Prof. Dr. Carsten Homburg

Transcription

1 Operative Controlling Lecture Winter term 2012/13

2 Organizational Schedule Lecture: Tuesday, 8:00-9:30 a.m. in Lecture hall XXIII Wednesday, 8:00-9:30 a.m. in Lecture hall XXIII Start: Ending: expected Exercise: Thursday 4:00-5:30 p.m. in Lecture hall XXV Start: Ending: expected Exam: Thursday, , 12:15 13:15, in Aula 1 2

3 Outline (I) 1. Fundamentals of Controlling 1.1 Controlling in practice 1.2 Controlling Theoretical concepts 1.3 Interdependencies as the starting point of Controlling 1.4 Summary 2. Theory, concepts and methods for the foundation of Controlling 2.1 Cost accounting 2.2 Variance analysis and cost control 2.3 Investment analysis 2.4 Linear programming using the example of production planning 3

4 Outline (II) 2.5 Dynamic programming (decision tree analysis) 2.6 The concept of information value 2.7 Agency Theory 3. Controlling instruments 3.1 Key Performance Indicators 3.2 Budgets and targets 3.3 Transfer pricing 3.4 Overhead cost allocation 3.5 Incentives 4. Conclusion 4

5 1.1 Controlling in practice The Controller-model (formulated by the International Group of Controlling (IGC)) Controllers design and guide the management process of defining goals, planning and steering and therefore share responsibility with the management for achieving the goals. That means: Controllers ensure the transparency of business results, finance, processes and strategy and thus contribute to higher economic effectiveness. Controller co-ordinate sub-targets and the related plans in a holistic way and organize a reporting-system which is future-oriented and covers the enterprise as a whole. 5

6 1.1 Controlling in practice Controllers moderate and design the management process of defining goals, planning and steering so that every decision maker can act in accordance with agreed goals. Controllers provide the necessary service of business-oriented data and information support. Controllers develop and maintain controlling systems. The IGC ( International Group of Controlling ) is a forum for sharing expertise and the coordination and development of controlling concepts and terminology. The IGC developed for example the Basis for the certification of controllers. Source: International Group of Controlling URL : 6

7 1.1 Controlling in practice Controllers Working hand in hand with the management MANAGER Responsible for results as Cost Center Profit Center and for Strategic success positions C o n t r o l l i n g CONTROLLER Responsible for transparency Information-, Decision-making-, and coordination service as well as Planning Moderator 7

8 1.1 Controlling in practice Controlling and Controller The entrepreneur is the responsible captain of the company, who sets the destination. The controller is the navigator, who has to assure that these goals will be certainly reached and that a company is now and in future efficient and profitable. Source: Focus online (translated from German) 8

9 1.1 Controlling in practice Command and control As a first navigator below the command bridge the controller is always eager, that all operations within the company can be measured and can be checked. A system of Key Performance Indicators (KPI) supports the Controller to keep in track and make processes more transparent to outsiders. If deviations exist, the Controller has to counteract or present alternatives, how desired results still can be achieved. Source: o.v. (2000): Der Controller: Vom Lotsen zum internen Berater, in WISU 4/00, S (translated from German) 9

10 1.1 Controlling in practice Planning and decision preparation On the basis of his precise knowledge of internal accounting, the controller makes proposals to the management, e.g. how costs can be reduced or processes can be optimized. Thus, he is also an important guide at upcoming acquisitions of new business units which have to be evaluated. In practice, the controller usually works closely with the management. The more the planning element of his work prevails, the more he will be involved in the functions of the management. Source: o.v. (2000): Der Controller: Vom Lotsen zum internen Berater, in WISU 4/00, S (translated from German) 10

11 1.1 Controlling in practice Planning and decision preparation Senior controllers often deal with issues such as : Which key performance indicators should be used in accounting? Should a full cost or contribution margin analysis be made? Which portfolio method should be used for strategic planning? Which objectives should guide the division manager: e.g. operating income, cash flow or shareholder value? Source: o.v. (2000): Der Controller: Vom Lotsen zum internen Berater, in WISU 4/00, S (translated from German) 11

12 1.1 Controlling in practice Profession in transition from a navigator to an internal consultant The prophecy is, that the Controller of the future has to orient himself more on soft features of his surroundings than on hard facts. His traditional function, the planning and monitoring of operational processes with the help of indicators, moves more and more into the background and is replaced by a more general control of the enterprise. The Controller of the future has to turn to a greater degree to service and consulting activities, where it matters to impart his existing knowledge. This converts the Lord of the numbers into an internal consultant, who understands the need to satisfy to his customers. Source: o.v. (2000): Der Controller: Vom Lotsen zum internen Berater, in WISU 4/00, S (translated from German) 12

