Strategic Control

1. Strategic Control • Control is taking measures that synchronize outcomes as closely as possible with plans • Traditionally, has been almost completely based on financial performance • Hence, top internal accounting officer became the “In Charge” official for organization control policies and procedures • What do we call the chief accounting officer of an organization? • Answer: The Controller • Financial Information was primary source • Rewarded Efficiency • Encouraged Dysfunctional Behavior

2. Strategic Control • Strategic Control Methods • Integrates Quantitative & Qualitative Measures • Uses Financial and Non-financial information • Customer (External) focus • Rewards based upon relative contributions to organization success • Encourages desired organizational behavior Implementing Planning Control Cycle Measuring Adjusting

3. 1990’s thru 21st Century Traditional Strategic Control and Control Systems Should motivate people toward desired organizational behavior rather than promote dysfunctional behavior  Customer Satisfaction New Product Development Rates Outcomes Quantitative & Qualitative Performance Meeting Budget Production Efficiency Inputs Quantitative Performance(Mostly Financial) What is Measured?

4. 1990’s thru 21st Century Traditional Who is evaluated?  Individuals Functions Responsibility Centers Individuals Teams (Groups) Cross-Functional People

5. 1990’s thru 21st Century Traditional Basis of Rewards control Systems  Efficiency Profits ROI Quality Innovation Creativity Overall Company Performance

6. 1990’s thru 21st Century Traditional Focus of Contemporary Control Systems  Internal Macro Environment Industry Environment Internal

7. Capacity Management Capacity is the potential or capability, of a set of resources to do work of some type to create value for the customer. Importance of capacity management (control) of organizations Huge initial outlays Sunk costs Inflexible Long-run costs Mostly Fixed Costs Goal of capacity management is to manage fixed costs (plant assets) in a manner that spreads costs over the largest possible volume A very difficult area of management because it involves long-range planning

8. Strategic Control of Capacity • Must have right amount of capacity to produce to customer demands *If there is excess capacity fixed costs must be spread over fewer units thereby making the units cost more *If there is insufficient capacity the company must incur additional costs to generate more capacity

9. Company A Company B A Capacity Management Example Company A and Company B each manufacture one product that is very similar in nature. Company A recently invested in modern machinery (new technology) that reduces its manufacturing labor cost. Company B continues to be labor intensive using its older machinery. Accordingly, Company A has much more fixed factory overhead annually than Company B ($ 1,500,000 compared to $ 600,000). The respective selling price and variable costs per unit are as follows: Selling Price $20.00 $20.00 Direct Mat. $2.00 $2.00 Direct Labor $1.00 $6.00 Var. Overhead $1.00 $1.00 Required: Compute the gross margins on the product of each company. Assume an annual volume of production and sales of 100,000 units; then 200,000 units.

10. Solution: Fixed Cost/Unit 15.00 6.00 (100,000 Units) Company A Company B Cost: Variable Costs/Unit $4.00 $9.00 Total Cost/Unit $19.00 $15.00 Selling Price $20.00 $20.00 Total Gross Margin $100,000 $500,000 (200,000 Units) The only Change is Fixed costs per unit $7.50 $3.00 Total Gross Margin $1,700,000 $1,600,000

11. Cost-Volume-Profit Analysis Contribution Margin Profit Area Revenue Line Break Even Point $ Fixed Costs & Total Costs Line Loss Area Variable Cost Line Activity Level