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Management Control Systems Chapter 9: Financial Performance Targets Merchant and Van der Stede: Management Control Systems © Pearson Education Limited.

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Presentation on theme: "Management Control Systems Chapter 9: Financial Performance Targets Merchant and Van der Stede: Management Control Systems © Pearson Education Limited."— Presentation transcript:

1 Management Control Systems Chapter 9: Financial Performance Targets Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

2 - 2 - Financial results controls... u Three core elements: –Financial responsibility centers »The apportioning of accountability for financial results within the organization. –Formal management processes »Planning & budgeting to define performance expectations and standards for evaluating performance. –Motivational contracts »To define the links between results and various organizational incentives.

3 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited Types of financial performance targets... u Model-based (engineered) / historical / negotiated u Internally / externally-derived –Target costing –Benchmarking »Best-in-industry / best-in-class »Unilateral / cooperative u Fixed / Flexible –Should managers be held accountable for achieving their plans regardless of the business conditions they face? –Relative performance targets. Information asymmetry

4 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited Budget target difficulty … ( 1 ) Goal Difficulty Easy Impossible Motivation / Performance

5 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited Budget target difficulty … ( 2 ) “theory” (lab experiments) : “Good targets” are about 25-40% achievable. TargetPerformance Probability

6 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited “Business practice” (field research) : Targets are about 80-90% achievable. TargetPerformance Probability Budget target difficulty … ( 3 )

7 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited Challenging but achievable... u To minimize dysfunctional management actions »Myopic behavior, data manipulation u To increase manager’s commitment to budget targets u To reduce the cost of organizational interventions »Management-by-exception u To protect against the cost of optimistic revenue projections »Over-commitment of resources u To create a “winning” atmosphere and positive attitude

8 Merchant and Van der Stede: Management Control Systems © Pearson Education Limited Budget participation... u Top-down / bottom-up budgeting »The budgetee is both involved and has influence over setting the budget. »Leads to better acceptance of budget targets, and hence, commitment to achieve them. »Is an effective way of information sharing: u Corporate priorities and constraints u lower-level insights about business potentials and risks. »But, … slack, bias, conservatism, lack of budgeting experience.


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