1. McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc.All rights reserved.

2. Learning Objectives

L01: Explain why companies develop control systems.

L02: Purposes for using budgets as a control device.

L03: Basic types of financial statements and financial ratios used as controls.

L04: Procedures for implementing effective control systems.

3. Spinning out of control?

Lax top management

Absence of policies

Lack of agreed-upon standards

Shoot the messenger management

Lack of periodic reviews

Bad information systems

Lack of ethics in the culture

4. The Control Process 5. Four Steps ofControl Systems

Set performance standards

• expected performance for a given goal

• motivates performance

• serves as a benchmark against which actual performance is assessed

2. Measure performance

3. Compare performance against standards; determine deviations

• Principle of Exception

• • control is enhanced by concentrating on exceptions to or significant deviations from expected result or standard

Take action to correct problems and reinforce successes

6. Six Sigma

Six Sigma

• quality control tool designed to reduce defects in all organization processes

• Greek letter used in statistics to designate the estimated standard deviation

The lower the sigma number, the higher the level of variation or defects.

The higher the sigma number, the lower the level of variation or defects.

At six-sigma-level, a process is producing fewer than 3.4 defects per million (approximately 99.99966 accuracy)

7. Management Audits for Various Systems

Management Audit

• evaluation of effectiveness and efficiency of various systems within organization

• • External Audit

• • • evaluation conducted by outside organization, such as a CPA firm

• • Internal Audit

• • • periodic assessment of companys own planning, organizing, leading, and controlling processes

Budgeting(budgetary controlling)

• Investigation of actual processes/results as compared to planned budget data

• verify accomplishments or remedy differences

8. A Sales-Expense Budget 9. Types of Budgets?

Sales budget

Production budget

Cost budget

Cash budget

Capital budget

Master budget

10. Financial Controls

Balance Sheet

• report that shows thefinancial picture of a company at a given timeand itemizesassets, liabilities, and stockholders equity.

• Assets

• • values of items the corporationowns

• Liabilities

• • amount a corporationowesto various creditors

• Stockholders Equity

• • amountaccruing to the corporations owners

11. Financial Controls

Balance Sheet

Total assets = Total liabilities + Stockholders Equity

Profit and Loss Statement

• itemized financial statement of income and expenses of companys operations

12. Financial Controls

Current Ratio

• liquidity ratio indicating extent to whichshort-termassets can decline and still be adequate to pay short-term liabilities

Debt-Equity Ratio

• leverage ratio that indicates the companys ability to meet itslong-termfinancial obligations

Return on Investment (ROI)

• ratio of profit to capital used, or arate of return from capital

13. 14. YOU should be able to

L01: Explain why companies develop control systems for employees.

L02: Summarize how to design a basic bureaucratic control system.

L03: Describe the purposes for using budgets as a control device.

L04: Define basic types financial statements and financial ratios used as controls.

15. YOU should be able to

L05: List procedures for implementing effective control systems.

L06: Identify ways in which organizations use market control mechanisms.

L07: Discuss the use of clan control in an empowered organization.

16. 17. Test Your Knowledge

There are three broad strategies for achieving organizational control.Describe these strategies and provide an example of each.

18. Test Your Knowledge

Bruce Genero is a financial manager at Flavors, Inc., a lollipop manufacturer.One of his duties as manager is to provide a budget that shows the anticipated receipts and expenditures of his department.The budget also shows the amount of working capital available and the extent to which outside financing may be required.Bruce produces this budget after all other estimation is complete.Which type of budget is Bruce currently working on?

A) Master budget

B) Cash budget

C) Cost production budget

D) Production budget

E) Sales budget

19. Test Your Knowledge

Read the Story on Page 294

Identify some criteria that you think Szaky would use in establishing performance standards for TerraCycle. What methods might he use to measure performance?

What elements of budgetary control does Szaky use to help his business develop and grow?

20. Test Your Knowledge

Casinos control card dealers by using multiple controls.Which of

the following would NOT be a correct tool used as one of the

multiple controls?

A) Requiring them to have a card dealer's license before being hired.

B) Using various forms of direct scrutiny, including closed-circuit cameras, two way mirrors, and direct supervision.

C) Requiring detailed paperwork to audit transfers of cash and cash equivalents.

D) Requiring employees to be searched before they leave the premises.

21. Test Your Knowledge

Briefly describe market control at the corporate level, business unit level, and the individual level.

22. Test Your Knowledge

Control that is based on the idea that employees may share the values, expectations, and goals of the organization and act in accordance with them, is called:

A) corporate culture control (CCC).

B) authority control.

C) bureaucratic control.

D) "no control".

E) clan control.