Management meeting and exceeding customer expectation 8th ch19

Control
Techniques

Chapter 19

MANAGEMENT
Meeting and Exceeding Customer Expectations
EIGHTH EDITION
Prepared by
Deborah Baker
Texas Christian University
Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved

1


learning objectives
1. Describe the content of the three primary
financial statements and how managers use
them

2. Explain ratio analysis and four types of ratios
used by managers

3. Describe the five types of financial

Chapter 19

responsibility centers and their relationship
to budgeting

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2


learning objectives

(continued)

4. Describe the four approaches to creating
budgets

5. Explain the two major types of budgets
used in businesses

6. Describe the five major marketing control
techniques used in businesses

7. Describe the six major human resource

Chapter 19

control techniques used in businesses

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3


Subsystems Requiring Controls

Marketing
Marketing
Operations
Operations

Finance
Finance

Functional
Functional
Subsystems
Subsystems

Chapter 19

Other
Other
Support
Support
Activities
Activities

Human
Human
Resources
Resources
Management
Management
Information
Information

Systems
Systems

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Chapter 19

Control Techniques

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11

Financial Statements
Balance Sheet
Assets = Liabilities + Stockholders’ Equity

Income Statement

Chapter 19

Income - Expenses = Profit or Loss

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6


Balance Sheet

11

Assets
Assets
Current
Current

Fixed
Fixed

Cash,
Cash, or
or items
items easily
easily converted
converted
to
to cash
cash within
within one
one year
year

Not

Not intended
intended for
for sale
sale or
or
conversion
conversion to
to cash
cash
Land
Land

Chapter 19

Buildings
Buildings
Equipment
Equipment
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11

Balance Sheet

Chapter 19

Liabilities

Liabilities
Current
Current Debt
Debt

Debts
Debts due
due and
and payable
payable within
within
one
one year
year

Long-Term
Long-Term
Debt
Debt

Debts
Debts due
due after
after one
one year
year from
from
date
date of
of balance

balance sheet
sheet

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11

Balance Sheet
Stockholders’
Stockholders’or
or Owner’s
Owner’s Equity
Equity

Chapter 19

Difference
Difference between
between the
the value
value
of
of assets
assets and
and liabilities
liabilities

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9


Income Statement

11

Seven
SevenCategories
Categories

Chapter 19

1.
2.
3.
4.
5.
6.
7.

Net sales
Cost of goods sold
Gross profit
Operating expenses
Net income (or loss) before taxes
Taxes
Net income

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22

Financial Ratio Analysis

Chapter 19

Financial
Financial
Ratio
Ratio

The relationship of two critical
figures from financial statements
—expressed in terms of a ratio,
decimal, or percentage—which
helps measure a company’s
financial health and its progress
toward goals

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11

22

Financial Ratio Analysis
Liquidity
Liquidity Ratio
Ratio
Profitability
Profitability Ratio
Ratio

Determines
Determines profits
profits on
on sales
sales
and
and the
the owner’s
owner’s investment
investment

Debt
Debt Ratio
Ratio

Ability
Ability of
of an
an organization
organization to

to
meet
meet its
its debts
debts

Activity
Activity Ratio
Ratio
Chapter 19

Ability
Ability of
of aa firm
firm to
to raise
raise cash
cash to
to
meet
meet short-term
short-term debts
debts

Sheds
Sheds light
light on
on key
key internal
internal

areas,
areas, such
such as
as inventory
inventory levels
levels

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33

Financial Responsibility Centers

Standard
Standard cost
costcenters
centers

Revenue
Revenue centers
centers

Discretionary
Discretionary
expense
expense centers
centers

Chapter 19

Profit
Profitcenters
centers

Investment
Investmentcenters
centers

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13


Financial Audits

33

Internal
InternalAudits
Audits




Chapter 19





Keep problems inhouse
Are likely to be
conducted by people
who know operations
well
May lack objectivity
May also lack the power
to penetrate cover-ups

External
ExternalAudits
Audits

 Conducted by an
independent public
accounting firm

 Federal regulations
require publicly traded
companies to conduct
certified external audits
each year

 Enhances credibility

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44

Ways That Budgets Serve
Managers
1.
1. They
Theyexpedite
expediteallocation
allocationand
andcoordination
coordinationof
of
resources
resourcesfor
forprograms
programsand
andprojects.
projects.
2.
2. They
Theyoperate
operateas
asaapowerful
powerfulmonitoring
monitoringsystem
system
when
whensupplemented

supplementedwith
withperiodic
periodicbudget
budget
updates.
updates.

