This document appears to be a course syllabus and textbook on management accounting and control. It covers several topics related to the subject including a history of management accounting approaches, the role of management controllers and how it is changing, budgeting, capital budgeting, cash flow analysis, cost accounting techniques, and performance measurement. The document contains chapter summaries and outlines for each topic, exam information, and case studies.

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Management
Accounting
Control
θωερτψυιοπασδφγηϕκλζξχϖβνμθωερτψ
Philippe
Smans
υιοπασδφγηϕκτψυιοπασδφγηϕκλζξχϖβν
Manon
Cuylits
μθωερτψυιοπασδφγηϕκλζξχϖβνμθωερτ
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οπασδφγηϕκλζξχϖβνμθωερτψυιοπασδφγ

2. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
2
TABLE
OF
CONTENTS
Exam
.......................................................................................................................................
3
Chapter
1:
Introduction
...................................................................................................
4
Some
history
.................................................................................................................................
4
1.
Classical
approach
...........................................................................................................................
4
2.
Cybernetic
approach
......................................................................................................................
5
3.
Systemic
approach
..........................................................................................................................
6
SUMMARY
....................................................................................................................................................
8
the
management
controller
....................................................................................................
8
The
role
of
Finance
is
changing
.......................................................................................................
11
The
role
of
the
Management
Controller
is
changing
..............................................................
12
Operational
and
strategic
feedback
...............................................................................................
14
What
might
be
part
of
the
Management
Control
Function
.................................................
16
Required
skills
........................................................................................................................................
19
Chapter
2:
Management
accounting
control
.........................................................
22
LINK
WITH
FINANCIAL
MANAGEMENT
............................................................................
22
LINK
WITH
MARKETING
MANAGEMENT
.........................................................................
25
Controlling
the
sales
force
....................................................................................................
25
Forecasting
sales
...................................................................................................................................
26
Establishing
sales
territories
and
quotas
....................................................................................
28
Analysing
expenses
..............................................................................................................................
29
THE
LINK
WITH
HR
MANAGEMENT
...................................................................................
31
Chapter
3:
budgetting
...................................................................................................
32
Successive
steps
for
a
budgeting
process:
..................................................................................
35
Operational
budgets
...............................................................................................................
37
Financial
budgets
..................................................................................................................................
38
Budget
Process
.........................................................................................................................
42
Incremental
method
.............................................................................................................................
42
Percentage
method
...............................................................................................................................
43
«
Zero
based
»
budget
..........................................................................................................................
43
Chapter
4:
Capital
budgeting
......................................................................................
45
Key
motives
for
making
capital
expenditures
..........................................................................
45
Steps
in
the
capital
budgeting
process
.............................................................................
46
Basic
Terminology
...................................................................................................................
47
Chapter
5:
cash
flow
.......................................................................................................
49
The
relevant
Cash
Flows
........................................................................................................
49
Main
components
..................................................................................................................................
50
Terminology
............................................................................................................................................
51
What
are
the
key
elements
of
the
recent
business
evolution?
..........................................
65
Parallel
Business
tools
evolution:
..................................................................................................
66
But…
............................................................................................................................................................
67
“Balances”
.................................................................................................................................................
69
Linkage
between
causes
and
strategic
activities
.....................................................................
75
Perspective
measurement
....................................................................................................
79
Financial
perspective
...........................................................................................................................
80
Customer
perspective
..........................................................................................................................
82

3. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Internal
process
perspective
............................................................................................................
86
Learning
and
Growth
perspective
..................................................................................................
87
Chapter
7:
Technique
of
cost
accounting
................................................................
97
Allocation
of
costs
..........................................................................................................
97
producing
department
overhead
.................................................................................................
100
Allocation
of
service
department
costs
to
producing
department
.......................
103
partial
overhead
absorption
...........................................................................................................
120
Activity-­‐based
costing
(ABC)
..........................................................................................................
124
Activity-­‐based
Costing
system
.......................................................................................................
134
CONCLUSION
...................................................................................................................
138
3
EXAM
Case
study:
19
pages
to
read,
there
will
be
questions
about
it.
We
can
bring
it
to
the
exam,
and
he
will
test
our
understanding.
We
can
bring
the
case
study
with
some
notes
on
it.
Other
questions:
Mix
of
several
types
of
questions:
QCM
–
basic
calculations
(CF,
Cost
allocation,
etc.)
–
questions
aiming
an
understanding
of
the
basic
subjects
(ex:
explain
the
job
of
a
MC)
–
close
questions,
etc.
We
don’t
have
to
know
the
presentations
but
we
have
to
know
one
or
two
messages
per
presentation.

4. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
4
CHAPTER
1:
INTRODUCTION
This
course
is
designed
for
students
with
a
Bachelor
Degree
in
Management
or
Business
Administration
who
want
to
develop
their
abilities
to
work
more
effectively
within
large
and/or
well-­‐structured
companies
and
to
deal
with
questions
of
management
control
in
any
type
of
company.
Therefore,
the
course
is
developed
from
a
company
/
business
point
of
view.
Theoretical
concepts
on
Management
Control
will
be
reviewed,
and
will
constantly
be
illustrated
through
real-­‐life
examples
and
case
studies,
in
order
to
have
the
students
familiarized
with
the
main
aspects
of
Management
Control
and
especially
to
apply
the
methods
of
Management
Accounting
Control.
Basic
concepts:
ð What
is
Management
control?
ð Why
is
it
necessary?
ð What
are
the
basic
tools?
SOME
HISTORY
If
we
look
back
we
can
see
that
over
time
3
types
of
management
control:
-­‐ Classical
approach
-­‐ Cybernetic
approach
-­‐ Systemic
approach
1. CLASSICAL
APPROACH
Fayol
(theoretician):
“management
means
a
couple
of
things:
-­‐ Planning,
-­‐ Organizing,
-­‐ Commanding,
-­‐ Coordinating
activities,
-­‐ Controlling
performances
(NB:
first
time
we
see
the
word
control)
Most
of
these
activities
are
task
management
oriented
rather
than
people
management
oriented.
This
was
typical
of
Taylor
and
the
Scientific
Management.

5. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Contrôler
(French)
=
to
check
something.
(E.g.:
to
check
the
speed
of
a
car)
To
control
something
(English)
=
Make
sure
that
things
“happens”
correctly
≠
to
check.
The
“control”
was
perceived
narrowly
(“surveillance”)
and
not
very
explicit.
ð Management
controller:
not
somebody
who’s
just
checking
the
management,
it’s
5
something
broader.
This
looks
like
something
mechanic,
really
systematic,
but
the
experience
shows
that
you
might
not
be
efficient;
you
could
fail
even
If
you
make
many
efforts
to
plan,
organize,
…
Nowadays,
things
are
moving
really
quickly.
You
have
to
be
able
to
adapt
to
those
changes.
A
better
ability
to
adapt
to
a
changing
environment
is
needed.
That
leads
to
the
cybernetic
approach.
After
a
while,
if
the
output
is
not
right
in
the
case
of
the
classical
approach,
you
will
change
your
approach
to
the
cybernetic
approach.
2. CYBERNETIC
APPROACH
Without
the
right
input
it’s
really
difficult
to
have
a
good
output.
If
my
outputs
seem
not
to
be
all
right,
it
might
be
because
of
the
inputs,
or
because
of
the
system
itself.
Output
=
It’s
something
you
want
to
reach,
an
objective.
Every
company
has
objectives.
They
will
put
a
system
in
place
and
chose
inputs.
Examples:

6. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Profit
is
a
typical
output
of
the
company,
but
not
the
only
one.
Another
example
of
output
could
be
customers,
market
shares,
customer
satisfaction,
and
so
on.
But
it’s
never
limited
to
profit.
Most
of
the
time
they
will
first
discover
that
the
output
is
not
good
and
they
will
make
changes.
It’s
better
than
the
previous
approach
but
still
no
question
about
the
relevance
of
6
the
goals
and
objectives.
“Is
this
the
right
output
that
I
want
to
achieve?”
or
“Is
there
another
output
which
would
be
better?”
If
you
start
to
question
the
relevance
of
your
objectives,
you
arrive
in
the
systemic
approach.
3. SYSTEMIC
APPROACH
You
will
consider
any
company
as
a
system.
That’s
much
more
sophisticated,
and
closer
to
the
reality,
because
nowadays,
running
a
business
is
becoming
more
and
more
complex:
(The
following
reasons
bring
problems
but
also
opportunities)
-­‐ More
competitors
on
the
market,
globalization
in
the
last
decade,
etc.
-­‐ Regulation
is
increasing;
environment
of
regulation
is
becoming
tougher
and
tougher.
The
speed
of
change
is
increasing.
-­‐ The
economic
situation
(crisis),
it’s
currently
not
easy.
But
it
also
creates
opportunities.
-­‐ Technologies.
Some
companies
are
very
successful
thanks
to
their
ability
to
adapt
themselves
really
quickly
to
new
technologies.
In
this
model,
a
company
is
defined
as
a
system
with
goals
and
able
to
adapt
itself
(continuously)
The
management
control
is
no
longer
a
process
of
“a
posteriori”
verification.
“Control”
means
actually
“keep
control
in
order
to
adapt
to
the
environment
evolution”.
Therefore
the
role
of
the
control
is:
-­‐ To
ensure
the
relevance
of
the
system’s
goal
and
objectives
-­‐ To
ensure
that
the
relationships
between
subsystems
allow
to
move
towards
the
objectives
Systemic
control
covers
the
2
points
of
view:
-­‐ External:
the
control
system
must
ensure
the
relevance
of
the
strategic
choices
and
of
the
behaviors
-­‐ Internal:
the
choice
of
control
system
is
clearly
linked
to
the
organizational
system

7. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
7
Analytic
approach
Systemic
approach
AA
isolates
and
then
concentrates
on
the
elements
SA
unifies
and
concentrates
on
the
interaction
between
elements.
Studies
the
nature
of
interactions
Studies
the
effects
of
interactions
Emphasizes
the
precision
of
details
Emphasize
global
perception
Modifies
one
variable
at
a
time
Modifies
groups
of
variables
simultaneously
Remains
independent
of
duration
of
time,
the
phenomena
considered
irreversible
Integrates
duration
of
time
and
irreversibility
Validates
facts
by
means
of
experimental
proof
within
the
body
of
a
theory
Validates
facts
through
comparison
of
the
behavior
of
the
model
with
reality
Uses
precise
and
detailed
models
that
are
less
useful
in
actual
operation
(example:
econometric
model)
Uses
models
that
are
insufficiently
rigorous
to
be
used
as
bases
of
knowledge
but
are
useful
in
decision
and
action
Has
an
efficient
approach
when
interactions
are
linear
and
weak
Has
an
efficient
approach
when
interaction
are
nonlinear
and
strong
Leads
to
discipline-­‐oriented
(juxtadisciplinary)
education
Leads
to
multidisciplinary
education
Leads
to
action
programmed
in
detail
Leads
to
action
through
objectives
Possesses
knowledge
of
details
poorly
defined
goals
Possesses
knowledge
of
goals,
fuzzy
details
1ST
ELEMENT
Analytic
approach
=
“AA
isolates
and
then
concentrates
on
the
elements”
Systemic
approach
=
“SA
unifies
and
concentrates
on
the
interaction
between
elements.”
A
company
is
a
system
(//
human
body:
sum
of
different
elements
interacting
a
lot
with
each
others).
In
this
approach
you
will
define
a
company
by
a
series
of
elements.
è
Different
parts,
and
for
each
part:
one
specialist.
That’s
typical
of
many
companies.
What
may
happen
if
you
concentrate
on
those
elements?
Ex:
You
may
have
a
purchasing
department:
the
job
of
the
purchasing
manager
is
buying.
If
he’s
a
real
specialist,
he
will
be
champion
in
bargaining
for
the
minimum
price.
Sometimes
it
raises
problems.
Ex:
I
buy
a
car
at
the
minimum
purchasing
price
=>
lower
quality,
so
much
more
reparations,
and
the
total
cost
of
the
car
could
be
higher
than
it
was
supposed
to.
Sometimes
it’s
not
a
good
idea
to
buy
a
car
at
the
minimum-­‐
purchasing
price.
Systemic
approach:
It’s
much
more
powerful
than
the
analytic
approach.
Here
you
look
at
several
elements
and
at
their
interactions!
You
never
look
just
at
the
purchasing
price
but
also
at
the
quality
etc.
You
concentrate
on
the
interactions
between
the
elements
in
this
approach.
Ex:
as
human
resource
manager,
what
do
you
expect?
You
want
your
people
to
be
productive,
so
you
want
them
to
be
motivated,
and
what
drives
motivation?
Training
possibilities,
coaching,
etc.

8. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Good
managers
have
to
look
at
the
interactions
between
human
resources,
finance
department,
purchasing
department,
etc.
It’s
necessary
for
the
company
to
succeed
8
SUMMARY
Classical
approach:
You
focus
on
the
output.è
The
only
things
you
need
to
do
are
check,
surveillance,
look
at
the
output.
Cybernetic
approach:
Focus
on
the
process
that
produces
the
output.
If
my
output
is
wrong,
it’s
probably
because
something
is
wrong
with
the
process.è
Process
audit.
How
does
the
process
work?
Systemic
approach:
Focus
on
the
system1
that
produces
the
output.
è
System
audit.
I’m
going
to
look
at
the
system
(//computer
system).
THE
MANAGEMENT
CONTROLLER
In
front
of
increasing
business
complexity,
there
are
often
too
many
activities
for
a
single
person.
More
and
more
activities
are
delegated
to
a
management
controller,
who
must
keep
the
CEO
informed
about
things
like:
-­‐ The
various
department’s
performances
-­‐ Sales
-­‐ Costs,
benefits
-­‐ Control
issues
related
to
systems
that
operates
transactions
-­‐ The
impact
of
new
taxes
and
other
national
or
international
trade
regulations
-­‐ Etc.
As
a
CEO
you
don’t
have
time
to
do
that,
so
you
ask
someone
to
do
it
for
you
and
to
keep
you
informed,
and
then
you
take
decisions,
because
it’s
your
job.
That
someone
is
the
management
controller.
1
System
=
a
collection
of
processes.
Of
course
it’s
much
more
complicated
than
a
process
because

9. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
A
management
controller
may
be
compared
to
a
ship
navigator,
who
keeps
the
captain
aware
of
current
or
potential
problems
(icebergs,
etc.)
9
The
job
of
the
management
controller
is
to
get
the
relevant
data,
to
work
them
out,
to
translate
them
into
useful
information
in
order
to
give
it
to
the
CEO.
He
collects
the
information
and
summarizes
it
to
give
it
to
the
CEO.
The
CEO
will
interpret
those
data
and
then
use
it
to
make
decisions.
Therefore,
the
Management
Controller
needs
to
be
aware
of
the
company’s
strategy.
His
job
is
to
get
the
relevant
figures;
therefore
he
needs
to
know
the
objectives,
strategy,
etc.
of
the
company.
Example:
If
the
strategy
of
the
company
is
to
grow,
the
Management
Controller
knows
some
figures
that
are
more
important
for
the
company
to
know.
He
can
then
select
the
relevant
data
depending
on
the
direction
that
the
company
wants
to
take
(its
final
destination,
its
strategy).
Traditionally,
in
most
companies,
the
Management
controller
reports
to
the
financial
manager
and
in
many
cases
his
job
is
not
named
management
controller
but
financial
controller.
Summary:
Get
information
è
Analyze
information
è
Provide,
based
on
that
information,
a
message
to
the
CEO
It
might
be
financial
data,
but
it
could
also
be
other
types
of
data.
It’s
absolutely
not
only
related
to
financial
data,
that’s
why
the
name
“financial
controller”
isn’t
that
good
for
this
function.
Life
of
a
company
is
not
limited
to
financial
data.
They
also
need
customer
satisfaction,
company
reputation,
etc.
you
don’t
get
that
sort
of
data
as
easily
accessible
as
financial
data.
Financial
data
are
the
most
easily
accessible
data
for
a
company.
SUMMARY
OF
EVERYTHING

10. Management
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2012-­‐2013
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10
OPERATIONS
MANAGEMENT
Operations
management
=
Day-­‐to-­‐day
management
In
a
company
there
is
a
difference
between
the
people
defining
the
strategies
and
the
one
applying
them.
Operations
management
is
one
type
of
management.
Those
managers
are
going
to
be
concerned
by
what’s
going
to
happen
in
the
next
days.
E.g.:
A
project
manager
is
an
operational
manager.
A
production
manager
too
(you
have
to
produce,
not
only
to
sell),
same
for
logistic
managers,
etc.
è
Those
are
operational
activities.
You
realize
the
day-­‐to-­‐day
life
of
a
company.
STRATEGIC
MANAGEMENT
Strategic
management
=
To
ensure
relevance
of
the
long-­‐term
objectives.
Time
horizon
is
longer
for
this
type
of
management.
What
do
I
want
to
achieve
within
3
years/
5
years.
Etc.
è
But
it’s
not
only
related
to
the
time
horizon:
The
aim
is
to
define
a
strategy
and
to
make
sure
that
the
strategy
is
going
to
happen,
to
manage
the
strategy
in
other
words.
Strategy:
I
want
to
achieve
one
goal,
and
this
goal
isn’t
specific
to
one
part
of
the
company
(e.g.
not
specific
to
sales).

11. Management
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Control
2012-­‐2013
Manon
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There
are
2
ways
of
communications
between
the
strategy
management
and
the
operations
management
even
if
their
job
has
a
completely
different
nature.
11
MANAGEMENT
CONTROL
Management
control
è
allows
the
definition
of
short-­‐term
objectives,
relevant
feedback,
and
a
(usually)
one-­‐year
time
horizon
management.
Feedback
is
really
important.
Once
you’ve
defined
the
strategy,
you’ll
need
regular
feedbacks.
There
is
another
part
in
the
job
that
we
haven’t
seen
so
far.
Basic
tool
used
by
the
management
controller
to
translate
the
strategy
into
shorter
objectives:
a
budget!
The
budgeting
process
that
is
one
of
the
most
painful
processes
in
companies;
it’s
the
responsibility
of
the
management
controller.
And
if
he
isn’t
the
main
responsible,
he
will
be
strongly
involved
in
the
budgeting
process.
Budget
is
a
tool,
which
is
used
to
go
from
red
to
green.
The
dashboard
also
is
a
basic
tool.
The
purpose
of
a
management
controller
is
to
help
the
good
communication
between
operational
and
strategic
management.
THE
ROLE
OF
FINANCE
IS
CHANGING
PAST

12. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
The
first
triangle
was
in
the
past.
Most
of
the
time
spent
by
the
people
was
in
transaction
processing,
a
little
bit
on
reporting
and
control
and
a
very
little
amount
in
decision
support.
12
CURRENT
Transaction
processing
takes
less
time
(almost
zero).
It
gives
much
more
time
to
Decision
Support.
It’s
the
role
of
management
accounting
controller.
è
The
management
controller
doesn’t
take
the
decisions
but
collects
data,
etc.
and
it
helps
the
CEO
to
take
decisions.
ERP
Systems:
Huge
software
(SAP
for
ex),
basically
they
automate
all
that’s
transaction
processing.
We
enter
one
data
in
the
system
and
it
is
going
to
check
if
there
is
enough
raw
materials
for
example,
and
if
not,
it
will
book
some
raw
materials
automatically,
etc.
Series
of
transactions
are
automatically
performed.
That’s
why
that
part
is
really
going
down;
which
is
a
good
new
because
it
leaves
more
time
for
the
other
activities.
Moreover,
it’s
a
boring
task.
The
finance
people
are
no
longer
doing
an
accountancy
job,
but
more
and
more
decision
support.
THE
ROLE
OF
THE
MANAGEMENT
CONTROLLER
IS
CHANGING
ð Originally
nothing
more
than
a
bookkeeper
ð The
function
changed
with
the
advent
of
computers
ð In
the
1970s
and
1980s,
CEOs
became
more
concerned
with
the
efficiency
of
all
company
departments,
including
the
accounting
function
ð Used
a
great
deal
of
process
and
financial
analysis
skill
to
assist
all
parts
of
the
corporation
in
many
ways.
This
is
probably
the
most
important
skill
for
a
management
controller.
Analysis:
that’s
what
it
is
about.
ð Over
the
course
of
one
century,
the
controller’s
function
has
risen
from
one
of
senior
clerk
to
one
of
the
most
advanced,
highly
educated,
and
useful
positions
in
the
entire
corporate
structure.

13. Management
Accounting
Control
2012-­‐2013
Manon
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13
FROM
CHECKING
TO
CONTROLLING
Checking
Controlling
è
Bureaucratic
&
Standard-­‐based
It’s
based
on
standards:
e.g.:
if
I
check
the
speed
of
a
car
that’s
because
there’s
a
speed
limit.
è
Reactive
&
flexible
Exactly
like
when
you
drive
a
car.
The
worst
thing
to
do
would
be
to
be
bureaucratic
and
standard-­‐obsessed,
that
wouldn’t
be
very
effective.
e.g.
There
are
always
going
to
be
idiots
that
are
not
going
to
stop
at
a
STOP
panel,
that
are
going
to
cross
the
streets
when
they
are
not
supposed
to.
You
have
to
be
reactive
and
flexible.
è
“Surveillance”
è
“Cause-­‐and-­‐effects”
relationships
è
No
focus
on
relevance
The
policeman
doesn’t
address
the
relevance.
è
Focus
on
relevance
The
Management
Controller
focuses
on
relevance.
It’s
good
for
him
to
ask
himself
“does
it
make
sense?
Does
that
objective
make
sense?”
è
Resources
management
&
allocation
è
Processes
and
competencies
management
è
“Single-­‐loop”
è
“Double-­‐loop”
è
Reactive
React
to
what’s
happening.
That’s
not
a
good
way
to
manage
a
company.
è
Proactive
Think
to
WHAT
COULD
HAPPEN,
that’s
the
good
way
to
manage
a
company
è
Optimization
è
Adaptation
They
successfully
adapt,
and
they
do
it
quickly!!!
è
Use
of
theoretical
models
è
Use
of
adequate
behaviors
è
Failure
trigger
sanctions
è
Failure
allow
learning
and
development
Failures
are
accepted,
and
they
are
necessary.
It
doesn’t
mean
that
we
like
failure,
but
it
is
important
because
it
allows
learning.
E.g.:
it’s
impossible
to
learn
riding
a
bicycle
without
falling.
There
is
nothing
wrong
at
making
mistakes,
but
you
have
to
learn
thanks
to
your
mistakes.
In
most
of
the
American
Companies,
failures
are
accepted,
but
you’re
not
allowed
to
make
4
times
the
same
mistake.
Anyway
it’s
obvious
that
nobody
like
failure.

14. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
14
OPERATIONAL
AND
STRATEGIC
FEEDBACK
REALLY
IMPORTANT
SLIDE
What
it
means
to
be
between
strategic
management
and
operation
management.
OPERATIONAL
FEEDBACK
When
you’re
in
the
operational
world,
you’ll
often:
è
Start
with
an
operational
plan
(what
are
you
going
to
produce,
how
much
do
I
have
to
sell,
etc.)
èTranslate
that
into
an
operational
budget
è
Translate/use
the
budget
into
operational
activities
(sell,
buy,
etc.).
è
At
the
end
I
have
some
outputs
(number
of
units
produced,
bought,
number
of
projects
completed,
new
products
developed,
etc.).
è
I’m
going
to
measure
that
(metrics)
to
close
the
loop,
and
è
Compare
that
to
my
initial
operational
plan.
E.g.:
At
the
end
of
the
first
week
you
only
have
90
cars
(you
were
supposed
to
have
100).
If
metrics
show
that
your
outputs
are
not
as
they
were
supposed
to
be
in
the
initial
plans,
there
are
2
options:
Both
are
good,
it
depends
of
the
circumstances,
etc.
-­‐ Change
your
plan
(maybe
it
wasn’t
appropriate)
-­‐ Keep
the
plan
but
change
something
else
(hire
more
people,
etc.)

15. Management
Accounting
Control
2012-­‐2013
Manon
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15
STRATEGIC
FEEDBACK
Strategic
plan
that
I
translate
in
a
strategic
budget
that’s
going
to
be
used
for
strategic
actions.
The
difference
I
can
do
here
is
strategic
actions
(ex:
mergers
and
acquisition,
to
launch
a
new
product,
…
)
è
they’re
not
routine
decisions.
The
purpose
of
those
strategic
actions
is
to
impact
the
operational
activities.
Example:
Mergers
and
acquisition:
I
buy
a
competitor
and
his
activity
becomes
mine,
and
it’s
going
to
impact
the
day-­‐to-­‐day
activities.
Same
if
I
decide
to
launch
a
new
product.
I
will
select
the
outputs
that
are
interesting,
in
relation
with
the
plan.
Outcome:
by
nature
it’s
nothing
more
than
an
output
with
a
strategic,
specific
importance.
I
can
measure
those
outcomes
thanks
to
metrics
and
close
the
loop
by
returning
to
the
strategic
plan.
EXAMPLE
I
run
my
business
in
BENELUX,
I
decide
to
take
a
strategic
action,
before
I
already
had
operational
activities
in
place.
I
want
to
get
more
sales.
ð Outputs
could
be
things
like
the
unit
sold
in
Belgium,
Netherlands
or
Luxemburg
ð The
sales
expressed
in
Euro
ð The
market
shares
in
Belgium/Netherlands/Luxemburg
ð Etc.
I
can
compare
those
outputs
to
your
plan
è
what
was
my
plan
in
relation
with
the
market
shares?
è
Strategic
plan:
to
sell
in
Germany
also!
BASIC
DIFFERENCES
BETWEEN
THE
STRATEGIC
LOOP
AND
THE
OPERATIONAL
LOOP
The
timing
is
very
different
between
both
loops.
Ø Operational
loop:
It’s
going
very
fast,
day-­‐to-­‐day
activities.
Done
on
a
daily
basis.
Ø Strategic
loop:
That’s
not
something
that
you
can
do
quickly
basically!
It
takes
months.
Budget
is
in
Strategic
actions.
Budget
is
expressing
into
operation
figures
some
strategic
decisions
that
I
took.

16. Management
Accounting
Control
2012-­‐2013
Manon
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16
Operation
è
strategic
(job
of
the
management
controller):
The
management
controller
will
pick
up
some
figures
from
the
operational
world
and
I
will
use
them
to
provide
information
to
the
CEO.
è
He
will
measure
some
of
the
outputs
and
provide
information
that
are
going
to
help
the
dashboard
to
take
decisions.
Therefore,
a
management
controller
needs
to
be
perfectly
aware
of
the
strategic
intent!
We
can
see
that
it
isn’t
an
easy
job.
It’s
not
always
easy
to
translate
something
into
a
figure.
Ex:
customer
loyalty
is
not
really
easy
to
translate
into
a
figure
(I
can
count
the
number
of
customers
lost).
Sometimes
it’s
easy;
sometimes
it’s
less
easy.
“Strategically
I
want
to
have
a
better
reputation”.
Reputation
is
possible
to
measure
but
not
that
easy.
Not
easy
to
translate
into
figures.
WHAT
MIGHT
BE
PART
OF
THE
MANAGEMENT
CONTROL
FUNCTION
Might
=
in
some
companies
it’s
not
part
of
the
job,
in
other
it
is
AUDITING
Ø The
scheduling
and
management
of
periodic
internal
audits,
as
well
as
the
preparation
of
resulting
audit
reports
and
the
communication
of
findings
and
recommendations
to
management
and
the
board
of
directors.
Ø The
preparation
of
work
papers
for
the
external
auditors
and
the
rendering
of
any
additional
assistance
needed
by
them
to
complete
the
annual
audit
NB:
In
some
companies
audit
and
management
control
are
separated
functions
BUDGETING
The
coordination
of
the
annual
budgeting
process,
including
maintenance
of
the
company
budget,
and
the
transfer
of
final
budget
information
into
the
financial
statements.
CONTROL
SYSTEMS
The
establishment
of
a
sufficiently
broad
set
of
controls
to
give
management
assurance
that
transactions
are
processed
properly.
COST
ACCOUNTING
(=
comptabilité
analytique)
It’s
almost
systematically
a
part
of
the
job
!
You
have
to
have
a
good
understanding
of
the
figures.

17. Management
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Control
2012-­‐2013
Manon
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Ø The
coordination
of
periodic
physical
inventory
counts
Ø The
periodic
analysis
and
allocation
of
costs
based
on
activity-­‐based
costing
pools
17
and
allocation
methods.
Ø The
continual
cost
review
of
products
currently
under
development,
using
the
principles
of
target
costing.
Ø The
periodic
compilation
and
evaluation
of
inventory
costs.
FINANCIAL
ANALYSIS
Ø The
periodic
comparison
of
actual
to
budgeted
results
and
the
communication
of
variances
to
management,
along
with
recommendations
for
improvement.
Ø The
continuing
review
of
revenue
and
expense
trends
and
the
communication
of
adverse
trends
results
to
management,
along
with
recommendations
for
improvement
Ø The
periodic
compilation
of
business
cycle
forecasting
statistics
and
the
communication
of
this
information
to
management,
along
with
predictions
related
to
the
impact
on
company
operations.
Ø The
periodic
calculation
of
a
standard
set
of
ratios
for
corporate
financial
performance
and
the
formulation
of
management
recommendations
based
on
the
results.
FINANCIAL
STATEMENTS
Ø The
preparation
of
all
periodic
financial
statements,
as
well
as
their
accompanying
footnotes.
Ø The
preparation
of
an
interpretive
analysis
of
the
financial
statements.
Ø The
preparation
and
distribution
of
recurring
and
one-­‐time
FIXED
ASSETS
Ø The
annual
audit
of
fixed
assets
to
ensure
that
all
recorded
assets
are
present.
Ø The
periodic
recording
of
fixed
assets
in
the
financial
records
and
their
proper
recording
under
the
correct
asset
categories
and
depreciation
methods.
Ø The
proper
analysis
of
all
capital
expenditure
requests.
POLICIES
AND
PROCEDURES
Ø The
creation
and
maintenance
of
all
policies
and
procedures
related
to
the
control
of
company
assets
and
the
proper
completion
of
financial
transactions.
Ø The
training
of
department
personnel
in
the
use
of
accounting
policies
and
procedures
Ø The
modification
of
existing
policies
and
procedures
to
match
the
requirements
of
government
regulations.

18. Management
Accounting
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2012-­‐2013
Manon
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18
PROCESS
ANALYSIS
Ø The
periodic
review
of
all
processes
involving
financial
analysis,
to
see
if
they
can
be
completed
with
better
controls,
lower
costs,
or
greater
speed.
RECORD
KEEPING
Ø The
proper
indexing,
storage,
and
retrieval
of
all
accounting
documents.
Ø The
orderly
planning
for
and
scheduling
of
document
destruction,
in
accordance
with
the
corporate
document
retention
policy.
TAX
PREPARATION
Ø The
timely
preparation
and
filing
of
tax
returns,
as
well
as
the
supervision
of
all
matters
relating
to
corporate
taxation,
such
as
conducting
an
effective
tax
management
program,
and
both
providing
and
enforcing
policies
and
procedures
related
to
the
compliance
of
all
corporate
personnel
with
applicable
government
tax
laws.
TRANSACTION
PROCESSING
Ø The
timely
completion
of
all
accounting
transactions
at
the
intervals
and
in
the
manner
specified
in
the
accounting
policies
and
procedures
manual.
Ø The
proper
completion
of
all
transactions
authorized
by
the
board
of
directors
or
in
accordance
with
the
terms
of
all
authorized
contracts.
Ø The
proper
approval
of
those
transactions
requiring
them,
in
accordance
with
company
policy.
This
list
may
appear
overwhelming,
but
just
because
the
controller
is
responsible
for
all
of
the
listed
areas
does
not
mean
that
this
person
must
actually
do
each
one.
In
other
words,
the
controller
primarily
manages
the
work
of
other
people
and
ensures
that
they
complete
most
of
the
tasks
just
listed.
In
particular,
a
controller
can
rely
on
the
services
of
assistant
controllers
who
are
responsible
for
smaller
portions
of
the
accounting
department.

19. Management
Accounting
Control
2012-­‐2013
Manon
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19
REQUIRED
SKILLS
ANALYSIS
OF
INFORMATION
The
controller
must
be
sufficiently
comfortable
with
financial
information
to
readily
understand
the
meaning
of
a
variety
of
ratios
and
trends
and
what
they
portend
for
a
company.è
The
figures
and
information:
You
don’t
need
to
be
a
financial
expert
but
a
really
good
ability
to
analyze
is
required.
COMMUNICATION
ABILITY
A
key
component
of
the
controller’s
function
is
compiling
information
and
communicating
it
to
management.
If
the
compiling
part
of
the
job
goes
well,
but
management
does
not
understand
its
implications,
then
the
controller
must
improve
his
or
her
communication
skills
in
order
to
better
impart
financial
information
to
the
management
team
Ø Those
two
are
the
most
important
skills
COMPANY
AND
INDUSTRY
KNOWLEDGE.
No
accounting
system
is
completely
“plain
vanilla”,
because
the
companies
and
industries
in
which
it
operates
have
a
sufficient
number
of
quirks
to
require
some
variation
from
the
typical
accounting
system.
Accordingly,
the
controller
must
have
a
good
knowledge
of
both
company
and
industry
operations
in
order
to
know
how
they
impact
the
operations
of
the
accounting
department
Ø It’s
better
if
you
have
some
knowledge
but
not
absolutely
mandatory.
MANAGEMENT
SKILL.
The
controller
presumably
will
have
a
staff
and,
if
so,
will
have
considerable
control
over
the
productivity
of
that
group.
Accordingly,
the
controller
must
have
an
excellent
knowledge
of
the
planning,
organizational,
directing,
and
measurement
functions
needed
to
manage
the
accounting
department.
PROVISION
OF
TIMELY
AND
COST-­‐EFFECTIVE
SERVICES.
The
controller
must
run
the
accounting
department
as
if
it
were
a
profit
center,
so
that
the
most
efficient
methods
are
used
to
complete
each
task
and
the
attention
of
the
department
is
focused
squarely
on
the
most
urgent
tasks
Ø A
typical
Management
controller
will
have
to
create
budget
and
dashboard.
There’s
a
timing
therefore
(ex:
budget
needs
to
be
ready
on
the
first
December).
It’s
important
to
be
able
to
provide
services
on
time.

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20
TECHNICAL
KNOWLEDGE.
Creating
an
accurate
financial
statement,
especially
one
for
a
publicly
held
company,
requires
a
considerable
knowledge
of
accounting
rules
and
regulations.
Accordingly,
a
controller
should
be
thoroughly
versed
in
all
generally
accepted
accounting
principles
(GAAP2,
IAS3,
IFRS4
è
Extremely
technical
standards.)
Ø Not
always
mandatory.
LET’S
LOOK
AT
A
VERY
BASIC
EXAMPLE
OF
IMC
ISSUE
Compared
profitability
of
4
subsidiaries:
NB:
figures
between
brackets
=
negative.
è
Key
message:
I
am
loosing
money
with
one
country
(Country
A).
When
I’m
selling
something,
I
throw
money
through
the
window.
We’ve
a
problem.
è
Main
reason:
I’ve
a
problem
because
of
customer
delivery.
WHY?
Let’s
make
the
ratio
between
customer
delivery
and
sales,
for
the
good
companies
and
for
the
bad
company.
For
nice
looking
company,
customer
delivery
cost
must
be
around
5%
of
the
sales.
In
country
A,
the
cost
is
already
a
percentage
of
the
sales.
It’s
10
times
more
than
for
the
good
companies.
Customer
delivery
costs
are
10
times
higher
than
in
good
working
countries.
2
GAAP:
Generally
Accepted
Accounting
Principles
3
IAS:
International
Accounting
Standards
4
IFRS:
International
Financial
and
Reporting
Standards

21. Management
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21
è
Why
are
those
costs
so
high?
We
can’t
now
thanks
to
the
figures.
There’s
a
limit.
Those
figures
give
information
up
to
a
certain
limit.
There’s
a
limit
to
the
job
of
management
controller.
You
have
to
talk
with
other
people
to
have
a
better
understanding
of
the
problem.
Role
of
the
Management
Controller:
-­‐ Interface
between
strategic
management
and
operational
management
-­‐ Getting
data
and
being
able
to
deliver
those
data
as
a
message

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22
CHAPTER
2:
MANAGEMENT
ACCOUNTING
CONTROL
LINK
WITH
FINANCIAL
MANAGEMENT
OPERATIONAL
CYCLE
When
you
start
a
company,
you
need
first
some
money.
You
get
that
money
thanks
to
Equity
and
LT
Debts
(Bank).
LT
debt
means
that
you’ll
have
to
pay
it
back
within
more
than
1
year.
That
money
is
cash!
I
can
use
this
cash
to
buy
LT
assets
(car,
truck,
etc.).
After
that,
you
can
start
to
operate.
You
find
suppliers;
you
buy
raw
materials,
etc.
And
you
work
to
turn
those
raw
materials
into
finished
products.
You
sell
those
finished
products
in
order
to
win
cash.
The
aim
of
the
game
is
to
have
CASH
thanks
to
this
operational
cycle.
Most
of
the
bankruptcies
start
because
companies
don’t
have
money
to
pay
the
salaries.
They
borrow
then
money
to
the
bank
but
with
an
interest
rate,
and
when
they
have
to
refund
the
bank,
they
face
a
problem.
The
Management
controller
needs
to
reach
a
balance
(both
in
amount
and
timing),
and
they
reach
it
when
they
have
a
really
low
working
capital
requirement
(or
even
negative,
because
it’s
possible).

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23
Let’s
have
a
look
at
the
balance
sheet:
Ø WC
=
Working
Capital
Ø WCR
=
Working
Capital
Requirement
Ø Left
column:
Assets
(Actif)
Ø Right
column:
Liabilities
(Passif)
LT
Assets:
(>1
year):
It’s
an
asset
used
for
the
production.
It’s
supposed
to
stay
within
the
company
more
than
1
year.
><
ST
assets.

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Difference
between
depreciation
and
the
other
categories
of
costs:
Depreciation:
That’s
not
money
physically
going
out
of
the
company.
It’s
something
that
you
take
into
account
as
if
it
was
a
cost
but
actually
there’s
no
money
going
out
of
the
company
24
physically.
Cash
flow
=
net
income
+
depreciation.
You
may
perfectly
have
situations
with
a
positive
cash
flow
but
a
negative
profit.
EXAMPLE
NB:
between
brackets:
negative
figures
You
use
raw
materials,
workers
(that
you
will
have
to
pay)
to
produce
during
a
period
of
time.
It
means
you’ll
face
cost
for
this
production.
At
the
end
of
the
month,
you
have
to
add
9450.
The
difference
between
the
inventory
at
the
end
of
the
period
and
the
beginning
of
the
period
is
what
has
been
sold.
è
Explanation
in
an
easier
way:
I
have
1000.
I
produce
3000.
I
can
sell
4000
then.
If
at
the
end
of
the
period
I
have
2000,
it
means
that
I
have
sold
for
2000.
(It’s
exactly
the
same
than
previously
but
with
easier
figures).

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25
LINK
WITH
MARKETING
MANAGEMENT
All
the
rates
have
to
be
high
in
order
to
have
a
high
market
share.
This
is
due
to
the
fact
that
if
awareness
rate,
contact
rate
and
hit
rate
are
high
but
consideration
rate
is
low,
your
market
share
is
going
to
be
low.
CONTROLLING
THE
SALES
FORCE
Two
reasons
for
the
control
in
the
sales
force:
-­‐ Personal
selling
can
be
a
large
marketing
expense
component
in
the
final
price
of
the
product
or
service.
It’s
worth
to
be
controlled
-­‐ It’s
related
to
the
efficiency.
Sales
force
efficiency
can’t
be
maximized
unless
it’s
directed,
motivated
and
audited
on
a
continual
basis.

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2012-­‐2013
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26
In
order
to
have
good
results,
there’s
a
need
of
controlling
the
sales
force
(directing
them,
motivating
them,
etc.)
Controlling
the
sales
force
involves
4
key
functions:
1. Forecasting
sales:
It’s
always
the
starting
point
2. Establishing
sales
territories
and
quotas.
3. Analyzing
expenses:
Sales
involve
expenses.
(E.g.:
restaurants
with
prospects,
clients,
etc.).
4. Motivating
and
compensating
performance.
FORECASTING
SALES
The
sales
forecast
is
an
estimate
of
how
much
of
the
company’s
output
(€
or
units)
can
be
sold
during
a
specified
future
period,
under:
It
lies
in
sales
planning
for
the
next
year
or
in
the
future.
There’s
always
a
forecast
long
term
and
short
term:
-­‐ Short
Term:
It’s
basically
a
managing
of
the
sales
force.
It’s
the
starting
point
of
the
budget
process.
The
period
of
time
is
maximum
1
year.
-­‐ Long
Term:
To
make
sure
you
have
a
capital
to
finance
the
business
development
and
to
have
enough
production
capacity.
It’s
focused
on
financing,
production
and
development.
The
sales
forecast
is
an
estimate
of
what
we
are
going
to
sell
next
year.
In
other
words,
it’s
how
much
of
the
company’s
output
can
be
sold
during
a
specified
future
period.
It’s
not
easy
to
calculate
it
and
in
order
to
minimize
the
risks
we
have
to
go
through
some
steps:
1. An
assumed
set
of
economic
conditions:
it’s
the
way
the
economy
is
going
to
be
next
year.
About
the
global
economic
environment.
2. A
proposed
marketing
plan:
what
you
plan
to
do
in
the
future.
Each
marketing
plan
will
deliver
a
specific
impact
on
the
product.

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Ø Used
to
establish
sales
quotas
Ø Used
to
plan
personal
selling
efforts
and
other
types
of
promotional
activities
in
27
the
marketing
mix.
Ø Used
to
budget
selling
expenses
Ø Used
to
plan
and
coordinate
production,
logistics,
inventories,
personnel,
etc.
SOME
FORECASTING
TECHNIQUES
JURY
OF
EXECUTIVE
OPINION
METHOD
I
may
ask
to
the
top
management
what’s
their
opinion.
“Next
year,
what
do
you
think
is
going
to
happen?”
The
CEO
and
the
operational
management
meet
to
discuss
the
decision
of
the
company.
Inconvenient:
the
top
management
is
not
in
contact
with
the
customers.
So,
their
decision
is
not
based
on
relevant
decision
or
at
least
not
concrete
enough.
So,
they
may
not
do
the
right
choice.
SALES
FORCE
COMPOSITE
METHOD
Ask
the
sales
people.
The
sales
force
is
directly
involved
with
the
customers.
They
can
bring
a
good
approach
for
the
future
decisions
related
to
the
performance
of
the
company.
Inconvenient:
Not
a
secure
method.
If
they
know
they
are
going
to
sell
20%
more
they
will
never
say
that
to
their
boss,
cause
something
might
happen.
It’s
better
to
say
that
they
are
going
to
sell
10%
more
cause
then
we’ll
give
them
that
as
an
objective
and
if
they
sell
more
than
10%
more,
the
boss
might
give
them
a
bonus.
They
underestimate
what
they
think
they
will
need
for
the
future.
The
salesman
is
going
to
be
careful
in
his
statement
concerning
his
objectives.
He’s
not
going
to
tell
the
truth.
It’s
always
an
estimation;
there
is
a
filter
of
information
As
a
boss
you
might
say:
“Instead
of
asking
my
sales
people,
why
don’t
I
bypass
them?”
CUSTOMER
EXPECTATIONS
METHOD
This
method
is
used
in
case
of
the
company
doesn’t
trust
the
salesman
and
suspects
he
filters
the
information
he
let
the
company
know.
Another
solution
is
to
ask
directly
the
customer
about
his
satisfaction.
It
concerns
the
raw
information,
untreated.
Inconvenient:
number
of
customer
is
too
large
to
be
analyzed.
There
is
a
need
of
samples,
and
as
a
result,
a
limitation
of
the
information.
Moreover,
customers
are
not
always
willing
to
answer
the
questions.
Customers
are
not
always
going
to
tell
the
truth.
If
we
ask
them
how
much
they
are
going
to
buy
next
year,
they
might
not
give
the
good
answer.

