Management Control: Purpose, Centers, Costs, and Key Functions
Management Control Purpose
To report: Transmit to each area of the organization the necessary information for its management.
To coordinate: Guide and coordinate all the efforts of the company towards the objectives set in an effective and efficient way.
To evaluate: Associate objectives with people, including the quality of performance and compensation.
To motivate: Motivate continuous improvement through the analysis of results in relation to the achievement of objectives set by each responsible party.
Responsibility Centers and Types
Need to divide the organization into smaller units to allow control. INPUTS- Process Company- OUTPUT by a person (need to measure the management and the objectives achieved).
Can be: area, part of areas, sum of areas….
Types of Responsibility Centers:
- Cost Center: Focus on cost control and the quantity and quality of services.
- Profit Center: Focus on profitability.
- Investment Center: The amount of money invested has to give a positive ROA (return on assets), RI (residual income) for the company.
The Cost Flow: Difference Between Inventoriable and Period Costs
Inventoriable costs: These are the costs associated with acquiring or producing goods or services that are intended for sale. These costs are initially recorded as assets on the balance sheet and are expensed as cost of goods sold when the goods are sold. Includes direct material, direct manufacturing labor, and overhead.
Period costs: These are associated with the production process. These costs are expensed in the period in which they are incurred rather than being recorded as assets on the balance sheet. Includes selling and marketing expenses and general and administrative expenses.
The Controller and the CDO: Key Functions and Relationship to Strategy
Over the years, the differentiation in work has increased, and more and more new job positions appear that focus more on one concrete part of the company.
Both positions must supervise and ensure that the objectives that have been established are met. However, they do so in different ways. The controller focuses on checking through rates, analyzing data, excels, KPIs… to ensure that the established objectives have been achieved and the performance is appropriate. Instead of that, the CDO leads and establishes the strategy of the digital transformation, guides the company to face these new challenges, ensures that the strategy of the DT is aligned, and creates the path of how the company is going to follow the new steps…
Cost/Expense/Investment (Examples)
Cost: Is a resource sacrificed or lost to achieve a specific objective, measured as the amount of money that must be paid to acquire goods or services. Example: Labor costs (wages, bonuses…), financing costs, administrative costs…
Expense: These are the monetary equivalent to the amount of goods or services destined to obtain the products, either for consumption or for their subsequent transformation. EX: utilities (electricity, gas, water…), supplies (printing and postage…), professional services (legal, accounting, consulting fees…)
Investment: This is to allocate money (or time) in the expectation of future benefits. EX: durable goods, in the real estate service. Industry, in factories for manufacturing.
Purchase/Acquisition Cost
Purchase cost: Associated with purchasing a product or a service. It includes the cost of the item itself, as well as any taxes, shipping, handling, and other associated costs.
Acquisition costs: The total of expenses incurred when a business acquires a new client (in sales and marketing), or related to buying a new asset (in accounting).
Cost: Fixed vs. Variable. Cost Behavior
Fixed cost: These are not important, they are irrelevant because they always exist. They don’t depend on your choice; for example, they won’t change if we alter the number of units that we are going to produce. The only exception are the traceable costs: these are the only ones that really matter, because they depend on our choice. They have a cause-and-effect relationship with our decision.
Variable costs: These are always important; my choices are going to set (in part) the future of the company. EX: raw material.
FC: the higher the FC are, the higher must be the achieved output in order to break-even.
VC: determined by marginal cost of extra units.