AMA Test 2

• - provide relevant info
• - induce goal congruent decisions
• -measure economic performance
• - be simple to understand and administer

• - Sourcing
• - Transfer Price

• - competent people
• - good atmosphere
• - market price
• - freedom to source
• - full information
• - negotiation

• - no external sales (max. cap. internally)
• - sole producer of differentiated product
• - significant investment in facilities

• - published market price
• - bids
• - similar products sold
• - similar products bought

• - how to define cost (usually standard)
• - how to calculate profit markup
• - basis (percentage of cost or investment)
• - profit allowed

• - fixed costs and profit should be negotiated periodically
• - questions possible about accuracy of cost and investment allocations
• - manufacturing unit's profit not affected by sales volume of final unit
• - possible conflict between manufacturing unit and company
• - similar to "take or pay" pricing

• - product transferred to marketing unit at standard variable cost
• - after product is sold, BUs share contribution earned

• - central services unit must accept but can partially control amount used
• - central services BU can use or not

• - settling transfer pricing disputes
• - reviewing sourcing changes
• - changing transfer pricing rules

• Class I: Sr. management controls sourcing
• Class II: all other products

• - Manuf. Unit's revenue credited at outside sales price.
• - Buying Unit charged total standard cost
• - Difference charged to HQ account and eliminated when statements are combined

sum of assets that may be employed in an investment center

• ROI
• EVA (economic value added)

net operating profit - capital charge

• - comprehensive measure
• - simple and meaningful
• - common denomenator

• - all BUs have same profit objective
• - decisions that increase ROI may decrease overall profits
• - different interest rates may be used for different assets
• - EVA has stronger positive correlation with changes in market value

• - reduces risk of takeover
• - creates currency for aggressiveness in mergers and acquisitions
• - reduces cost of capital

cost of capital X capital employed

estimated amount shareholders would receive if BUs were sold separately

assets on hand at the end of period covered

process of deciding on the programs that the organization will undertake and the approximate amount of resources that will be allocated to each program over the next several years

• - generate adequate profits from the resources at their disposal
• - invest in additional resources when it will produce an adequate return

• - increase ROI through business process reengineering and productivity gains without increasing asset base
• - divestment of assets whose ROI is less than the cost of capital
• - aggressive investment in assets with ROI above cost of capital
• - increase in sales, profit margin, or capital efficiencies
• - decrease in cost of capital percentage without affecting other variables

process of deciding on new strategies

• - framework for developing annual budget
• - management development tool
• - mechanism to force managers to think long term
• - means of aligning managers with the long-term strategies of the company

• - can become form-filling exercise
• - delegated to strategic planning department
• - time consuming and expensive

• - with top management buy in
• - relatively large and complex org.
• - considerable uncertainty of future but with flexibility to adapt to change.

• - review and update last year's strategic plan
• - decide on assumptions and guidelines
• - first iteration of new strategic plan
• - analysis
• - second iteration of new strategic plan
• - final review and approval

sum of individual plans doesn't add up to attainment of corporate objectives.

• - find opportunities for improvement in BU's plans
• - make acquisitions
• - review corporate objectives

• - linkages with suppliers
• - linkages with customers
• - process linkages

cost center

basis of allocation

• - collect materials costs separately
• - direct labor + other costs = conversion costs
• - assign R&D, gen. and admin., and marketing costs to products
• - use multiple allocation bases
• - allocation basis should reflect cause of cost occurrence
• - labor costs less important
• - indirect costs dominant part of cost

• - covers 1 year
• - states planned revenues and expenses
• - estimates BU's profit potential
• - stated in monetary terms
• - management commitment
• - reviewed and approved by authority
• - once approved, only changed under certain circumstances
• - periodically compared to actual

• - may or may not be in monetary terms
• - any period of time
• - forecaster doesn't accept responsibility
• - no approval by authority
• - updated with new information
• - variances not analyzed

