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  • Katholieke Universiteit Leuven (KU Leuven)
  • Master Of Business Engineering
  • Management Control and Cost Management (D0O58A)
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Summary Management Control & Cost Management | KU Leuven | 14/20

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Management Control and Cost Management (D0O58A)
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Summary of Management Control and Cost Management . Covers all course lecture and includes tips mentioned during the lectures.

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Summary Management control & Cost
Management

,Contents
PART 1: MANAGEMENT CONTROL ........................................................................................... 9
Module 1: Introduc2on to management control ...................................................................... 9
Management Control ............................................................................................................ 9
Control problems ................................................................................................................ 10
Agency theory ................................................................................................................. 10
Problems within teams ................................................................................................... 12
Examples of control failure ............................................................................................. 12
Designing control systems................................................................................................... 12
Module 2: Introduc2on to accoun2ng and cos2ng ................................................................. 13
The design of internal accoun2ng systems ......................................................................... 14
Module 3: Control frameworks & alterna2ves........................................................................ 15
Introduc2on ........................................................................................................................ 15
Zimmerman’s framework .................................................................................................... 15
Merchant & Van der Stede’s framework (based on Ouchi’s framework) ............................ 16
Results control ................................................................................................................ 16
Ac2on control.................................................................................................................. 18
Personnel control ............................................................................................................ 20
Cultural control ............................................................................................................... 21
Simon’s levers of control ..................................................................................................... 22
Module 4: Control System Cost............................................................................................... 23
Different costs ..................................................................................................................... 23
Direct cost ....................................................................................................................... 23
Indirect Costs (Side Effects / Unintended Consequences) .............................................. 23
Adapta2on Costs ............................................................................................................. 24
Module 5: Maintaining effec2ve control................................................................................. 25
Enabling vs. Coercive Controls ............................................................................................ 25
Five Traps in Control System Design.................................................................................... 25
Trap 1: One Size Fits All ................................................................................................... 25
Trap 2: Standpoint Bias ................................................................................................... 25
Trap 3: Easy Performance Measures ............................................................................... 25
Trap 4: Narrow Focus ...................................................................................................... 25

2

, Trap 5: Sta2c Approach ................................................................................................... 26
Module 6: Incen2ve systems .................................................................................................. 27
Types of Incen2ves – Pyramid of Maslow ....................................................................... 27
Three Purposes of Incen2ve Systems.............................................................................. 27
Good Incen2ve System Design ........................................................................................ 27
Long-term vs. Short-term Incen2ves ............................................................................... 27
Varia2ons Across Hierarchical Levels .............................................................................. 28
Why Pay-for-Performance Does Not Always Work.......................................................... 28
Module 7: Performance measurement ................................................................................... 30
Introduc2on to performance measurement ................................................................... 30
What is a good performance measure? .......................................................................... 30
Challenges of performance measurement...................................................................... 31
Mul2ple performance measures..................................................................................... 32
Overcoming the shortcomings of incomplete performance measures ........................... 32
Summary ......................................................................................................................... 33
Module 8: Financial performance measures .......................................................................... 34
Classifica2on of financial performance measures............................................................... 34
Ra2o measures ................................................................................................................... 35
Economic measures ............................................................................................................ 38
Module 9: Balanced Scorecard ............................................................................................... 39
Introduc2on ........................................................................................................................ 39
The Four BSC Perspec2ves .............................................................................................. 40
Four Func2ons of the BSC ............................................................................................... 40
Case Tesco: Steering wheel ................................................................................................. 40
Case: Global Oil M&R Division ............................................................................................ 41
Case: Fiedler Interna2onal (Lush Takeover Target) ............................................................. 41
Biases in BSC-Based Performance Evalua2on ................................................................. 42
Module 10: Financial responsibility centers ........................................................................... 43
Responsibility Accoun2ng ................................................................................................... 43
What is a reasonability center?....................................................................................... 43
The Four Types of Financial Responsibility Centers ............................................................ 43
Key considera2ons in selec2ng responsibility center...................................................... 45