13 1.2 Controlling Conceptions of theory Definition approaches Ensuring adequate rationality of the management (Weber, Koblenz) Result-oriented coordination between planning, control and information provision (Horváth, Stuttgart) Coordination of the overall management system (Küpper, Munich) Coordinationoriented approaches 13

14 1.2 Controlling Conceptions of theory The approach of Küpper Dispositive factor (Gutenberg) HR management Organization Management system Information system Planning Control Coordination by Controlling goal-oriented steering securing operational system Procurement Production Sales 14

15 1.2 Controlling Conceptions of theory The approach of Küpper Controlling to supply information to single management functions (1) Controlling has interface function within the management process (2) Example to (1): - Target/actual comparison within control - Provision of marginal cost within planning Example to (2): - Connection of a target/actual comparison (control) with incentive payments (HR management) - Connection of a decentralization decision (organization) with transfer pricing (planning, HR management) 15

16 1.2 Controlling Conceptions of theory Perspective in Major / Minor Controlling Criticism of Küpper s view: too comprehensive, almost general business administration character Alternative: Providing mainly monetary information for internal coordination of a company with respect to a comprehensive, mostly monetary overall objective 16

17 1.2 Controlling Conceptions of theory Perspective in Major / Minor Controlling Controlling (Modern) internal accounting (Ewert/Wagenhofer) Management accounting (Managerial accounting vs. financial accounting) Controlling as the internal financial steering tool of the company 17

18 1.2 Controlling Conceptions of theory Perspective in Major / Minor Controlling...management accounting information... enhances decision making, guides strategy development and evaluates existing strategies, and focuses efforts related to improving organizational performance and to evaluate the contribution and performance of organizational units and members (Kaplan/Atkinson (1998), p. 12.) 18

19 1.2 Controlling Conceptions of theory Perspective in Major / Minor Controlling Controlling Control However: Control is an important part of controlling 19

20 Interdependencies Hard interdependencies Soft interdependencies independent from decision maker dependent on decision maker (cannot be analyzed independent of the people who take over tasks) 20

21 1.3.1 Hard interdependencies Composite restriction Decision space of an area depends on decisions of other areas Example 1: Purchasing department only buys a certain quantity of a scarce resource Optimal production program of the production area is in general influenced 21

22 Composite restriction Example 1 (formal): x=(x 1,...,x J ) T : Production program d=(d 1,...,d J ) : Contribution margins per unit _ V = ( V 1,...,V I ) T : Available resources besides raw material V=(v ij ) : Matrix of consumption coefficients R L : Available quantity of raw material in stock (before purchasing) R E : Purchased quantity of raw material r=(r 1,...,r J ) : Consumption coefficients regarding raw material _ x = ( x 1,...,x J ) T : Sales limits 22

23 Decision model: 23

24 Composite restriction Example 2: Two production areas have common resources Partly optimal production programs are in general not feasible or not overall optimal 24

25 Example 2 (formal): T x = (x 1,..., x K, x K+1,..., x J) : P1-PK to area 1 Area 1 Area 2 P(K+1) - PJ to area 2 (J > K) 25

26 Example 2 (continued): Overall model: 26

27 Composite success The effects of actions of an area on the overall success depend on the actions of another area. Example 1: Manufacturing process that is to optimize over several areas MP 1 MP 2 MP 3 Overall success requires successful improvement in all three production areas 27

28 Composite success Example 2: Factor costs, if factor is needed in several areas and cost curve is not linear Procure- ment costs Direct costs Overhead costs Factor amount Marginal resource costs of an area can only be given according of factor inputs of other areas 28

29 Composite success Example 3: Substitutive or complementary relationship between products from two areas x i : Sales volumes p i : Unit prices K i (x i ) = F i + k i x i : Full costs x j = x j (p i,p j ) or x j = x j (p j,x i ) for i,j = 1,2 and i j Þ P1, P2 substitutive or complementary products 29

30 Composite success Isolated optimization: 30

31 Overall optimization with correct coverage of the composite success 31

32 ! G G x Consider = + = 0, with = ( p2 K 2'(x 2) ) p p p Let p * K '(x *) > i.e. p 2* > K 2'(x 2*) covers the (isolated) marginal cost K 2'(x 2*) 32

33 Case 1) 33

34 Case 2) 34

35 Simultaneously optimizing: 35

36 p2 p1 M 36

37 Isolated optimization: (Substitution effect was only partly accounted for) 37

38 Extension of the numerical example Complete neglection of substitution effects 38

39 Example continued: 39

40 Composite Evaluation The actions of areas cannot be evaluated independently, although the results of actions are independent. Example 1: Area A may perform investment (m A, s A ) Area B may perform investment (m B, s B ) m A, m B : Expected capital values s A, s B : Standard deviations Capital values are statistically independent 40