• - fine tune strategic plan
• - coordinate activities of parts of organization
• - assign responsibility to managers
• - obtain commitment (basis of evaluation)

• - operating
• - capital
• - budgeted balance sheet
• - budget cash flow statement

• - reports to corporate controller
• - administers information flow
• - publishes procedures and forms
• - coordinates and publishes basic corporate assumptions
• - provides assistance to budgetees
• - analyzes proposed budgets and makes recommendations
• - administers budget revision process
• - coordinates work of lower budget departments
• - analyzes budget vs. actual

• - general economic activity
• - price of purchases
• - labor rates
• - discretionary activity costs
• - selling prices

• - production costs
• - discretionary costs
• - market share
• - product mix

• - no short term action contrary to long term interests
• - reduce data manipulation
• - management confident of profit targets
• - avoids overcommittment of resources
• - "winning" atmosphere

• - ID key causal factors for profits
• - Breakdown overall profit variances by KCFs
• - Focus on profit impact of each KCF
• - Calculate impact of each KCF
• - Add complexity sequentially until adding doesn't provide insight

(Actual price - standard price) X actual volume

(Actual volume - budget volume) X Budget unit contribution

actual sales volume - (Actual sales volume X budget proportion) X budget unit contribution

(actual sales volume X Budget %) - budget sales X budget unit contribution

(actual sales - industry volume) X budget market penetration X budget unit contribution

(Actual industry volume - budget industry volume) X budget market penetration X budget unit contribution

• - predetermined standards or budgets
• - historical standards
• - external standards

• - discourage short term action contrary to long term interests
• - encourage BU managers to take advantage of long term opportunities despite short term loss
• - avoid distortion of communication between BU managers and senior management
• - avoid data manipulation

• - financial
• - customer
• - internal business
• - innovation and learning

• - bookings
• - backorders
• - market share
• - key account orders
• - customer satisfaction
• - customer retention
• - customer loyalty

• - capacity utilization
• - on-time delivery
• - inventory turnover
• - quality
• - cycle time

processing time + storage time + movement time + inspection time

• - define strategy
• - define measures of strategy
• - integrate measures in management system
• - review measures and results frequently

• - poor correlation between nonfinancial measures and results
• - fixation on financial results
• - measures not updated
• - measurement overload
• - difficulty establishing trade offs

management control information used as basis for think about new strategies in industries subject to very rapid environmental change.

ability of an organization to learn to cope with environmental changes on an ongoing basis

• - all employees continuously scan the environment
• - ID potential problems and opportunities
• - exchange environmental information candidly and openly
• - experiment with alternate business models to adapt to emerging environments

fundamental environmental shirts that could potentially disrupt the rules by which an organization is playing today

• - subset of management control information with a bearing on strategic uncertainties facing business becomes the focus point
• - Sr. management takes it seriously
• - all managers focus on information produced
• - all levels meet face to face to interpret and discuss implications
• - face to face meetings take the form of a debate and challenge assumptions

• - growth in the number of internet users
• - rollout of broadband communications
• - emergence of ubiquitous point and click interfaces that are based on open standards, cheap to set up and run, and global
• - increasing power of competing and communication technologies
• - growth in mobile communications for both voice telephony and internet access
• - development and deployment of speech recognition and machine-based language translation technologies that may make it possible for people speaking or writing different languages to communicate with each other in real time.

• - convergence of voice, data, and image has implications for firms operating in consumer electronics, telecommuncations and computer industries
• - integration of chemical and digital technology has impact on firms
• - blending of hardware and software has impact on firms
• - merging of plant engineering and biotechnology opens up opportunities for firms in life sciences

• - liberalization, deregulations, and privitization have the potential to create huge new customer segments in emerging markets such as China, India, and Brazil
• - new competitors from emerging markets may become global players in the future

• - the data continued in the subsystem should be unambiguous and simple to understand and interpret
• - the subsystem must contain data on strategic uncertainties
• - the data in the subsystem should help the firm develop new strategies