3

, Module 11: Introduc2on to budge2ng ................................................................................... 46
Introduc2on ........................................................................................................................ 46
How does budge2ng help organiza2ons? ........................................................................... 46
Why is budge2ng being cri2cized?...................................................................................... 47
Compensa2on systems ....................................................................................................... 48
Should budge2ng be abandoned? ...................................................................................... 49
Module 12: Characteris2cs of budge2ng systems .................................................................. 50
Who should set the budget? ............................................................................................... 50
How to set a target? ............................................................................................................ 50
Budget types/characteris2cs ............................................................................................... 52
Incremental and Zero-based budge2ng .......................................................................... 52
Line-item budge2ng ........................................................................................................ 53
Con2nuous/Rolling budge2ng ........................................................................................ 53
Budget lapsing................................................................................................................. 54
Flexible vs. Sta2c budgets ............................................................................................... 54
Module 13: Introduc2on to transfer pricing ........................................................................... 55
Why is transfer pricing important? ..................................................................................... 55
Transfer pricing and tax avoidance.................................................................................. 56
What is a good transfer price? ............................................................................................ 56
Module 14: Methods of transfer pricing ................................................................................. 57
Market-based transfer pricing............................................................................................. 57
Variable-cost transfer pricing .............................................................................................. 57
Full-cost transfer pricing ..................................................................................................... 57
Full-cost or variable-cost plus mark-up ............................................................................... 58
Nego2ated transfer pricing ................................................................................................. 58
Dual-rate transfer pricing .................................................................................................... 58
Exam example: MXV Inc. (variable vs full cost across tax regimes) ..................................... 58
Exam example: Cogen (variable vs full cost with excess capacity) ...................................... 58
Module 15: Case study (Prochim) and the Death Spiral ......................................................... 59
Case Prochim ...................................................................................................................... 59
Method of transfer pricing .............................................................................................. 59
Problems raised .............................................................................................................. 59