28. Management
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28
è
Those
3
first
techniques
are
necessary
for
a
good
forecast
even
if
they
suffer
from
imperfections
and
give
truncated
information.
It’s
always
better
to
run
them
because
those
techniques
bring
a
direct
input
from
direct
contact
with
important
actors
of
the
business.
The
3
next
techniques
are
more
technical
and
mathematic.
TIME-­‐SERIES
ANALYSIS
You
try
to
use
the
past
to
prevail
the
future.
You
look
at
the
past
evolution
and
try
to
extrapolate.
Ex:
during
the
last
10
years
my
sales
have
been
increasing
by
2%
every
year…
It’s
not
silly
to
extrapolate
then.
CORRELATION
ANALYSIS
You
correlate
something
with
another
forecast.
You
correlate
your
forecast
to
other
forecasts.
A
forecast
can
never
be
something
100%
accurate;
it’s
not
possible
to
predict
the
future.
OTHER
QUANTITATIVE
TECHNIQUES
è
Techniques:
Statistical,
mathematical,
simulation
models,
etc.
The
forecasting
techniques
can
become
highly
sophisticated,
but
they
are
never
a
substitute
to
sound
business
judgment.
We
have
to
take
into
consideration
both
means:
techniques
and
business
judgement.
No
single
method
provides
uniformly
accurate
results
with
infallible
precision
ESTABLISHING
SALES
TERRITORIES
AND
QUOTAS
SALES
TERRITORY
Represent
the
management’s
need
to
match
personal
selling
effort
with
the
sales
potential
(or
opportunity).
Example:
A
first
salesman
contacts
a
customer
to
offer
a
special
package.
Afterwards,
another
salesman
from
the
same
company
contacts
the
same
customer
but
he’s
more
aggressive
and
wants
to
sell
the
same
offer.
There’s
going
to
be
a
big
problem:
the
image
of
the
company
will
be
affected
because
there
is
a
bad
management
and
control
inside
the
company
to
make
such
a
mistake.

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29
QUOTA
It
represents
goals
assigned
to
salespeople.
As
a
result,
it
gives
benefits
to
the
company:
it’s
an
incentive
for
salespeople,
it
allows
to
evaluate
and
control
salespeople’s
efforts
and
goals
leads
to
quantitative
standard
different
from
the
standards
to
measure
performance.
It
means
that
it’s
an
additional
way
to
measure
performance.
Nevertheless,
it’s
never
easy
to
fix
goals.
There
is
always
a
discussion
to
define
the
goals.
What
is
an
objective?
It
requires
those
conditions
“SMART”.
- S:
it
has
to
be
specific
=
a
clear
objective
- M:
It
has
to
be
measurable
- A:
the
manager
or
the
person
in
charge
must
agree
it.
- R:
it
has
to
be
relevant
and
realistic
(=réaliste).
It
has
to
be
aggressive
enough,
but
realistic.
- T:
it
must
be
an
objective
defined
in
terms
of
time
I
want
to
measure
a
performance
in
the
area
of
sales.
I
want
to
judge
that
performance.
The
list:
different
ways
to
measure
that
performance.
They
are
some
signs
of
good
performance
but
you
won’t
use
all
those
tools,
you
will
have
to
select
the
best
ones
depending
on
your
case.
ANALYSING
EXPENSES

30. Management
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Selling
cost,
expenses.
You
have
to
look
at
that,
compare
data
between
columns/lines…
and
then
you
can
capture
something.
It’s
important
to
take
the
time
to
have
a
look
at
that.
30
MOTIVATING
AND
COMPENSATING
PERFORMANCE
2
basic
types
of
compensation:
Ø Salary:
In
main
company,
the
base
salary
is
known…
(?)
Ø Commission:
Commonly
used
for
the
sales
people
=>
the
more
you
sell,
the
more
money
you
will
have.
But
numerous
other
forms
of
incentives:
• Positive
feedback
on
salesperson
performance
evaluation
• Company
praise
(ex:
recognition
in
a
newsletter)
• Bonus
(ex:
cash,
merchandise,
or
travel
allowances)
• Salary
increase
• Pay
for
performance
for
specific
new
product
idea
• Paid
educational
allowance
• Earned
time
off
• Fringe
benefits
• Stock
options
• Vested
retirement
plan
• Profit
sharing

31. Management
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è
The
incentive
system
is
important
in
the
motivation
and
the
compensation
in
order
to
boost
the
workforce.
In
international
business,
we
have
to
think
about
an
international
customer
present
in
different
countries.
So
the
limitation
of
territory
tends
to
disappear
and
multinational
companies
are
growing.
THE
LINK
WITH
HR
MANAGEMENT
The
idea
is
to
make
sure
that
the
customer
will
receive
what
he
asked
for.
Let’s
remember
that
the
simple
aim
of
Management
Control
is
to
make
sure
that
results
conform
to
intentions.
I
want
to
make
sure
that
what’s
going
to
happen
is
what
I
expected.
I
want
to
have
the
measurement
telling
me
whether
I’m
on
the
right
track
è
do
I
have
to
change
something
or
keep
on
doing
like
that?
Applied
to
HR
Management,
this
implies
4
steps:
1)
Deciding
which
behaviors
or
outcomes
are
desired.
I
have
to
decide
what
is
the
outcome
that
I
expect,
what
do
I
want.
The
typical
outcome
expected
when
it
comes
to
HR
is
“I
expect
the
people
to
behave
like
that,
to
be
creative/productive/able
to
work
in
team/customer
focused/etc.”.
You
expect
some
specifics
behaviors
in
the
HR
department.
Another
thing
you
could
expect
are
the
competences.
You
expect
your
people
to
be
good
at
using
computer.
2)
Establishing
ways
to
measure
behaviors
or
outcome.
You
need
to
have
ways
to
measure
in
order
to
reach
your
objectives.
If
you
don’t
measure
there’s
no
chance
that
you’ll
achieve
your
objectives!
Some
measurement
are
easy
to
make,
some
others
are
not.
How
can
we
measure
behaviors?
Ex:
thanks
to
feedback,
or
by
asking
people.
3)
Measuring
what
happens
4)
Allocating
rewards
based
on
achievement

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CHAPTER
3:
BUDGETING
DEFINITION
- A
budget
is
a
set
of
figures
expressing
money
income
and
outcome,
which
shows
whether
a
financial
plan
will
help
reaching
organizational
objectives.
- Budgeting
is
the
process
of
budget
preparation.
- The
various
Budgets
provide
a
tool
to
communicate
short-­‐term
objectives.
It
is
the
way
to
communicate
the
budget
inside
the
company
BUDGETING
TECHNIQUES
Initially
I
have
a
strategy.
I
will
translate
that
strategy
into
figures.
Regardless
of
the
business
sector,
the
size
of
the
company,
etc.
There
are
always
three
steps
in
every
budgeting
technique:
1. Forecast
2. Budget:
I
need
to
translate
the
forecast
into
figures
3. Control:
I
need
to
follow
that
budget
=>
control
activities/budget
control.
It
doesn’t
make
sense
to
make
a
budget
if
you
don’t
follow
it
after.
And
you
need
to
follow
it
on
a
regular
basis.
“On
a
regular
basis”
is
different
depending
on
the
business.
Every
planning-­‐control
system
is
based
on
the
willingness
to
control
the
future,
and
therefore
to
accept
the
idea
of
forecasting

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This
attitude
must
be
team-­‐based,
and
active
rather
than
passive.
è
If
you
take
more
than
one
point
of
view
you
will
reduce
the
uncertainty!
If
you
only
take
one
point
of
view,
the
person
could
be
wrong…
Forecasting
is
more
than
just
extrapolating
the
past
on
a
predictable
trajectory
as
if
nothing
was
changed
in
the
behaviors.
Forecasting
is
necessary,
since
it
is
the
starting
point
of
many
management
tools.
è
Forecasting
is
the
starting
point
of
many
things,
that’s
why
it’s
absolutely
necessary!
Knowing
the
future
is
impossible,
you
may
describe
what
you
think
the
future
is
going
to
look
like
but
nothing’s
sure.
To
know
the
future
is
impossible;
however,
the
experience
shows
that
available
forecast
data,
even
far
from
perfection,
are
always
better
than
no
forecast
data
at
all
Short
term
forecasting
Mid
and
long
term
forecasting
Prospective
Time
Horizon
Close
Far
Very
far
Purpose
Precise:
sales
forecast,
raw
materials
pricing,
salaries
evolution,
etc.
Global
capacities:
production,
distribution,
etc.
Future
trends
Degree
of
certainty
High
Medium
Low
Variables
Based
on
current
economic
environment
Based
on
economic
trends
Qualitatives
Different
times
perspective
for
forecasts:
Ø Short
term
forecasting:
forecast
for
next
year
(1
year)
Ø Mid
and
long
term
forecasting:
(3
to
5
years)
Ø Prospective:
really
long
term
(over
5
years)
Short
term
forecasting:
precise:
how
much
• I
need
to
be
ready
this
year
for
what’s
going
to
happen
next
year.
I
need
to
have
some
very
precise
information
because
based
on
that
I
will
have
to
take
some
actions.
• Very
high
degree
of
certainty
• I
am
going
to
have
a
look
at
the
current
economic
environment.
Mid
and
long
term
forecasting:
Ø Here
we
talk
about
global
capacities.
I
have
to
think
in
term
of
global
capacities,
production
capacities,
etc.
(strategic
decision)
Ø Medium
degree
of
certainty
Ø I
will
take
a
look
at
the
economic
trends

34. Management
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2012-­‐2013
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EFFECTIVENESS
OF
TECHNIQUE
1st
basic
technique:
Extrapolations:
I
look
at
the
past
data’s
and
I
extrapolate.
I
see
that
I’ve
a
2%
increase
in
sales
every
year,
I
can
extrapolate
and
prevail
a
2%
increase
in
sales
for
next
year.
It’s
very
effective
in
the
short
term,
less
effective
in
the
mid
term
and
almost
not
effective
on
the
long
term.
2nd
technique:
Models:
Ex:
Mathematical
models,
etc.
Models
are
not
effective
for
the
short
term
but
are
most
effective
for
the
mid
term
(and
not
effective
for
the
long
term).
They
are
only
effective
for
the
mid
term
then.
It’s
done
through
programs.
3rd
technique:
Prospection:
Prospections
techniques
are
good
for
the
long
term
but
not
for
the
short
and
mid
term.
You
may
have
some
simple
prospection
techniques
like:
get
together
a
group
of
experts.
This
is
the
most
common
technique.
You
have
some
much
more
sophisticated
prospection
techniques
like
econometric
methods.

35. Management
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SUCCESSIVE
STEPS
FOR
A
BUDGETING
PROCESS:
PLANNING
PHASE
OF
THE
BUDGET
è
Long-­‐term
plan:
What
do
I
expect
in
3
to
5
years
from
now?
That’s
my
long-­‐term
plan.
A
company
wants
to
know
what
are
the
long-­‐term
objectives.
It’ll
reflect
in
the
budget
process.
The
purpose
is
to
influence
the
future.
It’s
more
active,
than
passive
in
order
to
make
the
business
grow.
è
Functional
periodic
budgets:
It
concerns
budgets
established
by
function
for
a
period
of
time.
Ex:
Marketing
Budget,
Financial
Budget,
R&D
budget,
etc.
NB:
Periodic
implies
a
part
of
year:
term,
months,
etc.
è
I
split
the
budget
into
quarterly
or
monthly
budgets:
The
budget
has
to
be
split
into
more
precise
framework
of
time
for
short-­‐term
forecast.
CONTROL
ACTIVITIES
è
Once
the
planning
set,
the
budget
is
available
and
departments
will
run
their
projects.
Months
by
months
the
management
controller
will
receive
the
results,
real
data.
Once
all
data
are
available,
a
comparison
with
the
actual-­‐forecast
can
be
made.
If
results
are
not
good,
2
options:
Ø I’ve
been
far
too
optimistic
with
my
budgets

36. Management
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2012-­‐2013
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Ø My
forecast
was
really
good
but…
è
Gap
analysis:
I
will
look
at
the
gap
(between
forecast
and
real
data’s),
sometimes
it’s
not
really
big,
and
then
I’ll
just
say
that
the
gap
is
meaningless/not
significant.
That’s
very
tricky,
not
easy
to
do,
but
I
need
to
do
it
for
the
next
step
è
Assessment
of
gap
relevance:
Is
the
gap
relevant
or
not?
If
it’s
not
relevant,
no
problem
but
if
it
is
relevant
that’s
difficult.
The
results
of
the
gap
analysis
will
make
place
to
an
assessment
of
the
gap
relevance.
The
purpose
is
to
know
if
the
gap
could
have
been
forecast
or
if
it
depends
on
external
variables.
The
origin
of
the
problem
is
addressed.
Ex:
quality
problems,
problem
of
communication,
crisis
on
the
market.
The
origin
of
the
problem
is
maybe
not
inclusively
in
the
sales,
but
it
can
come
from
another
department
è
Common
understanding
of
the
gap:
You
have
to
understand
the
reason
of
the
gap.
You
may
have
many
reasons
combined
together
or
one
single
reason
difficult
to
find,
etc.
I
have
to
understand
what’s
the
gap.
Only
20%
of
the
reasons
will
explain
80%
of
the
gap
=>
“80-­‐20
rule”!
I
want
to
know
the
main
reasons.
E.g.:
Because
my
customers
are
not
happy
è
Corrective
actions:
Actions
that
I
need
to
take
to
correct
the
situation.
It
may
be:
Ø “I
will
change
my
plans
for
the
following
period”
=>
I
will
train
my
sales
people;
I
will
change
something
for
the
next
period
of
time.
It’s
an
action
that’s
supposed
to
have
an
effect
on
the
next
period.
Ø “I
will
change
my
budget”
which
means:
I
will
change
my
objectives
Ø “I
will
change
my
long-­‐term
plan”
è
it
means
you
really
change
your
strategy,
you
have
to
be
careful
with
that!
Once
the
reasons
of
the
gap
are
known,
measures
can
be
taken
to
handle
the
problem.
They
are
likely
to
be
made
in
the
planning:
long-­‐term
plan
of
functional
periodic
budget
or
the
split
of
budgets.
And
so,
we
close
the
loop!
Another
way
to
look
at
that:

37. Management
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PLANNING:
To
identify
short-­‐term
objectives
è
To
develop
short-­‐term
plans
è
To
develop
the
budget
CONTROL:
To
measure
and
assess
the
performance
è
Reassess
objectives,
goals,
strategy,
and
plans.
PLANNING
AND
CONTROL,
ROLE
OF
BUDGETS
Balance
sheet
expected
at
the
end
of
the
next
year
for
example,
cash
flows,
…è
financial
figures
OPERATIONAL
BUDGETS
Usually
6
operational
budgets:
1. Sales
budget:
how
much
am
I
going
to
sell
next
year
(1st
month,
2nd
month…
1st
quarter,
etc.)
How
many
units
am
I
going
to
sell?
I
may
split
the
sales
budget
into
more
detailed
budget.
(per
categories,…).
It’s
a
forecast;
it
doesn’t
need
to
be
very
précised.
2. Investments:
What’s
the
amount
of
money
I’ll
have
to
invest
next
year
in
order
to
be
able
to
run
my
business…
3. Production
budget:
taking
into
account
what
I
plan
to
sell
next
year,
and
what
I
plan
to
invest,
How
much
will
I
have
to
produce
myself?
It
depends
on
the
sales
forecast
and
on
the
investment.
4. Purchasing
budget:
taking
into
account
all
the
previous
element,
how
much
will
I
have
to
purchase
next
year
5. Personal
and
training:
How
much
will
I
have
to
pay?

38. Management
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6. Administration
and
other
(advertising,
R
and
D,etc.):
basket
where
you
put
all
the
rest.
You
define
those
operational
budgets
in
the
order
above,
because
some
of
them
depend
on
the
previous
ones.
FINANCIAL
BUDGETS
3
usual
financial
budgets:
Ø Projected
cash
flows
Ø Projected
(pro
forma)
balance
sheet
Ø Projected
(pro
forma)
profit-­‐and-­‐loss
statement
A
budget
is
a
set
of
figures
expressing
money
income
and
outcome,
which
shows
whether
a
financial
plan
will
help
reaching
organizational
objectives.
Ø If
a
budget
doesn’t
contain
any
figures,
it’s
not
a
budget:
it’s
something
else.
Most
of
the
time
it’s
expressed
in
“money”
=>
Money
income
and
outcome
(but
not
always).
The
figures
are
not
necessarily
financial
figures.
E.g.:
a
company
usually
wants
to
achieve
a
very
high
reputation/
brand
reputation/…
it
would
make
sense
to
put
that
into
the
budget,
even
if
it’s
not
easy
to
measure
and
it’s
not
a
financial
figure.
Other
objectives
you
could
have:
You
want
to
reach
a
certain
number
of
market
shares/
you
want
to
have
“happy”
customers/
you
want
to
have
a
given
level
of
competencies/
you
want
to
launch
a
certain
amount
of
new
products
(innovation
aim).
Budgeting
is
the
process
of
budget
preparation
The
various
Budgets
provide
a
tool
to
communicate
short-­‐term
objectives
Ø There
are
several
budgets
(sales
budget,
purchasing
budget,
etc.)
Ø May
be
a
motivational
tool:
it
can
motivate
to
know
that
you
have
to
sell
a
certain
number
of
products.
BUDGETS
FLOW-­‐CHART
FOR
SALES

39. Management
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CLASSICAL
FLOW-­‐CHART
Sales
forecast:
I
start
here.
ð Long
term
forecast:
3
to
5
years
ð Mid
&
Short
term
forecast:
next
year
Starting
with
a
sales
forecast
is
always
an
obligation.
It’s
really
difficult
unless
you
are
in
a
really
stable
business,
but
that
happens
less
and
less.
You
have
to
take
plenty
of
things
into
account.
Based
on
the
mid
&
short
term
forecast,
I
will
look
at
what
I
have
to
produce
(production).
That’s
not
necessarily
the
same
amount
as
the
number
of
products
I
have
to
sell.
Why?
BMW
plans
to
sell
100.000
cars
next
year;
do
they
have
to
produce
100.000
cars
next
year?
No
because
they
might
have
cars
in
the
inventory.
It
depends
on
the
amount
in
inventory
then.
Maybe
they
will
subcontract;
it
means
they
don’t
have
to
produce
themselves.
Ø Sales
è
Estimation
Ø Production
èCalculation
based
on
the
estimation.

40. Management
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è
Purchasing:
If
I
know
what
I
have
to
produce,
I
know
what
I
will
have
to
buy
(raw
materials
and
so
on).
If
BMW
knows
they
have
to
produce
70.000
cars,
they
know
how
much
steel
they
have
to
buy
therefore.
è
Investment
and
financing:
There’s
an
investment
budget
(see
above),
it
depends
on
2
elements:
Long-­‐term
sales
forecast
&
mid-­‐
&
short-­‐term
sales
forecast.
Investment
means
I
will
invest
in
assets
that
are
going
to
stay
more
than
1
year
in
the
company
(Long-­‐term
assets).
If
I
look
at
my
long-­‐term
sales
forecast,
I
might
see
that
within
3
years
I
won’t
be
able
to
produce
enough,
and
I
can
then
decide
to
invest
in
something
to
improve
the
production.
è
Sales
means
there’s
money
coming
in
=>
cash
flow
è
Production,
purchasing,
investment
means
there’s
money
going
out
è
Every
part
means
there’s
an
influence
on
my
cash
flow.
If
I
have
a
good
idea
of
my
forecast,
I
can
deduct
my
cash
budget,
what’s
going
to
be
my
cash
production
over
time.
Once
I
have
that,
I
can
derive
to
“what’s
my
P&L
Statement
forecast
going
to
look
like
month
by
month
and
at
the
end
of
the
year,
and
same
for
the
balance
sheet
forecast,
I
will
know
what
it’s
going
to
look
like
month
by
month
and
at
the
end
of
the
year.
On
the
long-­‐term
:
The
investment
and
finance
of
the
company
are
also
affected
by
the
long-­‐
term
sales
forecast.
Indeed,
as
the
long-­‐term
concerns
the
future,
the
company
can
plan
the
new
investments
they’ll
have
to
make/buy
in
order
to
support
the
future
activities
of
the
company.
All
the
upper
part
of
the
chart
allows
defining
the
budget
and
the
balance
sheet.
COMPLEX
FLOW-­‐CHART

41. Management
Accounting
Control
2012-­‐2013
Manon
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41
Based
on
the
slide
above,
I
may
decide
on
an
Investment
project.
I
will
translate
my
investment
projects
into
investment
budgets
(a
budget
is
a
set
of
figures).
This
has
an
impact
on
the
cash
budget,
some
cash
money
is
going
out.
I
will
also
decide
my
short-­‐term
objectives
=>
Sales
budget,
production
budget
Production
budget:
In
some
case
you
may
have
to
precise
the
purchasing
budget,
the
direct
labor
budget
and
the
production
overhead
budget.
Those
are
the
elements
that
impacts
on
the
cash
budget.
I
divide
the
production
budget
into
those
3
elements.
I
may
derive
a
budgeted
product
cost.
è
Direct
impact
on
the
cash
budget:
It
helps
me
to
define
the
budgeted
P&L.
The
difference
with
the
classical
flow-­‐chart
concerns
the
beginning:
we
first
start
with
the
objectives
and
the
strategic
plans
instead
of
the
forecast
on
a
long
and
short
term
like
before.
This
first
step
will
impact
two
dimensions.
- First
dimension:
The
objectives
and
strategic
plans
will
be
reflected
in
the
investment
projects
that
will
directly
define
the
investment
budget
leading
to
a
specific
cash
budget.
- Second
dimension:
The
objectives
and
plans
will
lead
to
the
short-­‐term
objectives
defining
the
sales
and
production
budgets.

