why did traditional approaches for transfer
pricing not work at Teva, and why did the ABC
approach work instead?

• Market Price for the transferred product was not
  feasible because no market existed for Tevas
  manufactured and packaged pharmaceutical products
  that had not been distributed or marketed to
  customers

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• Teva utilized ABC because it provides better
  costing information and helps management manage
  efficiently and gain a better understanding of
  the firms competitive advantages, strengths, and
  weaknesses. ABC has the most impact on firms
  that produce numerous products.
• Teva produces both high-volume and low-volume
  products

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How did the ABC transfer pricing system
incorporate batch level costs? Product level
costs? Plant level costs?

• Unit-Level costs represent all the direct
  expenses associated with producing individual
  product units such as tablets, capsules, and
  ampoules.
• Marketing divisions are charged for Unit-Level
  Expenses (raw materials, packaging materials, and
  direct wages paid to production workers) based on
  the actual quantities of each individual product
  they acquire

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• Batch-Level costs include the expenses of
  resources used for each production or packaging
  batch, mainly the costs of preparation, setup,
  cleaning, quality control, laboratory testing,
  and computer and production management
• Marketing divisions are charged Batch-Level costs
  based on the actual number of production and
  packaging batches of each product they order
• Product-Specific costs include the expenses
  incurred in registering the products, making
  changes to a products production processes, and
  designing the package
• These are charged to marketing divisions annually
  based on the budget

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• Plant-Level costs represent the cost of
  maintaining the capacity of production lines
  including depreciation, cost of safety
  inspections, and insurance, as well as the
  general expenses of the plant such as security
  and landscaping
• These are charged to marketing divisions annually
  based on the budget

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What are some of the benefits of the ABC transfer
pricing system at Teva?

• Highlights unused capacity to reveal where
  production can be expanded without spending
  additional money
• Motivates cost reduction and production
  efficiencies in the manufacturing plants
• Managers in different divisions work together to
  identify ways to reduce Unit and Batch-Level
  expenses
• ABC information helps managers determine which
  manufacturing facility is appropriate for
  different types of products
• Measure profit performance under changing
  organizational structures
• Financial managers can forecast the potential
  performance of newly created profit centers and
  reconstruct what the past profit performance
  history would have been