M c GRAW - HILL INTERNATIONAL EDITION

Preface

The 12th edition of Management Control Systems provides concepts, text, and
cases for a course in management control systems. The book is designed to
allow students to gain knowledge, insights, and analytical skills related to how
a firm's managers go about designing, implementing, and using planning and
control systems to implement a firm's strategies. It does not deal extensively
with topics such as cost accounting and budgeting procedures, which are dis­
cussed in separate accounting courses. The book gives roughly equal emphasis
to the techniques of the management control process, such as transfer pricing,
budget preparation, and management compensation; and the behavioral con­
siderations involved in the use of these techniques, such as motivation, goal
congruence, and relative roles of superiors and subordinates.
The book is organized into three main parts, with Chapter 1 introducing the
overall conceptual framework for the book. Part One (Chapters 2 to 7) de­
scribes the environment in which management control takes place, called
responsibility centers. Part Two (Chapters 8 to 12) describes the sequential
steps in the typical management control process: strategic planning, budget
preparation, operations, and analysis of operations. Part Three (Chapters 13
to 16) describes variations in management control systems: controls for dif­
ferentiated strategies, service organizations, multinational organizations, and
project control.

CHANGES TO TEXT MATERIAL

While retaining the strengths of the 11th edition, we have made a number of
changes in both text and case material that we hope will increase their useful­
ness. In undertaking this revision, we surveyed users and nonusers of the 11th
edition. Their constructive comments and suggestions have been beneficial to
this revision.
Several improvements have been made to assist student learning. These in­
clude expanded chapter introductions, more diagrams and exhibits, real-world
examples, consistent terminology, expanded chapter summaries, and an up-to-date
reference list in each chapter.
We are confident that you will find the text material in this 12th edition well
organized, concisely written, laden with current examples, and consistent with
the current theory and practice of management control.

CHANGES IN CASES
A key strength of this book is the collection of cases that emphasize actual prac­
tice. The cases come from Harvard Business School, the Tuck School of Business
at Dartmouth, and a number of other schools, both in the United States and
abroad. The cases not only require the student to analyze situations, but also
give the student a feel for what actually happens in companies, a feeling that
cannot be conveyed adequately in the theoretical text. In this sense, the cases
can be viewed as extended examples of practice.
ix
Table of Contents

Preface ix Case 3-2: Nucor Corporation (B) 117

Case 3-3: Rendell Company 119

Chapter 1 Chapter 4

The Nature of Management

Responsibility Centers: Revenue

Control Systems 1
and Expense Centers 128

Basic Concepts 2
Responsibility Centers 128

Boundaries of Management Control 6

Revenue Centers 133

Road Map for the Reader 14

Expense Centers 133 c
Summary 17
Administrative and Support Centers 139 E
Case 1-1: Nucor Corporation (A) 19
Research and Development Centers 140 (

Case 1-2: Wal-Mart Stores, Inc. 31

Marketing Centers 143 (

Case 1-3: Xerox Corporation (A) 34

Summary 144 (

Case 1-4: Motorola Inc. 42

Case 4-1: Vershire Company 145 C
Case 4-2: New Jersey Insurance Company 151 C
PART ONE Case 4-3: NYPRO, Inc. 159 C
THE MANAGEMENT CONTROL Case 4-4: Whiz Calculator Company 170 C
Case 4-5: Westport Electric Corporation 175

ENVIRONMENT 51

Case 4-6: Grand Jean Company 181

p,
Chapter 2
Chapter 5 T
Understanding Strategies 53
Profit Centers 185 P

Goals 53
General Considerations 185

The Concept of Strategy 56

CI
Business Units as Profit Centers 189

Corporate-Level Strategy 58
Other Profit Centers 191 Sl

Business Unit Strategies 62

Measuring Profitability 194 N~
Summary 70
Summary 198 Ar
Case 2-1: Encyclopredia Britannica, Inc. (A) 72
Case 5-1: Profit Center Problems 200 AI:
Case 2-2: Encyclopredia Britannica, Inc. (B) 74
Case 5-2: North Country Auto, Inc. 201 StJ
Case 2-3: Encyclopredia Britannica, Inc. (C) 76
Case 5-3: Analog Devices, Incorporated: Su
Case 2-4: Cisco Systems (A) 79
MEMS 209 Ca
Case 2-5: Cisco Systems (B) 91
Case 5-4: Abrams Company 225 Ca
Case 2-6: Technology Note: Internetworking
Cal
Products 96 Chapter 6
Transfer Pricing 230 Ch
Chapter 3 Objectives of Transfer Prices 230 Bu
Behavior in Organizations 98
Transfer Pricing Methods 230 Na1
Goal Congruence 98
Pricing Corporate Services 239 Oth
Informal Factors That Influence
Administration of Transfer Prices 242 Bu(
Goal Congruence 99
Summary 244 Beh
The Formal Control System 103
Qua
Types of Organizations 105
Appendix Sun
Functions of the Controller 110
Some Theoretical Considerations 245 Cas!
Summary 112
Case 6-1: Transfer Pricing Problems 248 Cas!
Case 3-1: Southwest Airlines Corporation 114
Case 6-2: Birch Paper Company 254