4

Table of contents

  1. 01 PART 1: MANAGEMENT CONTROL 9
  2. 02 Module 1: Introduc2on to management control 9
  3. 03 Management Control 9
  4. 04 Control problems 10
  5. 05 Agency theory 10
  6. 06 Problems within teams 12
  7. 07 Examples of control failure 12
  8. 08 Designing control systems 12
  9. 09 Module 2: Introduc2on to accoun2ng and cos2ng 13
  10. 10 The design of internal accoun2ng systems 14
  11. 11 Module 3: Control frameworks & alterna2ves 15
  12. 12 Introduc2on 15
  13. 13 Zimmerman’s framework 15
  14. 14 Merchant & Van der Stede’s framework (based on Ouchi’s framework) 16
  15. 15 Results control 16
  16. 16 Ac2on control 18
  17. 17 Personnel control 20
  18. 18 Cultural control 21
  19. 19 Simon’s levers of control 22
  20. 20 Module 4: Control System Cost 23
  21. 21 Different costs 23
  22. 22 Direct cost 23
  23. 23 Indirect Costs (Side Effects / Unintended Consequences) 23
  24. 24 Adapta2on Costs 24
  25. 25 Module 5: Maintaining effec2ve control 25
  26. 26 Enabling vs. Coercive Controls 25
  27. 27 Five Traps in Control System Design 25
  28. 28 Trap 1: One Size Fits All 25
  29. 29 Trap 2: Standpoint Bias 25
  30. 30 Trap 3: Easy Performance Measures 25
  31. 31 Trap 4: Narrow Focus 25
  32. 32 Trap 5: Sta2c Approach 26
  33. 33 Module 6: Incen2ve systems 27
  34. 34 Types of Incen2ves – Pyramid of Maslow 27
  35. 35 Three Purposes of Incen2ve Systems 27
  36. 36 Good Incen2ve System Design 27
  37. 37 Long-term vs. Short-term Incen2ves 27
  38. 38 Varia2ons Across Hierarchical Levels 28
  39. 39 Why Pay-for-Performance Does Not Always Work 28
  40. 40 Module 7: Performance measurement 30
  41. 41 Introduc2on to performance measurement 30
  42. 42 What is a good performance measure? 30
  43. 43 Challenges of performance measurement 31
  44. 44 Mul2ple performance measures 32
  45. 45 Overcoming the shortcomings of incomplete performance measures 32
  46. 46 Summary 33
  47. 47 Module 8: Financial performance measures 34
  48. 48 Classifica2on of financial performance measures 34
  49. 49 Ra2o measures 35
  50. 50 Economic measures 38
  51. 51 Module 9: Balanced Scorecard 39
  52. 52 Introduc2on 39
  53. 53 The Four BSC Perspec2ves 40
  54. 54 Four Func2ons of the BSC 40
  55. 55 Case Tesco: Steering wheel 40
  56. 56 Case: Global Oil M&R Division 41
  57. 57 Case: Fiedler Interna2onal (Lush Takeover Target) 41
  58. 58 Biases in BSC-Based Performance Evalua2on 42
  59. 59 Module 10: Financial responsibility centers 43
  60. 60 Responsibility Accoun2ng 43
  61. 61 What is a reasonability center? 43
  62. 62 The Four Types of Financial Responsibility Centers 43
  63. 63 Key considera2ons in selec2ng responsibility center 45
  64. 64 Module 11: Introduc2on to budge2ng 46
  65. 65 Introduc2on 46
  66. 66 How does budge2ng help organiza2ons? 46
  67. 67 Why is budge2ng being cri2cized? 47
  68. 68 Compensa2on systems 48
  69. 69 Should budge2ng be abandoned? 49
  70. 70 Module 12: Characteris2cs of budge2ng systems 50
  71. 71 Who should set the budget? 50
  72. 72 How to set a target? 50
  73. 73 Budget types/characteris2cs 52
  74. 74 Incremental and Zero-based budge2ng 52
  75. 75 Line-item budge2ng 53
  76. 76 Con2nuous/Rolling budge2ng 53
  77. 77 Budget lapsing 54
  78. 78 Flexible vs. Sta2c budgets 54
  79. 79 Module 13: Introduc2on to transfer pricing 55
  80. 80 Why is transfer pricing important? 55
  81. 81 Transfer pricing and tax avoidance 56
  82. 82 What is a good transfer price? 56
  83. 83 Module 14: Methods of transfer pricing 57
  84. 84 Market-based transfer pricing 57
  85. 85 Variable-cost transfer pricing 57
  86. 86 Full-cost transfer pricing 57
  87. 87 Full-cost or variable-cost plus mark-up 58
  88. 88 Nego2ated transfer pricing 58
  89. 89 Dual-rate transfer pricing 58
  90. 90 Exam example: MXV Inc. (variable vs full cost across tax regimes) 58
  91. 91 Exam example: Cogen (variable vs full cost with excess capacity) 58
  92. 92 Module 15: Case study (Prochim) and the Death Spiral 59
  93. 93 Case Prochim 59
  94. 94 Method of transfer pricing 59
  95. 95 Problems raised 59
  96. 96 Death Spiral 59
  97. 97 Numerical example 60
  98. 98 How to avoid the Death Spiral 60
  99. 99 Evidence on Death Spiral (Bouwens and Steens, 2016) 60
  100. 100 PART 2: COST MANAGEMENT 61
  101. 101 Module 1: Cost terminology 61
  102. 102 Key terms 61
  103. 103 Opportunity costs 61
  104. 104 Exercise: Kinsley and Sons (cannibaliza2on) 61
  105. 105 Accoun2ng vs economic costs 61
  106. 106 Sunk costs and the sunk cost fallacy 61
  107. 107 Relevant vs irrelevant costs 62
  108. 108 Cost behavior 62
  109. 109 Marginal cost and average cost 62
  110. 110 Direct vs indirect costs 62
  111. 111 Product vs period costs 62
  112. 112 Module 2: Cost-Volume-Profit Analysis (CVP) 63
  113. 113 Key assump2ons of CVP 63
  114. 114 Opera2ng leverage 63
  115. 115 Exercise: News.com (choice between two ISPs) 63
  116. 116 Special order decisions 64
  117. 117 Exercise: Micro Enterprises 64