42. Management
Accounting
Control
2012-­‐2013
Manon
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We
always
have
to
read
the
graph
from
top
to
bottom
to
see
the
relations
and
the
consequences.
You
get
the
bottom
level
if
you
fulfil
the
bottom
level.
We’ll
know
analyse
in
details
one
budget
through
an
example.
42
You
may
divide
your
budget
into
variable
expenses.
Ø Variable
expenses
=
commission
on
sales.
The
more
I
sell,
the
more
I
get.
Ø Fixed
expenses
=
salaries,
depreciation,
advertising.
BUDGET
PROCESS
Starting
point:
always
a
sales
forecast.
The
budget
process
lies
in
3
steps:
1)
Estimate
projected
sales
revenue
level
è
ESTIMATION
Ø Historical
data
(You
may
try
to
forecast
the
sales
looking
at
the
historical
sales),
Current
factors,
Economic
variables,
Other
factors,
Specific
points
of
focus
2)
Determine
profit
requirements
è
DETERMINATION
3)
Calculate
projected
expenses
values
è
CALCULATION
based
on
the
elements
above.
There
are
several
ways
to
calculate
that:
Ø Incremental
method
Ø Method
based
on
a
percentage
Ø «
Zero-­‐based
»
budget
INCREMENTAL
METHOD

43. Management
Accounting
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2012-­‐2013
Manon
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43
Ø Estimate
future
expenses
based
on
current
expenses:
I
take
every
expenses
and
I
increase/decrease
them
by
5%
for
example
(always
same
percentage);
which
means
that
the
various
expenses
remain
the
same
proportion.
I
keep
the
same
costs
like
they
were
last
year
and
I
will
just
adapt
them.
Ø Current
expenses
levels
are
incremented/decremented
for
the
new
budget
Ø Based
on
the
assumption
that
past
year’s
cost
were
justified
and
reasonable
Ø Any
inefficiency
may
be
reproduced
in
the
new
budget!
If
an
expense
wasn’t
necessary,
it
will
still
be
there
next
year.
The
problem
with
that
method
is
that
I
base
it
on
the
assumption
that
every
expense
was
necessary;
which
may
be
false.
If
I
lost
money
last
year
because
of
inefficiency,
I
will
still
loose
money
this
year.
Example
of
the
incremental
method:
- For
the
sales:
If
we
want
to
increase
our
sales
by
10%,
we
have
to
increase
all
the
elements
in
the
chain
by
10%
to
reach
the
decision.
And,
we’ll
have
the
increase
in
the
future
- For
the
expenses:
If
last
year,
there
were
excessive
expenses,
the
new
budget
will
take
on
this
charge.
The
expenses
can’t
be
deleted.
They
are
transferred
to
the
next
year.
It’ll
be
less
efficient
and
it’s
going
to
be
wrong
in
the
future.
PERCENTAGE
METHOD
This
method
is
similar
to
the
previous
one,
but
we
increment/decrement
a
percentage
of
the
expenses
each
year.
Ø Based
on
the
current
%
of
each
expense
compared
to
total
expenses
Ø Uses
the
same
%
for
next
year.
I
keep
the
cost
structure
identical
for
the
next
year.
Ø Based
on
the
assumption
that
past
year’s
costs
were
justified
and
reasonable.
Ø Any
inefficiency
may
be
reproduced
in
the
new
budget!
«
ZERO
BASED
»
BUDGET
Ø Build
the
expenses
of
the
new
budget
«
from
scratch
»
Ø Previous
year’s
%
are
ignored
Ø Each
expense
must
be
justified
Ø Don’t
produce
inefficiencies
in
the
new
budget
Ø But
is
really
time
and
energy
demanding
Idea:
I
don’t
want
to
look
at
what
was
happening
last
year,
I
want
to
start
with
a
blank
paper,
I
start
from
scratch.
I
don’t
look
at
the
figures
from
last
year
and
increase/decrease

44. Management
Accounting
Control
2012-­‐2013
Manon
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them.
Each
expense
has
to
be
justified
then
(><
2
previous
methods).
Here
I
don’t
reproduce
inefficiencies.
It
takes
a
lot
of
time
and
a
lot
of
energy
to
proceed
like
this.
What
would
you
recommend?
Starting
from
scratch
again
might
not
be
a
bad
idea
from
time
to
time.
Zero
based-­‐budget
every
year
is
not
the
good
solution,
but
you
might
do
it
every
couple
of
year
or
every
3
years.
Every
year
is
a
bit
too
much.
During
2
or
3
years,
use
then
the
easiest
method:
percentage
method
or
incremental
method.
How
many
years?
It
depends
from
the
business
and
from
the
volatility
of
the
budget.
44

45. Management
Accounting
Control
2012-­‐2013
Manon
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45
CHAPTER
4:
CAPITAL
BUDGETING
In
the
Management
Control
function
you
will
have
to
make
the
good
decisions
and
one
of
the
usual
decisions
is
an
investment
decision.
Is
it
a
good
idea
to
invest
in
that
machine?
To
invest
in
that
company?
To
invest
money
there…?
I
will
have
to
help
the
top
management
to
take
the
right
decision,
the
right
investment
decision.
Whenever
I
need
to
invest
money,
not
as
current
expenses,
it’s
going
to
be
called
capital
budgeting.
Capital
Budgeting
is
the
process
of
identifying,
evaluating,
and
implementing
a
firm’s
investment
opportunities.
It
seeks
to
identify
investments
that
will
enhance
a
firm’s
competitive
advantage
and
increase
shareholder
wealth.
You
don’t
invest
in
something
if
you
don’t
get
a
“payment”
(?)
The
typical
capital
budgeting
decision
involves
a
large
up-­‐front
investment
followed
by
a
series
of
smaller
cash
inflows.
If
I
want
to
use
a
robot
in
a
factory,
that’s
a
huge
up-­‐front
investment.
Purchasing
price
+
installation
+
training
and
so
on,
but
why
do
I
want
to
use
a
robot
in
a
company?
Because
I
will
save
some
money,
I
want
to
automate
some
activities.
Those
smaller
benefits
I
will
get
them
on
a
long
period
of
time.
During
10
years
for
example
I
will
save
an
amount
of
money,
and
that
amount
of
money
is
the
profit
that
I’ll
get
from
that
investment.
I
will
then
compare.
In
some
cases
the
total
profits
are
going
to
be
higher
but
not
always.
If
they
are
going
to
be
higher,
it’s
a
good
idea
to
invest.
Poor
capital
budgeting
decisions
can
ultimately
result
in
company
bankruptcy.
If
I
don’t
look
carefully
enough
to
the
figures,
I
might
have
problems.
KEY
MOTIVES
FOR
MAKING
CAPITAL
EXPENDITURES
Expansion,
Replacement,
Renewal,
Other
purposes:
- Replacing
worn
out
or
obsolete
assets
:
machines,
investments,
equipment.
- Improving
business
efficiency:
new
products
up
to
date.
- Acquiring
assets
for
expansion
into
new
products
or
market:
most
of
the
time,
we
need
additional
assets
to
enter
into
a
new
market.
- Buying
a
new
business
- Comply
with
legal
requirements:
less
emission,
more
ecological,
trade
union.
- Satisfying
workforce
demands
- Environmental
requirements

46. Management
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2012-­‐2013
Manon
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46
EXAMPLES
OF
MOTIVES
FOR
CAPITAL
EXPENDITURES
STEPS
IN
THE
CAPITAL
BUDGETING
PROCESS

47. Management
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Control
2012-­‐2013
Manon
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Overall
process:
I
will
ask
people
(everybody/the
managers/etc.)
to
make
proposals:
“would
you
need
some
specific
investments?”
“Is
there
something
you
need?”
They
will
then
47
generate
proposals.
Those
proposals
are
not
always
going
to
be
accepted.
They
will
review
and
analyze
those
proposals
in
order
to
make
a
decision:
which
one
am
I
going
to
accept/decline.
They
will
then
implement
the
investment
and
there’s
going
to
be
a
follow-­‐up.
BASIC
TERMINOLOGY
MUTUALLY
EXCLUSIVE
VS
INDEPENDENT
Ø Mutually
Exclusive
Projects
are
investments
that
compete
in
some
way
for
a
company’s
resources.
A
firm
can
select
one
or
another
but
not
both.
Ø Independent
Projects,
on
the
other
hand,
do
not
compete
with
the
firm’s
resources.
A
company
can
select
one,
or
the
other,
or
both
-­‐
so
long
as
they
meet
minimum
profitability
thresholds.
UNLIMITED
FUNDS
VS
CAPITAL
Ø If
the
firm
has
unlimited
funds
for
making
investments,
then
all
independent
projects
that
provide
returns
greater
than
some
specified
level
can
be
accepted
and
implemented.
Ø However,
in
most
cases
firms
face
capital
rationing
restrictions
since
they
only
have
a
given
amount
of
funds
to
invest
in
potential
investment
projects
at
any
given
time.
You
know
that
next
year
you
will
have
to
invest
up
to
1.000.000
euros…
The
total
may
not
go
beyond…
ACCEPT-­‐REJECT
VS
RANKING

48. Management
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48
Ø The
accept-­‐reject
approach
involves
the
evaluation
of
capital
expenditure
proposals
to
determine
whether
they
meet
the
firm’s
minimum
acceptance
criteria.
I
may
decide
to
look
at
every
project
with
very
specific
acceptance
criteria!
My
investment
has
to
be
profitable.
Ø The
ranking
approach
involves
the
ranking
of
capital
expenditures
on
the
basis
of
some
predetermined
measure,
such
as
the
rate
of
return.
I
could
decide
to
keep
the
top
3,
or
top
5.
If
I
accept
to
keep
the
top
3,
the
3rd
one
might
only
have
a
3%
return
on
investment,
and
I
have
to
accept
that.
JUSKICI

49. Management
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49
CHAPTER
5:
CASH
FLOW
Cash
inflows:
income
specifically
related
to
the
project.
In
this
case
it’s
always
2000
$,
we
don’t
need
to
calculate
to
know
if
it’s
profitable.
The
initial
investment
is
10.000
$
and
we
earn
2000
$
every
year
during
8
years.
If
we
only
had
cash
inflows
during
5
years,
would
it
be
an
interesting
investment?
No
I
prefer
to
have
10.000
$
now
than
in
1
year.
Is
it
much
profitable
or
not
so
much?
If
I
want
the
answer
I
will
have
to
make
calculations.
It’s
not
an
income,
it’s
not
a
profit:
it’s
a
cash
flow!
It’s
not
the
same.
In
the
example
above
we
have
cash
flows
every
year.
(Inflows
and
outflows)
THE
RELEVANT
CASH
FLOWS
INCREMENTAL
CASH
FLOWS
Incremental
cash
flows
are
cash
flows
specifically
associated
with
the
investment,
and their
effect
on
the
firms
other
investments
(both
positive
and
negative)
must
also
be
considered.

50. Management
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Control
2012-­‐2013
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For
example,
if
a
day-­‐care
center
decides
to
open
another
facility,
the
impact
of
customers
who
decide
to
move
from
one
facility
to
the
new
facility
must
be
considered.
IKEA:
They
have
a
store
in
Zaventem
&
want
to
open
a
new
store
in
Anderlecht.
They
open
a
new
store
in
order
to
attract
new
customers.
Nevertheless
they
will
also
attract
existing
customers
of
Zaventem:
Cannibalization.
50
ð It
will
have
to
be
taken
into
account.
If
I
expect
1.000.000
euros
sales,
maybe
in
my
calculation
here
that’s
not
1.000.000
euros
that
I
need
to
take
into
account.
è
Incremental
cash
flow.
Maybe
800.000
will
come
from
existing
customers
from
other
stores.
Incremental
=
I
decide
to
launch
a
project
and
because
of
that
project,
this
cash
flow
shows
up.
MAIN
COMPONENTS
ð Initial
Investment

51. Management
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2012-­‐2013
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ð Operating
Cash
inflows
ð Terminal
cash
flow:
I
might
have
it
the
next
year
because
some
things
could
happen.
51
Typical
way:
Outflow
(=
initial
investment)
then
series
of
inflows
(=
operating
cash
inflows
and
terminal
cash
flow)
TERMINOLOGY
APD
ICI
NOTES
A
LA
MAIN
EXPANSION
VS
REPLACEMENT
CASH
FLOWS
EXPANSION
CASH
FLOWS
è
Ex:
creating
a
new
plant
(a
fourth
one)
No
problem:
Estimating
incremental
cash
flows
is
relatively
straightforward
in
the
case
of
expansion
projects,
but
not
so
in
the
case
of
replacement
projects.
è
Cash-­‐flow
specifically
coming
from
the
project/
specific
to
the
project
REPLACEMENT
CASH
FLOWS
è
Ex:
you
want
to
replace
something
(machine,
pc,
etc.)
With
replacement
projects,
incremental
cash
flows
must
be
computed
by
subtracting
existing
project
cash
flows
from
those
expected
from
the
new
project.
Incremental
cash
flows
must
be
calculated
by
subtracting
everything
that’s
coming
from
the
old
equipment
because
it
might
generate
cash
flows
when
existing.

52. Management
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2012-­‐2013
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52
Those
are
the
formulas
that
we
are
going
to
use.
SUNK
COSTS
VS
OPPORTUNITY
COSTS
• Note
that
cash
outlays
already
made
(sunk
costs)
are
irrelevant
to
the
decision
process.
• However,
opportunity
costs,
which
are
cash
flows
that
could
be
realized
from
the
best
alternative
use
of
the
asset,
are
relevant.
INTERNATIONAL
CAPITAL
BUDGETING
• International
capital
budgeting
analysis
differs
from
purely
domestic
analysis
because:
o Cash
inflows
and
outflows
occur
in
a
foreign
currency,
and
o Foreign
investments
potentially
face
significant
political
risks
• Despite
these
risk,
the
pace
of
foreign
direct
investment
has
accelerated
significantly
since
the
end
of
WWII.
EXAMPLES
OF
RELEVANT
CASH
FLOWS
ü Cash
inflows,
outflows,
and
opportunity
costs
ü Changes
in
working
capital
ü Installation,
removal
and
training
costs

53. Management
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53
ü Terminal
values
ü Depreciation
CATEGORIES
OF
CASH
FLOWS:
• Initial
Cash
Flows
are
cash
flows
resulting
initially
from
the
project.
These
are
typically
net
negative
outflows.
• Operating
Cash
Flows
are
the
cash
flows
generated
by
the
project
during
its
operation.
These
cash
flows
typically
net
positive
cash
flows.
• Terminal
Cash
Flows
result
from
the
disposition
of
the
project.
These
are
typically
positive
net
cash
flows.
FINDING
THE
INITIAL
INVESTMENT
The
basic
format
for
determining
initial
investment:
EXAMPLE:
TAX
TREATMENT
ON
SALES
OF
ASSETS

54. Management
Accounting
Control
2012-­‐2013
Manon
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Powell
Corporation,
a
large
diversified
manufacturer
of
aircraft
components,
is
trying
to
determine
the
initial
investment
required
to
replace
an
old
machine
with
a
new,
more
sophisticated
model.
The
machine’s
purchase
price
is
$380,000
and
an
additional
$20,000
will
be
necessary
to
install
it.
It
will
be
depreciated
under
MACRS
using
a
6-­‐year
recovery
period.
The
firm
has
found
a
buyer
willing
to
pay
$280,000
for
the
present
machine
and
remove
it
at
the
buyers
expense.
The
firm
expects
that
a
$35,000
increase
in
current
assets
and
an
$18,000
increase
in
current
liabilities
will
accompany
the
replacement.
Both
ordinary
income
and
capital
gains
are
taxed
at
40%.
54

55. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
55
FINDING
THE
OPERATING
CASH-­‐FLOW

56. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Powell
Corporation’s
estimates
of
its
revenues
and
expenses
(excluding
depreciation),
with
and
without
the
new
machine
described
in
the
preceding
example,
are
given
in
next
slide.
Note
that
both
the
expected
usable
life
of
the
proposed
machine
and
the
remaining
usable
life
of
the
existing
machine
are
5
years.
The
amount
to
be
depreciated
with
the
proposed
machine
is
calculated
by
summing
the
purchase
price
of
$380,000
and
the
installation
costs
of
$20,000.
56

57. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
57

58. Management
Accounting
Control
2012-­‐2013
Manon
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58

59. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
59
FINDING
THE
TERMINAL
CASH-­‐FLOW
Continuing
with
the
Powell
Corporation
example,
assume
that
the
firm
expects
to
be
able
to
liquidate
the
new
machine
at
the
end
of
its
5-­‐year
useable
life
to
net
$50,000
after
paying
removal
and
cleanup
costs.
The
old
machine
can
be
liquidated
at
the
end
of
the
5
years
to

60. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
net
$0
because
it
will
then
be
completely
obsolete.
The
firm
expects
to
recover
its
$17,000
net
working
capital
investment
upon
termination
of
the
project.
Again,
the
tax
rate
is
40%.
60
SUMMARIZING
THE
RELEVANT
CASH
FLOWS
HOW
TO
HANDLE
UNCERTAINTY
• Sensitivity
Analysis
-­‐
Analysis
of
the
effects
of
changes
in
sales,
costs,
etc.
on
a
project.
• Scenario
Analysis
-­‐
Project
analysis
given
a
particular
combination
of
assumptions.
• Simulation
Analysis
-­‐
Estimation
of
the
probabilities
of
different
possible
outcomes.

61. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
61
• Break
Even
Analysis
-­‐
Analysis
of
the
level
of
sales
(or
other
variable)
at
which
the
company
breaks
even.
SENSITIVITY
ANALYSIS
EXAMPLE
Given
the
expected
cash
flow
forecasts
listed
on
the
next
slide,
determine
the
NPV
of
the
project
given
changes
in
the
cash
flow
components
using
an
8%
cost
of
capital.
Assume
that
all
variables
remain
constant,
except
the
one
you
are
changing.
POSSIBLE
OUTCOMES

62. Management
Accounting
Control
2012-­‐2013
Manon
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62
NPV
calculations
for
pessimistic
investment
scenario
NPV
Possibilities
SCENARIO
ANALYSIS
EXAMPLE
(CONTINUED)
Cash-­‐flow
(year
1-­‐12)

63. Management
Accounting
Control
2012-­‐2013
Manon
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63
BREAK
EVEN
ANALYSIS
EXAMPLE
Given
the
forecasted
data
on
the
next
slide,
determine
the
number
of
planes
that
the
company
must
produce
in
order
to
break
even,
on
an
NPV
basis.
The
company’s
cost
of
capital
is
10%.
ANSWER
Ø The
break
even
point,
is
the
#
of
Planes
Sold
that
generates
a
NPV=$0.
Ø The
present
value
annuity
factor
of
a
6
year
cash
flow
at
10%
is
4.355
Thus,

64. Management
Accounting
Control
2012-­‐2013
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64
Solving
for
“Planes
Sold”
Planes
sold
=
63

65. Management
Accounting
Control
2012-­‐2013
Manon
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65
CHAPTER
6:
BUSINESS
EVOLUTION
WHAT
ARE
THE
KEY
ELEMENTS
OF
THE
RECENT
BUSINESS
EVOLUTION?
How
can
we
collect
info
from
operations?
It’s
difficult
to
measure
things
especially
in
this
environment.
ð More
cross-­‐functionality
Take
large
processes
that
analyze
more
process.
ð Stronger
relationships
with
Customers
&
suppliers
Relationship
with
the
customer
is
much
stronger,
same
for
the
suppliers.
Today
many
automobile
manufacturers
say
to
the
suppliers:
we’ll
five
you
access
to
all
computer
systems,
you
will
look
when
we
need
raw
materials
and
you
will
bring
them
to
the
manufacturing
place,
so
that
we
don’t
interfere
with
you.
You
enter
the
manufacturing
place
and
you
bring
it
to
the
place
where
it’s
needed.
ð The
market
requirements
ð Globalization
ð More
need
for
innovation:
o Shorter
life
cycles
(much
shorter,
especially
in
electronic
equipment).
o Time-­‐to-­‐market
more
critical:
time
it
takes
to
bring
to
the
market
a
new
product
or
service.
ð Competencies
are
enhanced

66. Management
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2012-­‐2013
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66
Level
of
needed
competencies
is
much
higher
PARALLEL
BUSINESS
TOOLS
EVOLUTION:
ð TQM
=
Total
Quality
Management.
Focus
on
customer
helps.
Way
to
secure
the
output
of
the
process
and
not
only
it
is
good
but
it’s
exactly
what
the
customers
expect
to
have.
In
many
cases
company
from
the
apst
were
ready
to
accept
...
the
right
output.
TQM
doesn’t
accept
that
idea.
95%
of
the
customers
are
good
but
it
means
that
5%
that’s
not
good
and
that
costs
a
lot
of
money.
ð JIT
Just
In
Time:
work
without
intermediate
inventories.
…
Whenever
there’s
a
problem
the
full
line
has
to
stop,
that’s
what
Toyota
developed.
ð TBC
=
Time
Based
Competition
All
the
tools
that
will
help
the
company
to
shorten
le
life
cycle,
the
production
cycle,
etc.
ð Lean
production
A
production
with
a
minimum
of
overrates
Minimum
production
overate:
minimum
administration
and
so
on.

67. Management
Accounting
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2012-­‐2013
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67
ð Customer-­‐focused
organization
No
explanation
ð Re-­‐engineering
Completely
re-­‐inventing
an
existing
process
because
we
are
not
happy
with
this
process.
Replace
a
process
with
a
new
one.
Just
a
human
improvement
isn’t
enough,
there’s
a
need
to
change
the
process.
Ex:
manually
=>
by
computer.
Process
have
a
cost,
it
takes
a
while
and
has
some
cost.
In
90
to
95%
of
the
cases,
the
process
cost
was
higher
than
the
repair
cost.
If
it’s
higher,
that’s
non-­‐sense,
something
is
wrong
with
that
process,
need
to
change
this
process,
to
use
a
new
one.
ð ABC
Quite
recent.
ð Empowerment
Giving
authority
to
people.
BUT…
ð Results
sporadic
or
disappointing.
Results
are
not
really
good.
Many
companies
are
not
happy
with
that.
There
has
been
some
improvement
but…
ð Weak
cause-­‐and-­‐effect
relationship
with
the
strategy
ð Limitations
of
finance
and
accounting
tools
and
methods.
For
example,
how
to
measure
the
financial
value
of:
(Standard
accounting
methods
=>
very
clear
limitations)
o New
products
«
in
the
pipe-­‐line
»?

68. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
You
have
money
you
want
to
invest
(?),
let’s
imagine
you
want
to
invest
in
pharmaceutical
company,
you
hesitate
between
2,
the
figures
are
the
same
for
both
companies
(Balance
Sheet,
Profit
and
Loss
statement,
…
everything
based
on
the
financial
information
is
the
same!)
but
you
know
that
one
company
has
20
products
under
development,
while
the
second
one
has
only
10!
Which
of
the
two
are
you
going
to
chose?
Which
one
is
more
likely
to
succeed?
The
first
one
!
20
products
in
the
pipe-­‐line.
68
o Process
capability?
What’s
the
process
is
capable
of
doing
or
not?
When
you
take
two
identical
production
lines
(same
machines,
process,
etc.),
you
start
one
production
line
in
Europe
and
the
other
in
Japan.
Systematically
after
a
couple
of
years,
one
production
line
is
doing
better
than
the
other.
Its
capability
has
been
improved,
but
no
investment
has
been
made.
Financially
it’s
impossible
to
detect
that
smth
has
been
changed.
Changing
in
some
of
the
production
steps,
…
something
happened
that’s
not
possible
to
detect
from
a
financial
point
of
view.
Better
company
but
again,
impossible
to
see
that
from
a
financial
point
of
view.
o Personnel
competency?
Not
smth
that
you
can
measure
based
on
the
financial
and
accounting
data?
You
can
pay
someone
more,
but
it
doesn’t
mean
he’s
better
or
works
better.
o Customer
loyalty?
More
able
to
invest
if
I
see
a
better
loyalty
from
customers.
o Quality
of
the
databases?
ð No
systematic
feedback
process
on
the
effectiveness
of
the
strategy.
MAC
is
about
giving
a
good
visibility
to
take
good
decisions.

69. Management
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2012-­‐2013
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69
LIMITS
OF
FINANCIAL
MEASUREMENTS
OF
PERFORMANCE
ð Focus
on
the
short
term,
less
on
long-­‐term
investments
ð The
system
favours
tangible
investments,
with
an
easy-­‐to-­‐
measure
return
ð Too
much
emphasis
on
investments
that
can
easily
be
valued
ð Companies
with
high
amounts
of
assets
can
operate
unefficiently
as
long
as
short-­‐
term
results
are
good.
Investing
in
training,
reputation
of
a
company…
Whenever
a
company
wants
to
invest
in
a
huge
machine
or
smth
else,
you
will
find
a
financial
analysis
with
details…
A
BALANCE
IS
NEEDED
BETWEEN:
ð Traditional
financial
measurements:
you
need
to
complement
them
with
other
types
of
measurement:
ð The
specific
needs
of
the
new
business
environnement
AND
YOU
ALSO
NEED
A
BALANCE
BETWEEN:
ð Short-­‐term
constraints
ð Long-­‐term
goal
Complement
traditional
financial
measurements
(focused
on
the
past)
with
measurements
on
«
drivers
»
of
future
performance.
“BALANCES”

70. Management
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Control
2012-­‐2013
Manon
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Balance
between
the
financial
type
of
measurement
and
the
non
financial
type
of
measurement.
More
and
more,
for
a
Management
Controller,
the
reporting
will
be
made
by
a
mix
of
those
2
elements.
A
good
reporting
is
not
linked
to
…
it’s
a
mix
of
financial
information
and
non-­‐financial
information.
Cost,
profitability,
sales,
amount
of
sales,
…
etc.
all
those
examples
are
financial
pieces
of
information.
Non-­‐financial
information:
(necessary
for
business
to
take
decisions)
Customer
loyalty,
customer
satisfaction,
employee’s
motivation,
etc.
are
not
financial!
It’s
crucial
for
the
business
but
you
don’t
measure
it
financially.
Non-­‐financial
information
are
much
more
oriented
towards
the
future.
It
doesn’t
mean
we
can
measure
the
future,
that’s
impossible.
Customer
satisfaction:
why
do
we
pay
attention
to
that?
Probably
because
if
you
get
satisfied
customers
you
will
get
more
sales.
When
I
measure
it,
it’s
because
IN
THE
FUTURE
I
hope
to
have
more
sales.
If
I
see
an
increase,
I
may
expect,
in
the
future,
to
have
increased
sales.
70
This
is
sometimes
called
a
driver
of
financial
reasons.
And
it’s
good
to
pay
attention
to
what’s
the
driver
of
financial
reasons.
Sometimes
the
driver
is
going
to
be
non
financial
reason.
EXERCISE
ð Provide
a
definition
of
«
strategy»
ð Provide
3
attributes
of
a
sound
strategy

71. Management
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2012-­‐2013
Manon
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71
ð Name
5
company’s
areas
that
might
be
impacted
by
a
strategy
4
categories
of
measurement:
-­‐ CUSTOMERS:
information
related
to
customers:
financial
or
not.
But
when
it
relates
to
customer,
I
put
the
measurements
inot
that
category
-­‐ FINANCIAL:
that’s
where
I’ll
put
all
my
financial
measurements
(ROI,
etc.).
-­‐ INTERNAL
BUSINESS
PROCESSES:
production
processes,
logistic
processes,
distribution
processes,
etc.
whenever
a
measurement
is
related
to
that,
I
will
put
it
into
that
category.
-­‐ LEARNING
&
GROWTH:
Where
I
will
put
any
measurement
related
to
the
people,
generally
speaking.
Personal
development.
Learning
(training,
etc.).
Any
measurement
related
to
the
development
of
the
needed
competencies.
Things
like
measurement
of
the
competencies
needed,
employee
satisfaction/moral/retention/turnover
etc.,
training
level,
training
effort,
training
cost.
All
those
things.
It
has
to
be
related
to
personal.
Any
important
business
measurement
can
be
put
into
one
of
those
4
categories.
When
you
want
to
define
and
manage
a
strategy,
you
have
to
translate
your
strategy
into
those
4
categories.
I
can’t
imagine
that
it’s
possible
to
have
a
strategy
that
doesn’t
have
an
impact
on
those
4
categories.
A
strategy
impact
on
the
categories!

72. Management
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2012-­‐2013
Manon
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72
A
very
good
reporting
system
will
have
to
address
at
minimum
measurement
in
those
4
categories.
If
not,
bad.
In
terms
of
finance,
the
basic
question
you
have
to
answer
to:
“how
do
we
look
to
shareholders?”
=>
Maximum
profit?
Regular
profit?
Secured
profit?
What
do
they
want?
It
might
change
from
one
shareholder
to
another!
They
don’t
want
necessarily
the
maximum.
The
answer
to
that
question
will
tell
you
what
you
need
to
put
in
term
of
measurement.
The
measurement
is
going
to
provide
the
right
visibility.
One
I
answered
the
previous
question:
In
a
customer
perspective:
“how
do
customers
see
us?”.
Ex:
for
Ryanair:
they
want
to
be
seen
as
the
cheapest
flying
company.
It
depends
on
who
are
your
customers.
In
an
internal
business
process
perspective:
“what
must
we
excel
at?”.
Where
you
need
to
be
excellent,
to
perform
really
well?
It
may
be
a
distribution
process,
a
marketing
process,
a
R&D
process.
It
depends
on
the
question
above:
how
you
want
to
be
perceived.
Not
all
your
business
processes
need
to
be
top,
only
some
of
them.
Given
the
processes
where
I
need
to
be
very
good,
I
can
ask
me
the
following
question.

73. Management
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2012-­‐2013
Manon
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In
an
innovation
&
Learning
perspective:
“Can
we
continue
to
improve
our
employees
skills
and
create
value
for
our
clients?”
73
…
We’ll
start
to
look
into
each
of
those
categories.
Measurements
are
not
enough.
Companies
need
a
strategy
management
system,
aiming
at:
ð Clarify
and
translate
vision
and
strategy
ð Communicate
strategic
objectives
and
measurements,
and
make
a
clear
link
between
them.
ð Plan
and
align
strategic
initiatives
stratégiques,
and
assign
them
objectives.
ð Improve
the
feedback
and
the
learning
process.
OPERATIONAL
AND
STRATEGIC
FEEDBACK
Operational
loop
–
strategic
loop
(cf.
previous
course).

74. Management
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Control
2012-­‐2013
Manon
Cuylits
Strategic
measurement
=>
4
categories:
finance,
customers,
employees,
internal
processes.
It’s
going
to
help
to
translate
strategy
into
measurement.
Measurement
of
outcome
and
Outcome
=
operational
output.
A
mix
of
financial
and
non-­‐financial
key
indicators:
is
that
enough
to
have
a
sound
measurement
system?
Is
it
enough?
NO
!
Why?
Because
you
need
to
have
measurements
but
also
objectives.
When
I
see
a
measurement
without
an
objective,
…
it
doesn’t
make
sense.
Do
you
achieve
this
objective?
If
a
measurement
not
related
to
an
objective:
why
do
you
measure
that?
74
For
example,
a
BSC
(Balanced
ScoreCard)
is
made
out
of
a
serie
of
objectives
and
measurements
with
a
clear
link
between
them,
consistant
and
mutually
reinforcing.
Think
about
flight
simulator...
Focus
on
the
cause-­‐and-­‐effect
relationship:
ð A
strategy
is
a
set
of
assumptions
about
cause-­‐
and-­‐effect
relationships.
ð These
relationships
must
be
explicit,
so
that
they
can
be
managed...and
validated.
ð They
must
cover
4
perspectives.
The
flow
of
cause
and
effect
is
always
the
same.
Start
from
the
top.
New
definition
of
a
strategy.

75. Management
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2012-­‐2013
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75
LINKAGE
BETWEEN
CAUSES
AND
STRATEGIC
ACTIVITIES

76. Management
Accounting
Control
2012-­‐2013
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76
An
example
of
a
cause
and
effect
relationship
can
be
outlined
as
follows:
ð IF
we
improve
Leadership
Capability
AND
give
employees
the
Skills
and
Training
they
need
to
perform
their
jobs,
THEN
we
will
improve
Employee
Satisfaction
&
Motivation
ð Consequently,
IF
we
improve
Employee
Satisfaction
&
Motivation,
THEN
Productivity
will
increase
since
Employee
Satisfaction
&
Motivation
is
a
driver
of
Productivity
ð IF
we
increase
Productivity,
THEN
Cost
will
Decrease
which
will
ultimately
result
in
an
Increased
Return
on
Investment

77. Management
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Control
2012-­‐2013
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77
BSC
=
Balanced
ScoreCard.
Are
there
positive
aspects
to
that?
1
without
2:
Lagging
indicators
without
Leading
indicators
ð Is
silent
about
how
to
achieve
results
ð Does
not
provide
early
feedback
on
the
success
of
strategy
implementation
2
without
1:
Leading
indicators
without
Lagging
indicators
ð May
well
provide
short-­‐term
operational
improvement
ð But
is
silent
about
whether
this
is
translated
into
sales
increase,
new
customers,
market
shares,
financial
results,
...

78. Management
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2012-­‐2013
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78
It’s
good
to
start
with
generic
measurements:
First
you
will
plan.
When
am
I
going
to
start?
You
don’t
have
to
panic
cause
you
can
always
start
with
generic
measurement.
…
Generic
measurement:
you
need
to
look
at
it
when
you
start
from
scratch,
when
you
start
with
a
white
sheet
of
paper.
Financial:
Most
of
the
time
you
will
measure
2
or
3
financial
elements,
like
ROI.
Customer

79. Management
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2012-­‐2013
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Internal
processes:
you
need
to
have
an
idea
about
the
output.
You
need
a
quality
measurement.
Those
3
elements
are
absolutely
necessary.
Why?
If
you
only
want
a
good
quality,
it
might
be
really
expensive
(cost).
You
should
say
“I
want
a
good
quality
but
not
at
any
cost”.
…
Learning
and
growth:
Important
to
have
satisfied
employees.
You
have
to
find
a
way
to
make
your
employees
happy.
Salary
is
not
the
best
way,
but
empowerment,
team
spirit
etc.
are.
…
A
balanced
set
of
measurement
will
be
set
between
a
balance
in
those
4
categories???
…
High
correlation
between
some
of
those
elements:
ex:
difficult
to
ask
a
non-­‐satisfied
employee
to
be
innovative.
79
Now
we
need
to
get
more
specific
measurements,
related
to
a
given
strategy.
Examples
of
strategic
focus:
ð Business
growth
–
one
aspect
may
be
the
BG.
My
strategy
is
“I
want
to
grow
my
business”.
It
can
be
growth
through
acquisition,
or
another
type
of
growth.
Not
all
strategies
are
growth-­‐oriented.
ð To
lower
the
risk
for
example
through
diversification.
It
can
also
be
another
strategic
focus.
ð To
increase
the
productivity
or
to
lower
the
cost.
ð Etc.
Most
of
the
time
the
MC
is
not
part
of
the
team
who’s
going
to
decide
on
the
strategy.
He
is
in
the
middle
management,
not
in
the
top
management.
=>
The
clearer
the
strategic
focus,
the
less
measurement
needed.
<=
PERSPECTIVE
MEASUREMENT

80. Management
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2012-­‐2013
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80
FINANCIAL
PERSPECTIVE
On
which
critical
factors
depend
the
relevant
financial
objectives?
ON
THE
LIFE
CYCLE
Growth:
Example
of
the
CD.
It
has
been
invented
25
years
ago
(+/-­‐).
Sales
boomed
for
some
years
and
then
it
became
stable
and
now
it’s
decreasing
because
it’s
the
end
of
the
CD’s
life.
It’s
the
same
for
any
product.
ROCI
=
Return
On
Capital
Investment.
Sustrain:
That’s
where
you
really
need
to
have
a
great
profitability.
ROCE
=
Return
On
Capital
Employed.
…
depending
on
where
I
am
I
will
get
more
attention
to
some
of
the
financial
measurement
&
objectives
(?)
MAIN
STRATEGIC
THEMES

81. Management
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2012-­‐2013
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I
may
want
to
growth
my
revenue,
to
reduce
my
cost,
or
else.
E.g.:
In
some
businesses,
like
the
printing
companies
(newspapers),
it’s
quite
impressive
cause
sales
are
huge,
and
one
of
the
printers
is
a
100-­‐meter
long,
and
is
really
expensive.
That
asset
has
to
run
all
the
time;
it
may
not
stop,
in
such
a
business.
Whenever
it
stops,
I
loose
a
lot
of
money.
The
asset
HAS
to
work.
(Asset
usage).
Ryanair
wants
to
minimize
the
time
the
plane
is
on
the
ground,
that’s
what
they
pay
attention
to!
Planes
are
staying
25
minutes
on
the
ground
between
two
flights.
81

82. Management
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82
I
have
all
possible
combinations.
Depending
on
where
you
are,
you
will
probably
favour
specific
measurements.
CUSTOMER
PERSPECTIVE
Represent
the
sources
of
the
«
revenues
»
that
are
part
of
the
financial
objectives.
Customers
are
going
to
bring
me
money
=>
Sources
of
revenues.
If
they
are
happy
to
do
business
with
me,
first
they
will
come
back,
and
second
they
might
be
ready
to
pay
some
more
money.
If
they
are
not
happy
they
might
leave
to
go
to
the
competitor.
GENERIC
MEASUREMENTS
Some
generic
measurement
related
to
customers
:
- Customer
satisfaction
:
a
company
wants
to
have
the
answers
to
the
question
of
satisfaction.
If
a
product
fulfills
the
customer
needs
and
expectations.
If
a
customer
is
highly
satisfied,
he’ll
be
loyal
to
the
company
and
we’ll
have
a
high
level
of
customer
retention.
The
way
to
measure
it
is
to
run
a
customer
survey.
The
customer
satisfaction
is
driver
of
the
customer
retention
and
customer
profitability
because
customers
will
be
ready
to
buy
a
product
at
a
very
high
price.
- Customer
acquisition
:
the
mouth-­‐to-­‐mouth
effect
is
an
essential
element
to
acquire
new
customers.
Rien
suivi.
ð Measured
by
most
of
companies.
It’s
not
because
it’s
generic
that
it’s
not
good
for
us.
It
probably
is.

83. Management
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2012-­‐2013
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83
BEYOND
GENERIC
MEASUREMENTS
Measurements
on
attributes
(factors)
Beyond
generic
measurement,
there
are
measurements
on
attributes
(factors)
:
Value
=
product/Service
attributes
+
image
+
relations
- Product/service
attributes:
it
lies
in
functionality,
quality,
price
and
time.
- Image:
the
image
of
a
brand
can
influence
customer’s
choice
(ex
:
Abercrombie,
Ferrari).
It
will
pass
a
message.
- Relation:
the
relations
with
the
customer
can
play
a
role
!
Each
product
of
service
represent
a
value
…
It
may
come
from
the
image
or
frome
a
specific
relationship
you
have
with
a
company.
Attributes:
-­‐ Functionality
-­‐ Quality
-­‐ Price
-­‐ Time
E.g.:
Ferrari:
…
How
to
measure
customer
satisfaction?
Best
way
=
survey.
A
customer
survey
is
run
to
know
the
global
satisfaction.
It
must
be
carefully
realize
because
the
answers
are
crucial
for
the
company.
So
the
questions
must
be
specific
and
pertinent.
Questions
concern
different
element
of
the
company
strategy
:
product
quality,
delivery
terms
offered,
on
time
delivery,
ease
of
contact.
All
these
elements
help
to
measure
global
satisfaction.
The
answers
will
range
between
very
unsatisfied,
unsatisfied,
neutral,
satisfied

84. Management
Accounting
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2012-­‐2013
Manon
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and
very
satisfied.
It’s
important
to
ask
the
main
question
at
the
beginning
of
the
survey
:
Are
you
globally
satisfied
?
Firstly,
the
customer
will
answer
the
question
and
then
underline
the
reasons.
84
Survey
where
you
ask
a
couple
of
question:
1) question
about
the
global
satisfaction
a. About
the
Product
quality
b. About
the
delivery
terms
offered
c. About
the
“on
time
delivery”
d. …
e. About
the
ease
of
contact
Ø Plenty
of
questions.
You
don’t
want
to
have
twenty
measurements,
you
only
want
one,
If
you
have
to
choose
one,
which
one
would
it
be?
You
have
to
take
the
measurements,
analyze
them
and
interpret
them.
Interpretation
of
the
survey
We
can
see
that
the
global
satisfaction
is
about
95%
and
the
factor
“ease
of
contact”
is
completely
unsatisfied
(98%).
So,
we
can
conclude
that
this
factor
plays
no
role
and
doesn’t
have
any
incidence
on
the
global
satisfaction.
As
a
result,
a
company
can
decide
to
focus
on
the
three
other
factors
:
product
quality,
delivery
terms
and
on
time
delivery
which
are
more
relevant.
So,
in
a
nutshell,
we
can
increase
our
global
satisfaction
by
focusing
on
a
small
series
of
factors
instead
of
analyzing
plenty
factors.

85. Management
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2012-­‐2013
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85
Ø 95%
of
the
customers
are
unsatisfied.
o 90%
are
satisfied
with
the
product
quality.
o etc.
If
you
are
a
MC,
your
job
is
to
interpret
that
and
to
deliver
a
message
to
the
top
management
(?).
Interpretation:
we’re
not
in
a
good
situation.
There
might
be
a
couple
of
reason
therefore
but
the
main
reason
obviously
is
the
“on
time
delivery”
here,
because
for
all
the
other
aspects
don’t
make
the
customers
unsatisfied.
So
it
means
there’s
a
need
to
improve
the
on
time
delivery.

86. Management
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2012-­‐2013
Manon
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Here
the
problem
clearly
is
the
ease
of
contact.
However,
it
doesn’t
seem
to
play
a
role
in
the
global
satisfaction
(Very
Satisfied).
It’s
not
a
driver.
It’s
not
linked
to
the
global
satisfaction.
Trying
to
improve
the
ease
of
contact
would
be
useless
cause
it
wouldn’t
improve
anything
else,
even
the
global
satisfaction
because
it’s
not
linked.
It
would
only
be
a
lost
of
time
and
money.
That
wouldn’t
be
a
good
management
decision!
Looking
at
the
relationship
between
the
figures
would
lead
to
good
management
decisions.
Looking
at
that
is
a
must.
You
might
need
to
keep
on
calculating
that
(do
I
keep
this
question
in
the
survey
or
not?).
86
INTERNAL
PROCESS
PERSPECTIVE
In
this
perspective,
we
identify
the
key
processes
(critical
for
customers
and
financial
results)
Ex:
product
equipment,
R&D,
billing
processes.
It
typically
comes
in
third
logical
steps
Generic
measurements
range
from
quality,
cost,
cycle
time
and
“throughput”(don’t
pay
attention
to
this
one).