vi

 Table of Contents vII

Case 6-3: General Appliance Corporation 256

Chapter 10

Case 6-4: Medoc Company 267

Analyzing Financial Performance

Reports 425

Chapter 7

Calculating Variances 425

Measuring and Controlling

Variations in Practice 432

Assets Employed 270

Limitations of Variance Analysis 437

Structure of the Analysis 271

Summary 438

Measuring Assets Employed 273

Case 10-1: Variance Analysis Problems 440

EVA versus ROI 283

Case 10-2: Solartronics, Inc. 444

Additional Considerations in Evaluating

Case 10-3: Galvor Company 446

Managers 288

Evaluating the Economic Performance

Chapter 11

of the Entity 289

Performance Measurement 460

Summary 290

Performance Measurement Systems 460

Case 7-1: Investment Center Problems (A) 291

Interactive Control 471

Case 7-2: Investment Center Problems (B) 295

Summary 474

Case 7-3: Quality Metal Service Center 300

Case 11-1: Analog Devices, Inc. (A) 476

Case 7-4: Aloha Products 309

Case 11-2: Analog Devices, Inc. (B) 492

Case 7-5: Dell Computer Corporation 315

Case 11-3: CUP Corporation 500

Case 7-6: Industrial Products Corporation 319

Case 11-4: Enager Industries, Inc. 508

Case 7-7: Marden Company 327

Chapter 12

PART TWO Management Compensation 513

THE MANAGEMENT CONTROL

Research Findings on Organizational

PROCESS 329
Incentives 513

Characteristics of Incentive

Chapter 8
Compensation Plans 514

Strategic Planning 330

Incentives for Corporate Officers 520

Nature of Strategic Planning 330

Incentives for Business Unit Managers 522

Analyzing Proposed New Programs 336

Agency Theory 530

Analyzing Ongoing Programs 339

Summary 534

Strategic Planning Process 344

Case 12-1: Lincoln Electric Company (A) 536

Summary 347
Case 12-2: Crown Point Cabinetry 554

Case 8-1: Allied Office Products 348

Case 12-3: Worthington Industries 561

Case 8-2: Hasbro Interactive 355

Case 12-4: Wayside Inns, Inc. 566

Case 8-3: Emerson Electric Co. 367

Chapter 9
PART THREE
Budget Preparation 380
VARIATIONS IN MANAGEMENT

CONTROL 575

Nature of a Budget 380

Other Budgets 386

Chapter 13

Budget Preparation Process 387

Behavioral Aspects 391

Controls for Differentiated

Quantitative Techniques 393

Strategies 576

Summary 394
Corporate Strategy 577

Case 9-1: New York Times 396

Business Unit Strategy 581

Case 9-2: Corning Microarray

Top Management Style 589

Technologies 408
Summary 591

 paz

viii Table of Contents

Case 13-1: Pelican Instruments, Inc. 593

Exchange Rates 685

]
Case 13-2: 3M Corporation 595
Summary 694

Case 13-3: Texas Instruments

and Hewlett-Packard 597

Appendix
Case 13-4: Texas Instruments 601
SFAS No. 52 Foreign Currency

Translation 694

Chapter 14
Case 15-1: AB Thorsten 697

Service Organizations 616

Case 15-2: Falcon, Inc. 705

Service Organizations in General 616

Case 15-3: Lincoln Electric Company (B) 712

Professional Service Organizations 618

Case 15-4: Hindustan Lever 71 7

Financial Service Organizations 623

Case 15-5: Xerox Corporation (B) 725

Health Care Organizations 626

Nonprofit Organizations 628

Chapter 16

Summary 631
Management Control of Projects 730

Case 14-1: O'Reilley Associates 633

Nature of Projects 730

Case 14-2: Williamson and Oliver 638

The Control Environment 733

Case 14-3: Harlan Foundation 647

Project Planning 737

Case 14-4: Piedmont University 650

Project Execution 740

Case 14-5: Chemical Bank 654

Project Evaluation 746

Case 14-6: Metropolitan Bank 669

Summary 749

Case 16-1: Modern Aircraft Company 751

Chapter 15

Multinational Organizations 678

Company Index 753

Cultural Differences 678

Transfer Pricing 680

Subject Index 758

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