41 s 2 B' 2 σ A µ A B 2 σ A µ A Source: Laux/ Liermann, 2005, p. 193 m 41

42 Composite Evalution: Example 2: As above, but other overall utility function 42

43 Composite risk Stochastic dependencies between the results of areas, for example: I 1, I 2, I 3 : three investment alternatives in three different areas s 1, s 2, s 3 : three possible equally likely environmental states in t=1 Investment Alternatives Payout in t=0 Cash flows in t=1 s 1 (1/3) s 2 (1/3) s 3 (1/3) I I I

44 A proportionate implementation of individual projects is possible. Liquidity constraint: There must be no negative payment in t=1. Note, it applies e.g.: P(I2 = 50 I3 = 0) = 1 > P(I = 50) P(I3 = 0) = = Also could I 2 in connection with I 1 ensure liquidity in case of s 3. Determine the optimal allocation of an investment budget in the amount of 1100 MU, by maximizing the expected payoff in t=1. 44

45 Solution: x i = Number of executions of investment alternative i A i = Payout for x i in time t=0 A risk-neutral decision maker chooses the alternative with the highest expected return Investment alternative I i Expected value (EW i ) for the returns of investment alternative Payout for x i =1 in t=0 Expected returns (EV i ) per invested MU I 1 I 2 I 3 45

46 Solution continued: All investment options are profitable (EV i >1) Without liquidity restriction, overall investment budget would be invested in I1 (100% expected returns), note in state s3 negative payment for I1 Because of the liquidity restriction one gets two investment alternatives: Mix of investment 1 and 2 (investment 2 has a positive return on investment and is therefore preferable to cash management) or invest in investment 3 Optimal mix is achieved, if the investment program in s 3 has a backflow of 0, i.e. x 2 =2x 1 or A 2 /30 = 2 A 1 /50 Û A 2 =6/5 A 1 46

47 Solution continued: The budget will be fully used in the optimum, thus applies: A1 + A2 = 1,100 6 A1 + A1 = 1, A 1 = 1, A1 = 500 A2 = A1 = Thus for the (provisional) optimal investment program x 1 =500/50=10 and x 2 =600/30=20 Expected returns through the investment program EV = 10 EV EV 2 = = 1,800 per invested MU: EV = 1.800/1.100 = 18/11 =

48 Solution continued: Also check if I 3 is not more attractive than the existing investment program of I 1 and I 2 : EV = > = EV 3 thus, the investment program I 1 and I 2 is preferable compared to the exclusive investment in I 3. Solved LP: max100 x + 40 x + 20 x subject to 50 x + 30 x + 14 x 1,100 x 2 x x ,2,3 48

49 1.3.2 Soft interdependencies Soft interdependencies: Superposition of hard interdependencies with problems of behavioral control. Interdependencies Hard interdependencies Soft interdependencies Composite restriction Composite success Composite evalution Composite risk Information asymmetry Bounded rationality Opportunistic behavior Discretionary behavior 49

50 Information asymmetry Problem: Decision makers have different, possibly conflicting, information. Example 1: In case of a composite evaluation of two divisions (areas) because of substitution effects (see example 3 in ) the division managers expect different sales functions. 50

51 Information asymmetry Example 2: Different assumptions about the capacity of a shared resource (see example 2: Composite restriction in ) Example 3: Different (subjective) probabilities with respect to future environmental states (see example 1: Composite risk in ) 51

52 Bounded rationality Problem: Decision makers have only a limited capacity for information acquisition and processing Even in case of cooperative behavior information asymmetry can (in general) not be eliminated without (communication) costs. In general, not all uncertainties can be reduced due to prohibitive costs. 52

53 Opportunistic and discretionary behavior Problem: Decision makers pursue (in certain circumstances) selfish goals and use non-controllable decisions (because of information costs) for individual utility maximization. Example 1: Division manager biases (deliberately) his costs Example 2: Unnecessarily high use of indirect areas at the expense of third party Exapmle 3: Biased forecasts in the budgeting process Example 4: Low labor input (effort) 53

54 1.3.3 Intertemporal interdependencies Problem: Both hard as well as soft interdependencies can relate across several points in time. Example: t=0 t=1 t=2 T Selecting and Utilization of the purchasing a manufacturing manufacturing facility by other facility decision maker End of useful life: the sale of manufacturing facility Behavior in t=1,2,... affects optimal decision in t=0. Decision in t=0 affects possible decisions in t=1,2,... 54

55 Note: information level improves (in general) over time Information Time 55

56 1.4 Summary Coordination-oriented perspective (broad agreement with the practical point of view) Usually controlling provides monetary information Underline overall objective Interdependencies require coordination (Types of interdependencies are in general not clear-cut) 56