87. Management
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2012-­‐2013
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87
EXAMPLE
OF
MEASUREMENTS
The
internal
process
starts
with
the
customer
need
identified
and
ends
with
the
customer
need
satisfied.
Within
this
framework,
other
processes
take
place:
- Innovation
process:
it
allows
to
identify
the
market
and
to
create
the
Profit
and
Sale
(P/S)
offering.
The
measurements
are
It
concerns
%
sales
from
new
products,
new
production
introduction
vs.
competition
(are
we
going
to
introduce
more
products
than
the
competitors),
process
capability
and
time
to
market
(the
time
it
takes
between
the
identification
and
the
operation
process),
BET
metric
(Break
even
time
metric
:
it
measures
the
time
it
takes
to
reach
the
break
eve).
- Operation
process
:
it
allows
to
build
and
deliver
the
profit
and
sales.
The
product
will
be
produced
and
sold.
The
measurements
are
MCE
(Manufacturing
Cycle
Efficiency
-­‐
it
concerns
the
difference
between
the
moment
we
start
producing
a
product
and
the
moment
the
product
is
finished),
FPY
(First
Past
Yield
–
it
concerns
the
first
control.
After
the
realization
fo
the
product,
they
are
controlled
and
the
amount
of
products
controlled
positive
represent
the
first
past
yied.
The
faulties
are
returned.
If
after
the
first
step
in
control,
80%
of
the
products
are
OK,
we
don’t
need
to
adjust
it.
80%
of
FPY),
ABC
process
cost.
- Postsale
service
process
LEARNING
AND
GROWTH
PERSPECTIVE

88. Management
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2012-­‐2013
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Are
the
people
happy
to
work
in
my
company?
If
yes
it
will
probably
improve
the
employee
productivity
and
the
employee
retention.
=>
Results…
88
Driver
of
employee
satisfaction
- Competencies:
two
possible
situations
o You
have
a
high
degree
of
competencies
and
the
company
doesn’t
use
those
competencies.
You
don’t
feel
happy,
even
though
the
salary
is
really
good.
o You
don’t
have
that
much
competencies
and
you
have
hard
work
to
achieve.
Best
way
to
measure
competencies:
…
- Technology
&
infrastructure
Tools
that
are
given
to
you
to
achieve
your
work
- Climate
for
action
(am
I
part
of
a
team,
is
my
relationship
with
my
boss…
etc.)
Core
measurements

89. Management
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2012-­‐2013
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Concurrently
with
the
customer
satisfaction,
employee
satisfaction
brings
employee
productivity
and
retention.
Happy
employee
will
be
motivated
to
work
and
more
productive.
On
the
other
hand,
they’ll
have
no
reason
to
leave
the
company.
They
gave
good
results.
How
to
measure
these
elements
?
A
good
measure
is
a
employee
survey
to
get
a
right
feedback
and
to
take
action.
The
purpose
is
to
ask
the
main
question
(are
you
globally
satisfied
?)
and
then
move
on
to
more
detailed
and
precise
questions
to
bring
up
the
main
reasons.
89
Enablers
- Competencies
are
important
to
know
if
employees
fulfill
the
requirement
for
the
job.
The
solution
will
be
to
offer
training
to
employee
in
order
to
reach
their
self
accomplishment.
Measurement
rely
on
strategic
skills,
training
levels
and
skill
leverage.
- Technology
structure:
this
aspect
can
be
relevant
to
know
if
the
equipment
employees
have
at
their
disposal
are
efficient.
Measurement
can
concern
strategic
technologies
(computers),
strategic
databases,
experience
capture
and
patent,
copyrights.
- Climate
for
action
:
the
company
wants
that
its
employees
perform
well
in
a
good
work
sphere.
If
employees
don’t
have
objecive,
there
is
no
action.
Measurement
consist
in
motivation,
empowerment
and
alignment.
How
to
link
measurements
to
the
strategy?

90. Management
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90
- Cause
and
effect
relationships:
Measurements
has
to
be
mixed
to
show
their
consequences
and
causes.
Without
cause
and
effect
relationship,
we’ll
get
a
random
sample
of
results
unrelated
with
the
relevant
information.
- Use
of
performance
drivers
- Link
with
financial
indicators
Group:
assignment
- list
all
of
the
possible
management
control
issues.
And
pick
up
the
more
relevant.
- Rank
the
issues
by
importance
the
first
one
is
the
most
important
- For
the
top
3
issues,
what
are
the
solutions
?
What
are
you
going
to
do?
- To
outline
what
would
be
a
good
set
of
measurements
based
on
the
4
perspectives.
- Based
on
the
information
that
we
have,
what
would
be
a
good
example
of
effective
balance
score.
Be
very
specific.

91. Management
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Control
2012-­‐2013
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91
OTD
is
of
critical
importance,
this
is
my
top
priority,
if
pressure,
“please
improve
on
time
delivery,
achieve
a
good
level
of
OTD”
that’s
your
objective,
if
you
don’t
reach
it:
consequences.
Whenever
one
put
a
serious
pressure
on
you,
you’ll
find
a
way
to
achieve
your
objective.
That
might
be
dangerous
for
the
company.
Why?
Not
a
good
idea
to
have
huge
level
of
inventory.
If
I
tell
you
my
only
priority
is
to
improve
OTD,
you’ll
find
a
way
to
achieve
it,
for
example
by
having
a
huge
inventory,
but
that’s
not
what
I
want.
I
want
an
improvement
in
OTD
without
having
an
inventory
going
to
the
roof
!
My
message
must
be
a
little
bit
more
sophisticated
than
“improve
the
OTD”,
it
musts
be:
“improve
the
OTD
without
increasing
the
inventory”.
Time
to
market
=>
objective
=
to
decrease
it.
The
things
I
put
pressure
on
(OTD
&
Time
to
market)
are
Strategic
measurements:
reflect
what
I
want
to
achieve,
part
of
my
strategy.
The
reactions
are
not
part
of
the
strategy!
+
Diagnostic
measurement
(reactions).
SOME
FIGURES
Results
of
survey:
• 59
%
of
top
managers
have
a
clear
understanding
of
how
to
implement
a
vision.
• ...and
only
7
%
of
middle
managers
o 74
%
of
top
managers
have
bonuses
linked
to
yearly
objectives

92. Management
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2012-­‐2013
Manon
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92
o <
33
%
of
top
managers
have
bonuses
linked
to
long-­‐term
strategic
objectives
o <
10
%
of
middle
managers
have
bonuses
linked
to
long-­‐term
strategic
objectives
Typical
symptom:
the
use
of
different
processes
for:
• Long
term
strategic
planning
• Short-­‐term
annual
budget
EXAMPLE
OBJECTIVE
MEASUREMENT
TARGET
INITIATIVE
Value
for
money
as
Customer
survey
#1
by
75%
of
perceived
by
Customers
Customers
Focus
Group
…
In
a
reporting
system,
just
a
figure
is
meaningless.
If
I
know
that
net
profit
is
8%,
I
tells
me
something
but
not
much…
There’s
a
need
for
words.
“I
want
to
be
perceived
by
my
customers
like
someone
…”,
once
I
know
my
objective,
I
have
to
decide
how
to
measure
it.
Then
I’ll
define
the
target,
with
a
figure.
And
then
I
may
decide
on
a
strategic
initiative
to
achieve
this
objective.
In
the
previous
system,
deviations
against
established
plans
were
considered
as
defects,
which
is
not
an
incentive
to
check
whether:
• Objectives
were
relevant
• The
method
used
to
reach
them
was
appropriate
Strategy
is
a
process,
and
strategic
ideas
may
origin
from
the
whole
organization.

93. Management
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2012-­‐2013
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93
Three
basic
elements
for
a
strategic
learning
process:
• A
shared
strategic
structure,
that
communicates
strategy
and
allows
everyone
to
see
how
his
own
activities
contributes
to
strategy
achievement.
• A
feedback
process
that
collects
data
and
allows
to
test
assumptions
made
on
links
between
objectives
and
initiatives.
• A
team-­‐based
problem
solving
process,
that
analyse
the
data,
draw
conclusions
and,
when
necessary,
adapt
strategy.
§ Correlation
analysis
§ Scenario
analysis
§ Initiatives
review
§ External
review
§ Anecdotes
reports
• Step
1:
3
months,
a
team
of
top
managers
• Step
2:
6
months,
from
n
to
n-­‐2.
• Step
3:
1
month:
elimination
of
non-­‐strategic
investments
and
start
of
change
programs
• Step
4:
3
months,
review
of
various
BSC’s

94. Management
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2012-­‐2013
Manon
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94
• Step
5:
«
refine
»
the
BSC
• Step
6:
after
1
year,
communication
to
the
whole
organisation.
n
to
n-­‐3
have
their
individual
objectives
linked
to
BSC
• Step
7:
3-­‐5
year
objectives
settings
for
each
measurement
in
the
BSC.
Identification
of
needed
investments.
The
first
year
becomes
the
annual
budget.
• Step
8:
Monthly
&
Quarterly
reviews
• Step
9:
Annual
strategic
review
with
update
• Step
10:
Each
employee
must
link
his
individual
objectives
to
those
in
the
BSC.
WHY
IS
THAT
NOT
SIMPLE?
• Structure
defects
(ex.
only
«
lagging
measurements
»)
• Organizational
defects
o Unappropriate
delegation
o Copy-­‐paste
of
«
best-­‐in-­‐class
»
o Wait
too
long
for
the
perfect
BSC
3
CRITICAL
ROLES
• Architect
• Change
agent
• Communicator
IT
SUPPORT
TOOLS

95. Management
Accounting
Control
2012-­‐2013
Manon
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95
In
many
of
the
recent
ERP
systems,
you
have
balanced
scorecard
tools.

96. Management
Accounting
Control
2012-­‐2013
Manon
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96
You
may
really
double
click
on
those
sections
and
have
the
following
screen
:
This
is
a
practical
tool;
balanced
scorecard
isn’t
a
theoretical
tool.
A
company
uses
it.

97. Management
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Control
2012-­‐2013
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97
CHAPTER
7:
TECHNIQUE
OF
COST
ACCOUNTING
ALLOCATION
OF
COSTS
Why
is
that
important?
When
we
talk
about
cost
allocation,
we
talk
about
allocation
of
indirect
costs;
we
don’t
allocate
direct
costs.
Remember
that
Indirect
Costs
of
a
particular
cost
object
are
costs
that
are
related
to
that
cost
object
but
cannot
be
traced
to
it
in
an
economically
feasible
(cost-­‐effective)
way.
These
costs
often
comprise
a
large
percentage
of
the
overall
costs
assigned
to
such
cost
objects
as
products,
services,
customers,
and
distribution
channels.
Why
do
managers
allocate
indirect
costs
to
these
cost
objects?
Example
of
direct
costs:
- Raw
materials:
I
can
link/trace
it
directly
to
a
unit
being
produced,
the
cost
of
that
raw
material
I
can
trace
it
to
the
unit
produced.
Salary:
can
be
direct
or
indirect,
it
depends
on
the
cost
object.
I
want
to
relate
that
cost
to
a
given
cost
object.
Salary
of
a
supervisor:
if
the
cost
object
is
the
unit
produced
by
the
manufacturing
plant,
if
that’s
the
cost
object,
is
the
cost
direct
or
not?
Indirect,
because
not
easy
to
link
to
the
production
of
1
unit.
Salary
of
the
plant
manager,
supervisor:
how
can
you
link
it?
On
the
basis
of
what
are
you
going
to
allocate
it?
It’s
not
easy
to
allocate,
so
it’s
indirect.
It’s
never
impossible
to
relate
a
cost,
but
it’s
direct
or
indirect
depending
on
the
fact
that
it’s
easy
or
difficult
to
relate
to…
So
DIRECT
or
INDIRECT
is
a
first
classification
in
COSTS.
Second
classification:
FIXED
or
VARIABLE.
You
look
at
the
behavior
over
time,
is
it
fix
or
does
it
vary
over
time?
No
cost
is
really
fixed
over
a
long
period
of
time.
Ex:
the
rent
of
a
building
is
going
to
change,
but
is
typically
going
to
be
fixed
for
1
year.
Costs
problematic
for
a
company
are
not
the
variable
costs.
If
you
only
have
variable
costs
in
a
company,
you’re
not
going
to
go
bankrupt.
Running
a
company
with
only
variable
costs
is
really
comfortable.
Fixed
costs
are
staying
the
same.
Management
controller
will
like
to
look
at
fixed
costs
because
they
are
dangerous,
and
they
are
going
to
look
at
the
indirect
costs
(direct
costs
are
never
a
problem).

98. Management
Accounting
Control
2012-­‐2013
Manon
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I
want
to
have
a
real
idea
of
my
TOTAL
COST.
If
I
have
a
very
precise
idea,
I
can
take
the
right
decisions.
How
do
we
compute
that
total
cost?
For
direct
cost
it’s
easy
but
what
about
indirect
costs!
How
do
I
distribute
it
to
each
unit,
what
are
the
rules?
That’s
what
we
are
going
to
cover
here.
It’s
very
often
quite
significant,
20-­‐35%
of
the
total
cost
of
a
company!
Why
do
we
watch
those
costs?
May
influence
the
total
cost.
If
my
cost
allocation
base
doesn’t
make
sense,
some
of
my
products
might
be
overcosted
of
undercosted
(receive
more
or
less
costs
in
indirect
costs
that
they
should
receive).
…
Some
allocation
rules
make
sense,
some
other
don’t.
IT
Costs:
costs
of
the
IT
department:
what
would
be
a
good
cost
allocation
base?
Distribution
on
the
basis
of
what
?
We
don’t
have
to
pay
anything
if
we
don’t
use
any
PC
for
example.
We
should
use
the
number
of
PC
for
example,
as
a
basis.
If
no
computer,
no
IT
costs.
…
Problem
in
many
companies:
the
reliability
of
the
data.
=>
using
timesheet
data.
Once
a
month,
use
the
timesheet
and
try
to
remember
what
they
did
3
weeks
ago…
It’s
not
going
to
provide
reliable
data.
…
98

99. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
99
If
I
know
the
total
cost
and
the
income
of
that,
I
just
look
at
the
difference
between
that,
and
I
know
if
it’s
profitable.
If
it’s
not
I
could
think
about
deleting
it.
Comparison
between
income
and
cost.
It’s
not
because
it’s
not
profitable
that
you
will
directly
stop
the
product
line.
You
might
keep
it
for
strategic
reasons.
Sometimes
you
loose
money
on
one
part
of
the
activity,
but
you
earn
money
in
another
part,
which
compensates
the
loss.
I’m
in
a
research
company,
and
I
work
on
4
projects.
One
of
them
is
subsidized.
…
Is
the
photocopy
machine
SPECIFICALLY
allocated
to
the
project?
Justify
!!!
This
is
my
cost
object
(ex:
a
product
which
I
produce
and
sell,
a
project,
a
customer,
a
department,
anything
about
which
you
want
to
have
information
about
the
costs).
Direct
costs:
directly
linked,
traced
to
the
cost
object.
Indirect
costs:
2
categories.
They
are
not
traced,
they
are
allocated,
and
I
need
to
define
an
allocation
method/base.
- producing
department
indirect
costs
- supporting
(service)
department
costs
(HR,
IT,
General
services
department,
etc.)

100. Management
Accounting
Control
2012-­‐2013
Manon
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100
I
have
to
make
a
clear
distinction
between
those
department
where
action
takes
place.
PRODUCING
DEPARTMENT
OVERHEAD
The
cost
of
direct
labor
and
direct
materials
can
easily
be
identified
and
charged
to
specific
jobs.
All
other
costs,
such
as
indirect
materials,
indirect
labor,
and
other
entity
expenses
which
cannot
be
identified
with
or
charged
directly
to
specific
jobs,
are
called
producing
department
overhead.
These
indirect
costs
are
categorized
as
fixed,
variable
or
semi-­‐
variable.
Direct
material:
used
to
build
the
car
for
example.
Indirect
materials:
paper
for
the
photocopy
machine,
stitches,
etc.
Direct
labor:
made
out
of
the
cost
for
the
people
working
directly
Indirect
labor:
secretaries,
supervisor,
IT
people,
etc.
Other
costs,
not
direct
or
indirect,
we
call
that
sometimes
PDO
(see
title).
…
The
name
«
factory
overhead
»
(«
factory
»
meaning
actually
«
producing
department
»)
is
widely
used
instead
of
«
producing
department
overhead
».
We
will
also
use
it
here,
but
please
keep
in
mind
it
is
not
just
for
manufacturing:
it
is
equally
applicable
to
service
businesses
such
as
audit
companies,
research
laboratories,
project
companies,
etc....
…
No
distinction
between
a
company
with
a
production
department
producing
cars
(tangible
element)
and
for
example
an
audit
company,
where
they
produce
audit,
which
is
a
service
(intangible
element).
=>
Producing
department.
Factory
department
has
the
same
meaning
but
it’s
better
to
use
producing
department
because
it
doesn’t
make
a
distinction
between
tangible
and
intangible
elements
produced.
11/12/12:

101. Management
Accounting
Control
2012-­‐2013
Manon
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Direct
cost
+
allocated
indirect
cost
=
TOTAL
COST
=>
Basic
information
that
you
need
(but
not
the
only
one).
Costs
that
are
not
direct
are
indirect.
Salary
of
the
company’s
boss
is
going
to
be
spread
…
this
is
called
the
allocation
of
indirect
cost.
How
is
it
possible
to
allocate
those
costs?
I
need
to
allocate
it
to
know
the
total
costs
of
the
aircraft
being
produced.
Direct
cost:
no
problem
because
direct
link,
easily
traced.
Producing
department
and
the
other
ones
(the
ones
related
to
the
support
department).
101
APPLIED
FACTORY
OVERHEAD
An
estimate
of
the
next
period's
factory
overhead
costs
is
made
which
is
then
divided
by
a
base,
such
as
labor
hours,
machine
hours,
etc.,
and
expressed
as
a
predetermined
rate.
This
predetermined
rate
helps
management
measure
unit
costs.
If
no
predetermined
rate
is
used,
management
would
have
to
wait
until
the
end
of
the
period
to
know
the
amount
of
factory
overhead
costs
and,
therefore,
the
total
cost
per
unit.
BASE
TO
BE
USED
The
base
used
to
compute
the
predetermined
factory
overhead
rate
should
be
closely
related
to
functions
represented
by
the
factory
overhead
cost
being
applied.
The
five
bases
generally
used
to
calculate
the
factory
overhead
rate
are:

102. Management
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2012-­‐2013
Manon
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Generally:
5
bases.
I
could
allocate
on
the
basis
of
units
of
production:
if
a
given
department
produces
2
times
more
than
an
other
or
else…
I
will
take
the
total
of
indirect
costs
(factory
overhead,
producing
department
overhead)
and
divide
it
by
the
units
of
production.
It
gives
me
a
ratio
???
Example:
we
have
a
car
manufacturing,
we
assemble
2
models
(A
&
B),
and
if
I
use
the
number
of
units
produced,
what
I
will
do,
the
total
of
the
units
produced
(of
the
2)
is
for
example
1000.
I
produce
1000
totally.
Total
of
my
indirect
cost
for
that
factory:
1000
euros.
Calculation
is
easy,
I
have
to
allocate
1000
euros
to
each
of
the
models.
It
means
whenever
I
produce
1
car,
I
have
to
put
to
the
top
of
the
indirect
cost:
1
euro.
Whenever
a
car
is
being
produced,
I
will
put
on
that
car
2
euros
of
indirect
costs
if
indirect
costs
=
2000
euros.
On
the
basis
of
that,
I
can
make
any
type
of
calculation.
102
Use
the
direct
material
cost.
Computation:
total
indirect
cost
(factoruy
overhead)
divided
by
the
direct
material
cost
x
100.
If
I
multiply
by
100,
I
can
get
it
as
a
percentage.
This
is
applicable
purely
to
Manufacturing
company.
You
don’t
use
it
in
a
service
company.

103. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
103
…
Direct
labor
hours,
we
talk
about
labor
hours
and
not
labor
costs!
…
Which
of
those
5
methods
should
we
choose?
He’s
going
to
describe
a
business
situation
and
we’ll
have
to
decide
which
method
to
use.
Company
with
a
…
it’s
produced
by
a
robot.
There
is
almost
no
human
working
there.
Which
method
should
we
use
to
allocate
indirect
costs?
Machine
hours.
We’ll
put
more
costs
on
the
products
requiring
more
working
hours.
All
the
costs
are
going
to
be
driven
by
the
machine.
…
I
need
an
engineer
checking
the
quality
of
…
=>
this
is
an
indirect
cost!
…?
Above:
Typical
list
of
allocation
base.
You
will
allocate
based
on
the
models
in
the
first
column.
Ex:
Maintenance
cost:
indirect
cost,
I
may
decide
to
allocate
it
based
on
the
number
of
machines
(???)
It
is
because
I
need
more
machine
hours
that
I
need
more
maintenance
costs
(…
?)
Ex:
Supervision
costs:
what’s
the
cost
driver
of
supervision
cost?
Why
do
I
need
supervision?
To
supervise
persons
working
on
the
product.
Amount
of
direct
labour
hours.
If
a
product
requires
2
times
more
…
for
this
product
I
will
need
more
supervision
and
then
more
supervision
costs.
ALLOCATION
OF
SERVICE
DEPARTMENT
COSTS
TO
PRODUCING
DEPARTMENT
There
are
two
basic
types
of
departments
in
any
company:
producing
departments
and
service
departments.
A
producing
department
is
one
where
the
conversion
or
production

104. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
takes
place.
A
service
department
(e.g.,
personnel
or
maintenance)
provides
support
to
the
producing
departments.
Since
the
producing
departments
are
directly
benefited
by
service
departments,
the
expenses
of
a
service
department
should
be
allocated
to
the
appropriate
producing
departments
(as
part
of
factory
overhead
costs).
One
of
the
following
methods
may
be
used
to
allocate
service
department
costs
to
producing
departments:
104
(1)
Direct
method
(2)
Step
method
(3)
Algebraic
method
Other
type
of
indirect
cost.
I
talk
about
service
department,
support
department
(not
production
department
!!!).
We’ll
look
at
3
methods.
DIRECT
METHOD
This
is
the
most
common
method
of
allocating
service
department
costs
to
producing
departments
because
of
its
mathematical
simplicity
and
ease
of
application.
It
involves
allocation
of
service
department
costs
directly
to
producing
departments
and
ignores
any
services
provided
by
one
service
department
to
another.
The
problem
is
just
to
choose
the
most
appropriate
allocation
base,
as
it
was
in
the
allocation
of
producing
department
overhead.
This
is
the
most
common
method
of
allocating
service
department
costs
to
producing
departments
because
of
its
mathematical
simplicity
and
ease
of
application.
It
involves
allocation
of
service
department
costs
directly
to
producing
departments
and
ignores
any
services
provided
by
one
service
department
to
another.
The
problem
is
just
to
choose
the
most
appropriate
allocation
base,
as
it
was
in
the
allocation
of
producing
department
overhead.
Situation:
a
company
works
on
different
project
(i.e
building,
…)and
they
have
to
classical
supporting
departments
(i.e.
HR
department
and
IT
department).
The
company
may
make
the
assumption
that
the
IT
costs
will
be
allocate
to
the
different
projects
based
on
something.
What
about
the
HR
department,
to
allocate
the
costs,
we
have
to
allocate
the
costs
on
the
basis
of
person.
The
cost
object
is
the
project,
the
cost
driver
(=
it’s
a
variable
which
impacts
the
cost
object)
is
the
workforce
(the
more
people
we
have,
the
more
activities
we’ll
use
from
the
HR
department).
The
idea
behind
the
direct
cost
is
to
say
that
HR
people
only
work
for
the
customer,
the
costs
object.
But,
that’s
not
really
true
because
the
HR
people
also
work
for
other
department
(i.e.
IT,
financial,….).
But,
in
the
direct

105. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
105
method,
we
make
here
the
assumption
that
the
entire
workforce
is
allocated
to
the
HR
department
and
the
same
thing
for
the
IT
department.
As
a
result,
it’s
not
close
to
the
reality
and
it
ignores
the
reciprocal
element.
Most
common
method:
I
take
the
total
cost
of
a
given
support
department
(ex
total
cost
of
human
resources).
I
record
the
costs
and
whenever
there’s
a
cost
I
will
put
it
in
a
department.
I
take
the
total
cost
of
the
department
and
I
put
it
on
the
cost
object
directly.
Problem:
allocation
of
the
service
cost
is
made
directly
to
the
…
but
I
completely
ignore
the
fact
that
support
department
may
be
working
for
each
other’s.
HR
dep
works
directly
for
the
producing
department,
and
idem
for
IT
etc.
IT’s
an
assumption
but
in
the
real
life
it’s
not
the
case,
because
HR
department
also
works
for
the
IT
department
etc.
for
example!!!
In
this
method
I
ignore
that,
it’s
the
limitation
of
the
method.
Otherwise,
this
method
is
really
easy.
But
it
has
limitations.
STEP
METHOD
The
idea
is
to
take
into
account
some
reciprocal
services
among
the
department
on
a
limited
way.
Based
on
the
graph,
we
start
with
the
building
maintenance
which
provide
services
to
all
other
department
and
will
put
this
service
on
the
top
of
the
graph.
Then,
the
other
steps
will
concern
the
other
department
ranking
by
the
decreasing
importance
of
the
allocation
:
facility
management,
other
services,
main
cost
pools.
For
the
step
method,
we’ll
take
the
first
step
and
allocate
the
costs
to
all
the
other
steps.
That’s
the
first
allocation,
under
the
step
method,
we
make
the
assumption
that
nothing
is
going
back.
The
other
steps
can
give
something
to
the
firs
step.
The
next
step
is
to
take
the
total
costs
of
the
facility
management
which
the
original
total
costs
+
what
has
been
allocated
and
will
be
allocate
to
the
lower
steps.
Actually,
the
first
step
become
“facility
management”
and
allocate
the
costs
to
the
other
costs.
This
method
is
more
accurate
than
the
direct
method
when
services
are
provided
to
other
service
departments.
The
allocation
of
service
department
costs
is
performed
by
a
series
of
steps:
1. The
costs
of
the
service
department
that
provides
services
to
the
greatest
number
of
other
service
departments
are
usually
allocated
first.

106. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
2. The
costs
of
the
service
department
that
provides
services
to
the
next
greatest
number
of
service
departments
are
then
allocated.
Any
costs
added
to
this
department
from
step
1
are
included.
Note
that
under
this
method,
the
costs
of
subsequent
service
departments
will
not
be
allocated
to
the
preceding
service
departments:
thus
any
reciprocal
services
among
service
departments
are
ignored.
3. The
sequence
outlined
above
is
continued.
step
by
step,
until
all
the
service
106
department
costs
have
been
allocated
to
producing
departments.
Graphical
example
of
the
step
method:
Second
Method:
Step
method
You
will
list
all
the
support
department
and
you
will
put
in
the
first
position
the
one
delivering
services
to
the
most
of
the
others.
Ex:
building
maintenance
is
offering
serices
to
all
the
other
department,
it’s
the
most
universal.
I
will
then
put
the
following
one,
facility
management.
And
so
on,
I
put
that
gradually.
I
start
wirth
the
one
on
the
top
position.
I
take
the
total
of
its
cost.
That
amount
of
money
I
will
allocate
it
to
all
the
other
departments.
I
wil
take
an
allocation
base
to
allocate
that
cost
to
all
the
others.
I
perform
the
allocation
of
the
cost.
One
that
step
is
completed,
that
bloc
is
empty
cause
all
the
costs
have
been
allocated
to
other
departments.
I
will
then
do
exactly
the
same
with
the
second
one
BUT
I
CAN’T
GO
BACK.
I
will
empty
that
amount
on
money
on
the
FOLLOWING
one
but
won’t
go
back
=>
I
won’t
allocate
to
the
one
backwards,
on
the
top
(here:
building
maintenance
in
comparison
to
facility
management).
Assumption:
In
this
case
facility
management
doesn’t
provide
services
to
the
building
maintenances.
Only
downwards,
not
upwards.
But
in
the
real
life
it’s
not
the
case,
there
are

107. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
allocations
between
those
departments.
It’s
better
than
the
first
method
but
there
are
still
limitations.
I
ignore
that
there
are
reciprocal
departments.
If
I
want
to
take
that
into
account
I
will
need
to
use
the
3rd
method,
the
most
accurate
one.
107
ALGEBRAIC
METHOD
This
is
the
most
accurate
of
the
three
methods
when
reciprocal
services
are
provided
among
the
service
departments.
With
the
algebraic
method,
simultaneous
equations
are
used
to
allocate
service
department
costs
to
service
departments
and
producing
departments.
The
number
of
simultaneous
equations
is
proportional
to
the
number
of
service
departments.
The
use
of
a
computer
(excel
sheet)
facilitates
the
computations
when
many
service
departments
exist.
It
takes
into
consideration
all
the
reciprocal
services.
(IT
to
HR
and
HR
to
IT).
Based
on
the
graph,
we
start
with
the
cost
by
nature
arriving
in
a
company
(i.e.
material,
labor,
services,
amortization
costs).
Those
costs
are
standard
for
large
categories
in
company
=
origin.
The
purpose
is
to
find
the
mechanism
to
allocate
those
costs
to
the
cost
object
=
destination.
Between
there
are
different
mechanism
:
- direct
cost
:
it
goes
directly
from
the
origin
to
destination.
They
are
traced
directly
to
the
cost
object.
Ex
:
- indirect
cost
:
We
allocate
them
through
(first
step)
cost
pools
(it’s
a
grouping
of
indirect
costs
before
final
allocation
of
the
cost
object).
Normally,
it’s
just
a
department.
It’s
very
easy
for
the
department
to
collect
all
the
indirect
costs
related
to
the
department.
We
will
identify
some
cost
pools
and
we’ll
first
allocation
the
costs
by
nature
to
the
cost
pools
which
is
the
intermediate
cost
object.
There
are
two
ways
to
allocate
indirect
costs
to
the
cost
pools
:
o Measurement
method
:
it’s
easy
to
allocate
costs
if
there
is
a
measurement
(time
sheet,
electricy
counter,
….
)
we
have
a
specific
base
to
know
at
which
we
have
to
calculate
the
costs.
o Allocation
base:
in
case
of
no
measure
method,
for
electricy,
we
can
see
that
if
an
area
is
dubbled
than
another
one,
we
can
assume
there
will
be
a
double
consumption.
We
need
to
have
a
referencial
data.
We
don’t
allocate
directly
to
the
cost
object
because
we
need
to
take
into
consideration
the
reciprocal
services
among
(second
step)
service
department.
When
it’s
done,
we
can
us
the
cost-­‐allocation
base
to
allocate
pools
of
indirect
costs
to
cost
objects.
Besides,
cost
pools
can
be
allocated
to
other
cost
pools
before
ending
in
the
cost
object.

108. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Algebraic
Method:
I’ll
have
to
solve
mathematical
equations.
At
the
beginning
I
can
identify
some
costs,
I
will
identify
the
costs
by
nature.
I
will
look
at
the
bill
and
identify
if
it’s
a
cost
for
a
service,
a
material
bought
to
a
supplyer
etc.
4
types
of
cost
nature:
108
- labour
- service
(bought
to
a
supplier
ex
cleaning
service)
- material
- amortization
Those
cost
I
can
identify
them
and
the
only
thing
I
know
is
the
nature
of
those
costs.
At
the
end
I
want
those
costd
allocated
to
the
final
product
or
service.
Whenever
you
buy
a
PC
a
fraction
of
that
cost
is
coming
from
the
salary
of
the
CEO
of
the
company
for
example.
Process
to
go
from
origin
(cost
by
nature)
to
destination
(cost
object).
If
the
cost
is
direct
it
goes
directly
to
the
cost
object,
no
problem.
Indrect
cost:
cost
which
can’t
be
traced
easily
to
the
cost
object,
cost
which
is
not
direct.
1st
I
will
group
them
in
cost
pools
(=
traditional
department
in
a
company
ex:
HR,
IT,
marketing,
Sales,
production,e
tc.).
We’ll
have
main
cost
pools
and
auxiliary
cost
pools
…
Main
cost
Pools:
where
procution
is
made.
Production
deoartment
Auxiliary
cost
pool:
support
department.
That’s
not
where
the
action
takes
place
(that’s
main
cost
ppols).
I
group
my
costd
into
the
right
cost
bools
thanks
to
a
MEASUREMENT
METHOD
(time
sheet
etc.)
or
using
AN
ALLOCATION
BASE
(number
of
square
meters,
of
people,
of
PCs,
etc.).
It’s
alxways
one
of
those
2
methods.
The
best
one
is
the
first
one,
when
you
have
a
measurement
tool
available.
…
If
I
use
more
square
meters
I
will
have
to
heat
(chauffer)
more.
Heating
costs.
…

109. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Each
room
has
its
own
calory
meter.
For
each
room
you
know
the
exact
number
of
calories
used.
(possibility
to
work
with
pull
overs
etc.)
IT
costs:
You
may
decide
to
allocate
IT
cost
based
on
a
number
of
PCs.
It
makes
sense.
We’ll
allocate
twice
more
IT
when
twice
more
PCs
for
example.
We’ll
ask
technicians
to
use
time
sheet
(fill
them),
whenever
they
repair
a
PC
they
need
to
write
it
on
a
time
sheet.
Measurement
=
time
sheet.
I
have
the
information
on
which
I
can
make
my
cost
allocation.
If
no
measurement,
find
a
way
to
allocate,
based
on
an
allocation
method.
109
That
was
the
first
step.
Put
the
costs
in
the
right
cost
pool.
(main
and
auxiliary).
I
will
solve
the
issue
of
reciprocal
services.
There
are
services
from
one
service
department
to
another
one.
Once
that
done,
I
will
be
able
to…
All
indirect
cost
will
first
be
group
into
cost
pools.
After
that:
either
transferred
to
other
cost
pools
or
allocated
to
the
cost
object.
At
a
given
moment
I
wan
to
have
all
the
auxiliary
cost
pools
exmpty
(transfer
to
the
main
cost
pools)
and
then
from
the
main
cost
pools
to
the
cost
objects.
Final
destination:
I
want
to
have
all
the
costs
allocated
to
the
cost
object.
PRIMARY
ALLOCATION
and
then
SECONDARY
ALLOCATION.
OVERVIEW
OF
THE
FULL
COSTING
PROCESS

110. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
110
All
indirect
costs
will
first
be
grouped
in
cost
pools,
and
after
that
they
will:
• Either
be
transferred
to
other
cost
pools;
• Or
allocated
to
cost
objects,
which
is
always
the
final
destination.
In
order
to
do
this,
two
successive
allocation
steps
will
take
place:
primary
allocation
and
secondary
allocation.
PRIMARY
ALLOCATION
All
indirect
costs
to
cost
pools. The
total
of
the
costs
regrouped
in
one
cost
pool
is
the
cost
of
this
cost
pool.
There
are
2
categories
of
cost
pool:
• Main
cost
pools
:
their
costs
will
be
almost
fully
transferred
to
cost
objects;
• Auxiliary
cost
pools:
they
provide
services
to
other
cost
pools
(main
or
auxiliary).
Auxiliary
cost
pools
are
sometimes
called
«
service
centers»
or
«
support
centers
»,
because
they
don’t
have
direct
link
with
what
is
being
produced,
but
they
contribute
to
the
internal
organization
by
providing
services
to
other
centers.
Typical
examples:
payroll
admin,
IT,
maintenance,
HR.
Primary
allocation
:
we
allocate
all
the
indirect
costs
to
cost
pools.
These
indirect
costs
come
from
supporting
service
and
producing
department
that
will
be
reflected
in
auxiliary
and
main
pools.
The
auxiliary
pools
will
still
influence
the
department
and
still
provide
costs

111. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
to
other
services.
.
That’s
why
we’ll
need
to
allocate
them
in
the
main
pools
to
cover
all
the
indirect
costs.
111
PUTIN
INDIRECT
COST
AND
PUT
IT
IN
THE
RIGHT
POOL.
Main
cost
pool:
cost
pool
whose
cost
will
be
almost
fully
transferred
to
the
cost
object.
…
I
start
with
my
indreict
cost
when
they
happen
and
I
will
put
them
in
the
right
cost
pool,
main
or
auxiliary.
This
is
the
primary
allocation.
Any
indirect
cost
will
be
transferred
to
one
of
the
pools.
SECONDARY
ALLOCATION
The
purpose
is
to
allocate
the
costs
of
the
auxiliary
pools
to
the
main
pools.
Secondary
allocation
:
we’ll
observe
what
happens
inside
the
cost
pools.
The
purpose
is
to
allocate
the
auxiliary
pools
to
the
main
pools.
We
want
to
have
all
the
auxiliary
costs
empty.
Then
I
will
have
to
perform
a
secondary
allocation.
The
aim
is
to
allocate
the
costs
to
the
main
pools.
I
take
all
my
auxiliary
cost
and
the
aim
is
to
empty
them
and
put
them
in
the
main
pools.
That’s
what
I
want
by
the
end
of
the
step:
empty
auxiliary
pools
and
amounts
transferred
to
the
main
pools.
I
do
it
USING
AN
ALLOCATION
BASE
that
we’ll
have
to
choose.
Sometimes
it’s
going
to
be
3
times
1/3,
it
depends
on
the
allocation
base.

112. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
112
REPROGICAL
SERVICES
ALGEBRAIC
METHOD
The
reciprocal
method
allocates
support-­‐department
costs
to
operating
departments
by
fully
recognizinng
the
mutual
services
provided
among
all
support
departments.
This
is
of
course
contradictory
with
the
step
method,
since
there
are
services
«
simultaneously
»
provided
between
support
departments.
Pool
A
provides
services
to
pool
B,
and
simultaneously
pool
B
provides
services
to
pool
A.
We’ll
use
that
method
to
deal
with
the
reciprociacal
method.

113. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
We
have
Pool
A
and
B,
auxiliary
pools,
fulfilled
with
indreict
costs
and
them
made
empty,
transfer
of
the
amounts
to
main
pools?.
SIMULTANEOUSLY
Problem
!
113
EXAMPLE
A
research
laboratory
works
on
4
projects,
named
P1
to
P4.
The
operations
are
supported
by
a
HR
department,
and
another
department
in
charge
of
the
IT
equipment
maintenance.
All
the
costs
are
allocated
by
using
the
table
on
the
next
slide.
Obviously
the
project
is
my
cost
object,
I
want
to
know
what’s
the
total
cost
of
the
project
(cost
object).
4
projects
then
4
costs
objects.
The
operations,
are
supported
by
HR
department
and
another
one
in
charge
with
maintenance
of
the
computers.
One
department
is
in
charge
with
work
on
the
project
P1,
another
one
with
project
P2
etc.
How
many
departments?
At
least
4,
one
per
project.
But
on
the
top
of
that
I
have
a
human
resource
department
and
an
IT
maintenance
department:
6
departments
then.
How
many
dep
might
be
considered
as
main
departments
and
how
many
as
support?
MAIN:
4,
the
4
working
on
the
projects
and
2
support
departments.
That’s
the
basis
for
our
analysis.
Different
departments
in
the
table.
Example
:
A
research
laboratory
works
on
4
projects,
named
P1
to
P4.The
operations
are
supported
by
a
HR
department,
and
another
department
in
charge
of
the
IT
equipment
maintenance.
All
the
costs
are
allocated
by
using
the
table
on
the
next
slide.

114. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Let’s
assume
that
for
a
given
period
of
time,
I
will
record
a
total
of
3
billion
euros,
total
of
all
my
costs.
I
will
perform
the
primary
allocation
(allocating
those
costs
to
all
the
different
cost
pools,
primary
or
auxiliary).
Why
is
it
10%
?
No
idea,
that’s
given.
That’s
a
specifi
allocation
base.
2
basic
ways
to
allocate
that
cost
to
the
various
cost
pools:
114
- Measuremnt
(time
sheet,
accounter)
- Allocation
base
Those
are
the
results
of
the
primary
allocation.
It
might
be
the
result
of
time
sheets
or
anything
else
but
now
I’m
just
having
a
look
at
the
results,
not
at
the
reasons.
After
the
primary
allocation
we
need
to
go
through
the
secondary
allocation.
=
What
do
I
want
to
do
with
that
allocation?
Empty
the
auxiliary
cost
pools
down
to
the
main
cost
pools.
At
the
end
of
that
allocation
I
want
to
have
HR
and
IT
cost
pools
EMPTY
and
all
the
costs
transferred
to
the
4
main
cost
pools.
In
order
to
do
that
I
need
an
allocation
base.
Here
it’s
given.
TO
allocate
HR
costs,
you
need
an
allocation
base
for
example.
30%
is
for
IT,
20%
for
P1,
P2
and
P3,
and
10%
for
P4.
Etc.
People
from
HR
management
for
30%
of
their
time
(or
spend
30%
of
their
resources)
for
IT
department
(it”s
the
same
rto
say
that).
I
will
do
exactly
the
same
for
IT
department.

115. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
What
do
I
want
then?
To
empty
the
total
cost
of
human
resource.
What’s
the
problem
with
reciprocal
services?
TOTAL
OF
HR
Management:
164.000
+
10%
of
IT
TOTAL
OF
IT
maintenance:
300.000
+
30%
of
the
total
amount
of
HR
management.
It
looks
like
I
am
turning
around.
HR
amount
of
money
refers
to
IT
and
IT
amount
refers
to
HR
!!!!!
To
know
the
amount
of
money
in
HR
I
need
to
know
the
one
in
IT
and
to
know
the
amount
of
money
in
IT
I
need
to
know
the
amount
of
money
in
HR.
Mathematically
it’s
really
easy
to
solve.
115
The
total
of
all
indirect
costs
is
3
000
000.
- The
primary
allocation
:
is
to
allocate
the
indirect
costs
to
the
other
entities
(P1,P2,P3,P4).
How
was
it
been
allocated
:
either
measurement
method
or
allocation
base
or
a
combination
of
that.
- The
secondary
allocation
:
we’ll
use
an
allocation
base
to
express
the
percentage
of
costs
related
to
each
project
for
each
department.
The
figures
is
calculated
internally
and
are
given
for
the
table.
However,
during
the
secondary
allocation,
we
didn’t
take
into
consideration
the
reciprocal
services.
The
problem
is
that
IT
department
is
providing
services
to
HR
department
and
“inversément”.
The
total
allocation
for
the
HR
management
is
30%
+
costs
allocated
for
the
IT
department
and
the
same
for
the
IT
department.
But
we
don’t
know
the
amount
of
costs
for
the
respective
department
(HR
for
IT
management,
and
IT
for
HR
management).
The
solution
so
is
to
use
“x”
to
be
the
unknown
total
of
the
HR
department,
and
“y”
the
unknown
total
of
the
IT
department.
We
have
the
following:
HR
department
:
X
=
164000
+
0.10Y
IT
department
:
Y
=
300
000+
0.30X
leading
to
x
=200
000
et
y
=360
000,
which
allows
to
finish
the
allocation
table
(see
following
slide).
Let’s
go
ahead
with
the
secondary
allocation.
There
are
reciprocal
services
between
HR
and
IT
department.

116. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
116
Let
x
be
the
unknown
total
of
the
HR
department,
and
y
the
unknown
total
of
the
IT
department.
We
have
the
following:
Way
to
solve
mathematically
X
=
164.000
+
10%
of
Y
Y
=
300.000
+
30%
of
X.
2
equations
with
two
unknown
variables.
Easy
to
solve
then.
Why
2
equations
with
two
unknown
variables?
Because
2
auxiliary.
If
I
had
3
auxiliaries,
I
would
have
3
equations
with
3
unknown
values.
How
are
we
going
to
solve
that?
We
take
the
value
“X
=”
and
replace
it
in
the
second
equation,
and
then
we
just
solve.
Therefore,
we
have
the
equations
systems:
• 164000
+
0,10
y
=
x
• 300
000
+
0,30
x
=
y
Leading
to
x
=200
000
et
y
=360
000,
which
allows
to
finish
the
allocation
table
(see
following
slide):

117. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
There
are
no
indirect
costs
left
in
the
two
departments,
all
the
indirect
costs
have
been
allocated
to
the
projects
:
P1,P2,P3
and
P4.
(for
Hr
department
:
164.000
–
200.000
+
36.000
=
0).
In
some
case,
highly
different
assumption
can
lead
to
minor
difference
in
the
calculation.
So,
the
method
is
not
sensitive
to
the
assumption.
117
This methodology allows even further refinement:
BUT=
HUMAN
RESOURCES
IS
ALSO
WORKING
FOR
ITSELF
!!!

118. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
here
we
see
that
HR
work
10%
of
their
time
for
itself,
and
IT
5%
of
their
time
for
itself,
so
we
put
a
percentage
in
the
right
case
here.
Let’s
go
ahead
again
with
the
secondary
allocation.
There
are
reciprocal
services
between
HR
and
IT
department,
and
self-­‐provided
services.
Let
x
be
the
unknown
total
of
the
HR
department,
and
y
the
unknown
total
of
the
IT
department.
We
have
now
the
following:
118
Exactly
the
same
method
to
solve
the
equation
Therefore,
we
have
the
equations
systems:
• 164000
+
0,05
y
+
0,1
x
=
x
• 300
000
+
0,20
x
+
0,05
y
=
y
leading
to
x
=
202
130
and
y
=
358
343,
which
allows
to
finish
the
allocation
table
(see
following
slide):
There’s
no
big
difference
after
the
refinement,
we
see
that
sometimes
the
refinement
is
worthless.

119. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
119

120. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Sometimes,
subsidiaries
can
perfom
better
than
other
in
th
full
costing
method,
but
we
need
to
take
into
consideration
if
there
are
over/undercosted
and
what
kind
of
allocation
method
is
used.
It
can
change
figures
and
cannot
reflect
the
reality.
Differences in pourcentage. Using one allocation base and another one. The effect in
percentage is almost not changing. Message: don’t over sophisticate the method,
sometimes you won’t see the real result using a more sophisticated method. In this
case, using one method or the other, there’s no big difference so no more effort
needed.
As management controller you don’t look for the 100% accurate solution/ 100%
visibility. You look for the good visibility (?). You have to be carefull with all those
sophisticated method, you’re not looking for the PERFECT method.
120
PARTIAL
OVERHEAD
ABSORPTION

121. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
121
You
may
look
to
some
partial
costs.
We
won’t
cover
this
part,
we
should
read
it
but
no
question
at
the
exam.
The
allocation,
sometimes
made
on
a
more
or
less
arbitrary
basis,
of
the
overhead
and
structure
costs
to
the
products
or
services
sold
during
the
time
period
is
not
always
the
most
relevant
method
allowing
to
take
sound
decisions
(pricing,
etc...)
Actually,
it
is
sometimes
better
to
calculate
a
“margin”
that
simply
measures
the
contribution
of
the
different
products
and
services
to
the
common
costs.
In
this
case,
it
is
better
to
use
partial
overhead
absorption
method,
that
will
absorb
only
a
well
defined
portion
of
the
total
costs,
rather
than
calculate
the
total
cost.
The
methods
that
are
used
in
practice
are
:
• Margin
on
direct
cost
• Margin
on
variable
cost
• Margin
on
specific
cost
The
allocation,
sometimes
made
on
a
more
or
less
arbitrary
basis,
of
the
overhead
and
structure
costs
to
the
products
or
services
sold
during
the
time
period
is
not
always
the
most
relevant
method
allowing
to
take
sound
decisions
(pricing,
etc...)
Actually,
it
is
sometimes
better
to
calculate
a
“margin”
that
simply
measures
the
contribution
of
the
different
products
and
services
to
the
common
costs.
In
this
case,
it
is
better
to
use
partial
overhead
absorption
method,
that
will
absorb
only
a
well
defined
portion
of
the
total
costs,
rather
than
calculate
the
total
cost
The
methods
that
are
used
in
practice
are
:
- Margin
on
direct
cost
:
is
the
opposite
of
variable
costs
- Margin
on
variable
cost
:
is
the
opposite
of
direct
costs
- Margin
on
specific
cost
:
the
most
used
method
in
practice.
It
concerns
all
variable
costs
(direct
and
indirect)
+
fixed
direct
costs.
The
four
possible
is
fixed,
variable,
direct
and
indirect.
Under
that
method,
only
the
fixed
indirect
costs
are
not
taken
into
account
because
it’s
the
most
difficult
to
allocate.
The
other
costs
are
easy
to
allocate.
MARGIN
ON
DIRECT
COST

122. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
122
MARGIN
ON
VARIABLE
COSTS
MARGIN
ON
SPECIFIC
COSTS
This
method
is
much
more
used
in
practice.

123. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Applying
this
method
allows
therefore
the
separation
of
specific
fixed
costs
from
common
fixed
costs.
It
allows
the
calculation
of
a
«
margin
on
specific
costs»,
also
called
«contribution».
The
specific
cost
is
not
a
full
cost,
but
it
is
often
very
close,
since
the
gap
is
only
related
to
the
common
part
of
structure
costs,
which
is
often
useless
to
allocate
distinctly
to
every
product.
Building
the
margin
on
specific
cost
is
described
the
following
way
(for
a
company
having
3
activities
A,
B
et
C)
:
This
method
shows
the
same
type
of
advantage
as
the
margin
on
variable
costs;
it
is
a
«
natural
»
enhancement.
In
particular,
all
issues
related
to
keeping
or
leaving
an
activity
may
be
adressed
through
specific
costs.
Compared
to
margin
on
variable
costs,
it
shows
more
clearly
the
contribution
of
each
product,
service
or
activity
to
the
structure
costs.
This
allows
to
identify
which
portion
would
remain
if
the
decision
is
taken
to
leave
the
product,
service
or
activity.
123

124. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
124
ACTIVITY-­‐BASED
COSTING
(ABC)
Different
approach.
ABC
is
an
approach
to
costing
that
focuses
on
individual
activities
as
the
fundamental
cost
objects.
It
uses
the
costs
of
these
activities
as
the
basis
for
assigning
costs
to
other
costs
objects
such
as
the
products
or
services.
An
activity
is
an
event,
task
or
unit
of
work
with
a
specified
purpose
(for
example
designing
products,
setting
up
machines,
...)
More
informally:
activities
are
verbs;
they
are
things
that
a
company
does.
We
focus
on
activities
as
cost
object.
We
just
use
the
activities
for
the
cost
allocation.
It’s
another
method
of
cost
allocation
and
it’s
more
accurate.
The
basis
idea
is
to
avoid
any
over
or
undercosting.
A
cost
object
can
be
overcosted
or
undercosted.
If
indirect
cost
is
too
high,
we’ll
talk
about
overcosted
Ex
(1):
We
have
three
people
going
to
the
restaurant.
The
total
bill
is
60€.
If
we
are
good
friends,
we
take
the
bill
divided
by
three
=
20.
Who’s
overcosted
and
undercosted
?Jose
and
Nancy
are
overcosted
whereas
Roberta
is
undercosted.
In
a
business
language,
this
situation
can
be
translated
by
:
we
have
a
total
cost
we
want
to
allocate
to
different
cost
objects
(=three
persons).
The
result
of
the
cost
allocation
is
20
on
each
cost
object.
The
allocation
cost
process
is
allocated
equally
to
the
cost
objects.
In
this
case,
I
perform
an
allocation
of
the
total
cost
and
we
allocate
a
cost
to
the
cost
objects
based
on
the
allocation
base.
It’s
far
from
the
reality.
Ex
(2):
Kole
corporation
is
manufacturing
a
normal
lens
and
complex
lens.
I
assume
that
the
company
uses
a
single
indirect-­‐cost
rate
job
costing
system.
The
cost
objects
are
the
lens:
80NL
+
20CL.
The
normal
lens
includes
direct
materials
and
direct
mfg
labor.
The
direct
cost
per
unit
is
29€.
For
the
complex
lens,
the
direct
cost
per
unit
is
59€.
For
the
indirect
costs,
we
have
2.900.
000.
We
have
to
allocate
that
to
the
final
cost
objects
in
order
to
do
that
we’ll
have
to
define
an
allocation
base.
Since
it’s
a
manufacturing
company,
it’s
a
good
idée
to
allocate
that
in
function
of
the
manufacturing
labor-­‐hours.
Logic
=
if
we
need
more
lens,
we’ll
need
more
workforce.
Per
unit,
it
is
58€
per
direct
manufacturing
labor-­‐hours.

125. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Ex(3)
:
We
have
a
total
of
50
000
costs,
and
the
division
is
:
Kole
uses
36,000
direct
manufacturing
labor-­‐hours
to
make
NL
and
14,000
direct
manufacturing
labor-­‐hours
to
make
CL.
How
much
indirect
cost
are
allocated
ot
each
product
?
NL
:36.000
x
58
=
2.088.000
(=indirect
cost
allocated)
CL
:
14.000
x58€
=
812.000
The
total
costs
of
the
normal
lense
is
direct
costs
+
allocated
indirect
costs
(2.320.000
+
2.088.000)
and
th
complexe
lense
is
similar
((1.992.000).
125
è
this
is
the
traditional
allocating
method
using
the
allocation
method
base
=
direct
manufacturing
labour
hours.
ABC
is
an
approach
to
costing
that
focuses
on
individual
activities
as
the
fundamental
cost
objects.
It
uses
the
costs
of
these
activities
as
the
basis
for
assigning
costs
to
other
costs
objects
such
as
the
products
or
services.
An
activity
is
an
event,
task
or
unit
of
work
with
a
specified
purpose
(for
example
designing
products,
setting
up
machines,
...)
More
informally:
activities
are
verbs;
they
are
things
that
a
company
does.
Activity-­‐Based
Costing
(ABC)
is
another
method
of
allocating
costs
to
products
and
services.
It
is
generally
used
as
a
tool
for
planning
and
control.
It
was
developed
as
an
approach
to
address
problems
associated
with
traditional
cost
management
systems,
that
tend
to
have
the
inability
to
accurately
determine
actual
production
and
service
costs,
or
provide
useful
information
for
operating
decisions.
With
these
deficiencies,
managers
can
be
exposed
to
making
decisions
based
on
inaccurate
data.
The
higher
exposure
is
for
companies
with
multiple
products
or
services.
ABC
allows
managers
to
attribute
costs
to
activities
and
products
more
accurately
than
traditional
cost
accounting
methods.
The
activities
responsible
for
the
costs
can
be
identified
and
passed
on
to
users
only
when
the
product
or
service
uses
the
activity.
Some
of
the
advantages
ABC
offers
is
an
improved
means
of
identifying
high
overhead
costs
per
unit
and
finding
ways
to
reduce
the
costs.

126. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
126
The
way
it
works
is:
• First
major
activities
are
identified
in
the
process
system.
• Next
cost
pools
are
created
for
groups
of
activities
that
can
be
allocated
together.
• Following
this
cost
drivers
are
identified.
The
number
of
cost
drivers
used
vary
depending
on
the
balance
between
accuracy
and
complexity.
• After
determining
the
cost
drivers,
rates
are
calculated.
• The
rates
are
then
applied
to
the
respective
cost
drivers
for
each
product
or
service
that
is
being
considered.
• The
overhead
cost
per
unit
is
then
derived
by
dividing
the
total
cost
for
the
product
by
the
total
product
units.
Learning
Objective
1:
Explain
undercosting
and
overcosting
of
products
and
services.
Undercosting
and
Overcosting
Example
Undercosting
and
overcosting
problematic
(products
and
service)
There’s
a
risk
of
putting
to
much
or
not
enough
money
when
allocating,
depending
on
the
method
I
use.

127. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
What’s
likely
to
happens
when
you’re
a
good
friend?
You
divide
it
by
3:
20.
Everybody’s
going
to
pay
20.
That
person
is
obviously
undercosted.
(?)
One
perso
undercosted
and
2
are
overcosted.
But
no
problem
in
this
case
cause
we
can
assume
that
those
eprsons
are
good
friends.
But
it
might
be
a
problem
in
other
problematics.
If
it
costs
to
much
because
of
a
mistake
in
my
process
and
I
decide
to
stop
the
production
because
It
seems
to
be
overciosted,
it
might
be
a
bad
decision.
Learning
Objective
2:
Present
guidelines
for
refining
a
costing
system
127
EXISTING
SINGLE
INDIRECT-­‐
COST
POOL
SYSTEM
EXAMPLE
We
have
a
company
manufacturing
lenses
(for
microscopes).

128. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
128
2
types
of
lenses:
normal
and
complex
I
will
produce
80.000
normal
lenses
and
20.000
complex
lenses.
Each
normal
lense
produced
has
a
direct
cost
of
29
euros.
Each
complex
lens
produced
has
a
direct
cost
of
59
euro.

129. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Now
we
are
going
to
deal
with
the
indirect
costs.
Total
costs
=
indirect
+
direct
(basic).
I
will
pool
all
the
indirect
cost
in
a
cost
pool.
Total
amount
of
2.900.00
euros.
I
need
to
allocate
that
to
the
different
lenses,
normal
and
complexes.
I
decide
to
allocate
it
on
the
basis
of
direct
hours.
(see
different
methods
above).
If
I
want
to
allocate
2.900.000
on
the
basis
of
50.000
direct
labor
hours:
58
euros
of
indirect
cost
per
direct
manufacturing
labor
hour.
(?)
In
this
case
what’s
the
meaning
of
that
amount
of
money?
Whenever
a
lens
is
going
to
use
1
hour
of
direct
labor
hour,
I
will
count
on
the
top
of
that
58
euros
of
indirect
cost.
If
a
lens
requires
10
direct
labor
hours,
I
will
add
580
euros
of
indirect
cost.
58
euros
of
indirect
cost
per
direct
manufacturing
hour.
Now
I
can
compute
the
total
cost:
direct
and
indirect
costs.
Here
I
can
compute
the
total
costs.
For
a
given
lens
I
will
look
at
the
number
of
direct
hours
needed
to
produce
it
and
then
multipliate.
129
LET
S
WORK
THAT
OUT.

130. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
CL
=
complex
lenses
NL
=
normal
lenses
That
amount
of
money
is
spread
between
the
2
types
of
lenses.
I
perform
the
allocation
of
the
total
indirect
costs
to
my
different
cost
objects.
The
allocation
base
(labor
hours)
is
ok
because
the
more
hours
I
use,
the
more
it
costs
(?).
Direct
cost
that
has
been
computed
earlier
+
the
indirect
=
4.408.000
euros.
The
cost
per
unit
=
55,10
euros.
130

131. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
131
TOTAL
UNIT
COST
of
a
complex
lens
=
99,60
euros.
Let’s
imagine
we
can
sell
the
normal
lenses.
We
have
a
8,2%
margin.
We
can
see
that
complex
lenses
are
more
profitable
than
normal
lenses.
REFINING
A
COSTING
SYSTEM
We’ll
look
at
one
of
the
basis
activities
of
the
company.
1. Design
of
products
and
process
:
2. Manufacturing
operations
3. Shipping
and
distribution

132. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
In
ABC,
we’ll
start
with
the
fundamental
cost
objects.
The
starting
point
inside
the
fundamental
is
the
activities
and
their
costs.
That
will
lad
to
the
assignments
of
other
cost
objects
(cost
of
products,
service,
customer).
The
most
complicated
task
is
to
define
the
most
relevant
activities.
We
have
to
find
the
right
balance
between
the
total
list
of
activities
and
not
enough
activities.
Inside
the
company,
the
corporation
identified
key
activities
:
132
§ Design
products
and
processes.
§ Set
up
molding
machine.
§ Operate
machines
to
manufacture
lenses.
§ Maintain
and
clean
the
molds.
§ Set
up
batches
of
finished
lenses
for
shipment.
§ Distribute
lenses
to
customers.
§ Administer
and
manage
all
processes.

133. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
In
order
to
refin
I
will
look
at
my
operation.
I
see
that
I
have
some
important
activities
(shipping
and
distribution,
manufacturing,
etc.).
Difference
with
the
ABC
method
is
that
here
I
will
look
at
the
activities.
I
will
look
at
my
operations,
my
activities,
and
calculate
the
cost
of
my
activities
and
based
on
that
I
will
…
My
Cost
allocation
base
(CAB)
is
the
cost
of
the
basic
activities
of
the
company.
I
will
allocate
indirect
cost
based
on
the
cost
of
the
activities.
133
Learning
Objective
3:
Distinguish
between
the
traditional
and
the
activity-based costing approaches
to
designing
a
costing
system.

134. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
134
ACTIVITY-­‐BASED
COSTING
SYSTEM
All
my
company
is
summarized
by
describing
those
7
activities.
People
have
to
agree
on
what
are
the
key
activities.
Find
a
right
balance
between
not
to
many
activities
and
1
or
2
activities
on
the
other
hand
might
be
not
enough.
Example
of
3
of
those
activities:

135. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
Those
are
activities.
Fundamental
cost
object
=
cost
activities.
I
have
activities.
I
will
use
those
activities
as
cost
pools.
Indirect
costs
related
to
set
up
activities
I
will
group
them
here,
etc.
Allocation
to
the
final
cost
object.
But
I
need
to
find
a
way
to
allocate
that.
For
the
shipment
I
will
allocate
the
shipping
indirect
cost
based
on
the
number
of
shipment.
If
1
Single
lens
requires
more
shipment,
I
will
allocate
more
shipment
(costs?)???.
Clear
cause
and
effect
relationship.
The
cause=
fact
that
I
have
many
shipment
and
effect
=
I
need
more
indirect
shipping
costs.
Set
up
cost.
Allocate
indirect
set
up
cost
based
on
the
number
of
set
up
hours.
The
more
set
up
hours
I
need,
the
more
set
up
indirect
costs
I
will
have.
Design:
design
indirect
costs
are
going
to
be
allocated
on
the
basis
of
the
number
of
parts
per
square
feet
(?).
…
I
will
probably
avoir
under
and
overcosting.
135
- Shipping
:
We
want
to
assign
the
total
costs
of
the
shipping
activities
to
the
lense
list
:
either
NL,
or
CL
or
other.
Which
allocation
method
are
we
using
?
On
the
number
of
lenses?
On
the
number
of
shippers
?
Yes,
it
makes
sense.
In
other
word,
if
the
lenses
NL
require
two
times
more
shipping
than
lenses
CL,
it
will
require
two
times
more
shipping
costs.
- Setup
:
For
the
setup
of
the
machines,
we’ll
use
an
allocation
base
as
the
number
of
setup
hours.
If
a
lence
NL
needs
two
times
more
setup
hours
than
lence
CL,
the
cost
will
be
dubbled.
Another
example
with
the
batch:
What
I
will
do
here:
illustrate
that
method
for
indirect
set
up
costs
(1
category
of
indirect
costs)
I
will
use
the
2
methods
for
the
same
amount
of
money
and
we
will
compare.

136. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
136
640
=
320
*
2hours
I
will
produce
the
NL
in
320
batches
of
250
units
(?)
Whenever
I
start
a
batch
I
need
5
hours.
Since
I
need
5
hours
for
any
batch,
it
gives
me
a
total
of
640
setup
hours
(???)
Total
set
up
costs
=
409.200
euro
that
I
will
allocate
to
my
2
cost
objects
(NL
and
CL)
8.184
is
the
cost
bear
by
each
direct
manufacturing
labor-­‐hour
unit.
I
can
compute
the
cost
of
1
single
set
up
hour.
Each
set
up
hour
cost
me
155
euros.
/labour
hour?
(see
previous
method).
8.184
euros
We
have
409200
amount
of
indirect
costs
that
we
want
to
allocate
the
final
product
using
the
first
method,
the
biggest
portion
the
costs
is
on
the
Normal
lense.
We
have
36000
x
8184.
Actually,
the
real
situation
is
exactly
the
reverse.
But,
based
on
the
ABC
activity,
the
biggest
portion
is
for
the
Complex
lense.
If
a
company
would
have
based
its
decision
on
the
first
method,
it
would
have
been
a
wrong
decision.
If
we
allocate
on
the
setu-­‐hours,
it

137. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
reflects
the
good
image
of
the
reality.
The
second
method,
ABC,
is
the
good
method.
The
normal
lenses
are
overcosting
and
the
complex
lense
are
undercosted
for
the
first
method.
We’ll
stop
producing
the
overcosted
products
because
less
we
produce,
more
we
have
profit.
Allocation
using
the
direct
labour
hur:
I
will
count
8,184euros
allocated
to
…
We
do
it
for
each
method.
One
is
the
opposite
of
the
other.
In
the
first
one
I
allocate
75%
to
the
complex
lenses
and
25%
to
the
normal
lenses
and
here
it’s
the
exact
contrary,
75%
to
the
NL
and
25%
to
the
CL
!!
Obviously
I
have
a
serious
overcosting
or
undercosting
problem.
Which
method
is
the
most
accurate?
(TYPICAL
137
EXAM
QUESTION)
Which
method
would
be
the
best
one,
which
one
would
you
recommend
and
why?
Allocating
set
up
indirect
cost:
it
make
sense
to
allocate
the
set
up
indirect
cost
on
the
basis
of
the
set
up
hours.
If
a
product
requires
more
set
up
hours
I
will
put
on
that
product
more
set
up
hours.
Does
it
make
sense
to
allocate
set
up
indirect
costs
based
on
the
number
of
direct
labour
hours?
No.
…
ALLOCATING
USING
SET
UP
HOURS:
which
product
would
be
overcosted?
Normal
Lenses

138. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
We’re
talking
about
3
times
more.
Normal
lenses
are
going
to
be
overcosted
and
automatically
the
CL
are
going
to
be
undercosted
(if
2
products,
if
one
is
overcosted,
automatically
the
other
one
is
going
to
be
undercosted).
If
I
decide
to
stop
the
NL
because
the
cost
is
to
high,
it’s
a
bad
decision
because
I
base
my
decision
on
a
bad
number.
Benefit
of
Activity
based
costing
=
method
providing
the
most
accurate
results.
138
CONCLUSION
Written
exam:
- 10%
for
the
presentation
- 90%
1
question
related
to
the
case
study
(READ
IT!!!!)
He
wants
to
use
it
to
test
our
understanding
of
some
basic
concepts.
No
shmet
questions.
We
have
to
understand
the
global
environment
of
the
case
study,
and
then
one
question
related
to
that
case
study
Ex:
use
it
to
show
an
example
of
what
might
be
a
measurement
of
something
Ok
using
the
case
study
if
I
ask
you
to
draft,
give
an
example
of
a
balance
score
card,
what
element
would
you
put
in
it
(?????)
That
question
has
not
ONE
RIGHT
ANSWER.
Multiple
choice
questions
One
or
two
calculation
questions
Ex:
Indirect
cost
allocation
exercice
(see
last
course)

139. Management
Accounting
Control
2012-­‐2013
Manon
Cuylits
One
ore
two
general
questions,
open-­‐ended
questions
(definition
of
a
concept,
or
else).
He
expects
from
us
to
give
our
own
perception
of
the
concept.
Let’s
not
copy
paste
the
slides.
Ex:
best
definition
of
the
job
of
a
management
controller.
139
We
can
take
everything
we
want
with
us
at
the
exam.
Our
answers
have
to
be
PERSONALS!!!
Copy
pasting
the
slides
isn’t
the
right
choice.
We
need
to
show
that
we
understood
the
basic
concepts.
Express
it
simply.
There’s
going
to
be
some
very
vague,
general
questions.
Way
to
test
wether
we
got
a
good
understanding
of
the
basic
concepts
and
if
we
can
go
directly
to
what’s
essential/crucial.