  118. 118 Op2mizing with scarce resources 64
  119. 119 Module 3: Introduc2on to cost alloca2on 64
  120. 120 Why allocate costs? 64
  121. 121 The three steps 65
  122. 122 The alloca2on base 65
  123. 123 Cost alloca2on as internal taxa2on 65
  124. 124 When should service costs be allocated? 65
  125. 125 Exercise: Fuentes Systems 65
  126. 126 Alloca2ng mul2ple service costs to opera2ng units 66
  127. 127 Direct method 66
  128. 128 Step-down method 66
  129. 129 Reciprocal method 66
  130. 130 Module 4: Insula2ng vs non-insula2ng cost alloca2on 67
  131. 131 The two choices of alloca2on base 67
  132. 132 Insula2ng cost alloca2on 67
  133. 133 Non-insula2ng cost alloca2on 67
  134. 134 Which method to choose? 67
  135. 135 Exercise: Hallsite Imaging (non-insula2ng example) 67
  136. 136 Evalua2ng performance: segment margin vs full alloca2on 67
  137. 137 Should we drop units with nega2ve controllable segment margin? 68
  138. 138 Exercise: Wasley (death spiral from cost alloca2on) 68
  139. 139 Exercise: Grove City Broadcas2ng (alloca2on drives behavior) 68
  140. 140 Module 5: Introduc2on to absorp2on cos2ng 69
  141. 141 Why absorp2on cos2ng? 69
  142. 142 Two types of absorp2on cos2ng 69
  143. 143 Inventory accoun2ng methods: LIFO vs FIFO 69
  144. 144 Module 6: Job order cos2ng 70
  145. 145 Sekng a good alloca2on base 70
  146. 146 The overhead rate 70
  147. 147 Budgeted volume: expected vs normal 70
  148. 148 Under- or over-absorbed overhead 70
  149. 149 Three ways to treat under/over-absorbed overhead 70
  150. 150 Exam example: MacGiver Brass 71
  151. 151 Exam example: Fox Mats (choice of alloca2on base) 71
  152. 152 Single vs mul2ple alloca2on bases 71
  153. 153 Two-stage cost alloca2on 71
  154. 154 Module 7: Joint cost alloca2on 72
  155. 155 Alloca2on based on physical measure (insula2ng) 72
  156. 156 The key principle: Net Realizable Value (NRV) 72
  157. 157 Limits of NRV 72
  158. 158 Module 8: Variable cos2ng vs absorp2on cos2ng 73
  159. 159 The overproduc2on problem with absorp2on cos2ng 73
  160. 160 Earnings management mechanisms 73
  161. 161 Solu2ons to overproduc2on 73
  162. 162 Variable cos2ng 73
  163. 163 Limita2ons of variable cos2ng 73
  164. 164 Exam example: Medford Mug Company 74
  165. 165 Module 9: Introduc2on to Ac2vity-Based Cos2ng (ABC) 75
  166. 166 Why ABC? 75
  167. 167 The core idea 75
  168. 168 The two-step process 75
  169. 169 Common types of ac2vity drivers 75
  170. 170 Ac2vity levels 75
  171. 171 Tradi2onal vs ABC: a numerical example 76
  172. 172 Absorp2on cos2ng distorts product costs 76
  173. 173 Module 10: Ac2vity-Based Cos2ng (con2nued) 77
  174. 174 Benefits of ABC 77
  175. 175 Ac2vity-Based Management (ABM) 77
  176. 176 Costs and limits of ABC 77
  177. 177 Three sources of error (Datar & Gupta, 1994) 77
  178. 178 Time-driven ABC 77
  179. 179 Es2ma2ng cost per unit 77
  180. 180 Time equa2ons 78
  181. 181 Common misunderstandings about ABC 78
  182. 182 Case study: Classic Pen Company 78
  183. 183 Module 11: Customer Profitability Analysis (CPA) 79
  184. 184 Why CPA malers 79
  185. 185 Tradi2onal methods of customer cos2ng 79
  186. 186 CPA using ABC: a two-phase process 79
  187. 187 CPA as a strategic tool 79
  188. 188 Should we drop loss-making customers? 80
  189. 189 Factors to consider when implemen2ng CPA 80
  190. 190 Case study: Blue Ridge Manufacturing 80
  191. 191 Module 12: Total Cost of Ownership (TCO) and supplier selec2on 81
  192. 192 Why TCO malers 81
  193. 193 Exam example: Hi-Tech mobile phones 81
  194. 194 TCO as a supplier-selec2on system 81
  195. 195 Strategic uses of TCO 81
  196. 196 Module 13: Total Quality Management (TQM) 83
  197. 197 The TQM concept 83
  198. 198 The four cost categories of quality 83
  199. 199 Exam example: Tagway 4000 83
  200. 200 Module 14: Target cos2ng 84
  201. 201 Three views about pricing 84
  202. 202 What is target cos2ng? 84
  203. 203 Why target cos2ng 84
  204. 204 Exam example: Oak Auto Supply 84
  205. 205 Module 15: Standard cos2ng 84
  206. 206 Why standard cos2ng? 84
  207. 207 Methods to set a standard 85
  208. 208 Module 16: Labor and Materials Variance Analyses 85
  209. 209 Direct labor variance 85
  210. 210 Materials variance 85
  211. 211 Bookkeeping and responsibility assignment 85
  212. 212 Disposal of variances 85
  213. 213 Exam example: Sonware Associates 86
  214. 214 Analyzing variances 86
  215. 215 Revising standards? 86
  216. 216 Exam example: Aronowitz Coa2ngs 86
  217. 217 Dysfunc2onal effects of standards 86
  218. 218 Minimizing nega2ve effects 87
  219. 219 process informa2on properly) 10

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Subjects

  • management control
  • cost management
  • control systems
  • incentive systems
  • performance measurement
  • agency theory
  • accounting systems
  • organizational control
  • ku leuven
  • master business engineering

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