Chapter 19

3.
3. They
Theyprovide
providerigorous
rigorouscontrol
controlguidelines
guidelinesfor
for
managers
managersby
bysetting
settinglimits
limitson
onexpenditures.
expenditures.
4.
4. They
Theyfacilitate
facilitateevaluation
evaluationof
ofindividual

individualand
and
department
departmentperformance.
performance.
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44

Budget Development Process
1.
1. Setting
Setting goals
goals
2.
2. Planning
Planning and
and scheduling
scheduling to
to reach
reach goals
goals
3.
3. Identifying
Identifying and
and pricing
pricing resources

resources

Chapter 19

4.
4. Locating
Locating needed
needed funds
funds
5.
5. Adjusting
Adjusting goals,
goals, plans,
plans, and
and resources
resources
to
to match
match fund
fund availability
availability
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44

Budget Approaches
Top-Down

Top-Down

Bottom-Up
Bottom-Up

Chapter 19

Zero-Based
Zero-Based
Flexible
Flexible
Budgeting
Budgeting
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44

Top-Down Budgeting
Senior managers prepare budgets and
distribute them to lower levels, with or
without input from below.

 May plan and control without cooperation
and knowledge of their subordinates

 May miss or neglect information about

Chapter 19

opportunities and risks

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18


Bottom-Up Budgeting

44

Also known as grassroots budgeting, it taps the
knowledge and experiences of all organization
members.
Participants…

 understand priorities, limits, perspectives, and
goals

 negotiate compromises
 consolidate the various views into an inclusive
Chapter 19

framework

 support the budget
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44

Zero-Based Budgeting
 Forces managers to examine operations and
explore more efficient ways of operating

 Requires preparers to launch each new
budget from a clean sheet of “paper”

 Requires justification of every dollar
requested, based on the coming year’s
strategic plans and goals

Chapter 19

 Requires a listing of goals for the fiscal
period, identifying people, and resources
needed to achieve the goals, along with
costs

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44

Flexible Budgeting
 Set levels of expense are correlated with
specified output levels

 Sets “meet or beat” standards with which
expenditures can be compared

 Unit expenses within budgeted amounts

Chapter 19

are usually permitted

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55

Operating Budgets
Operating
Operating
Budgets
Budgets

 Financial plans and
controls for each
financial responsibility
center’s revenues,

expenses, and profits

Chapter 19

Revenue
Revenue
Budgets
Budgets
Expense
Expense
Budgets
Budgets

Profit
Profit
Budgets
Budgets

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55

Expense Budgets
Fixed
Fixed costs
costs

Variable
Variable costs
costs

Chapter 19

Mixed
Mixed costs
costs

Facility-related
Facility-related expenses
expenses
incurred
incurred regardless
regardless of
of the
the
amount
amount of
of activity
activity
Relate
Relate directly
directly to
to operations
operations
and
and vary
vary with

with revenue
revenue and
and
production
production levels
levels

Contain
Contain fixed
fixed and
and variable
variable
elements
elements

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55

Financial Budgets

Chapter 19

Financial
Financial
Budgets
Budgets

Cash
Cash
Budgets
Budgets

 Details of how a
financial responsibility
center will manage its
cash and capital
expenditures

Capital
Capital
Expenditures
Expenditures
Budgets
Budgets

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Chapter 19

55

Financial Budgets

Cash
Cash budgets
budgets

Project
Project the
the amount
amount of
of cash
cash that
that
will
will flow
flow into
into and
and out
out of
of an
an
organization
organization during
during aa fixed
fixed
period
period

Capital
Capital
expenditures
expenditures

budgets
budgets

Project
Project the
the short-and
short-and long-term
long-term
funding
funding needed
needed to
to acquire
acquire
capital
capital goods
goods

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