MANAGEMENT ANALYSIS

AND MONITORING

NEW TRENDS

“CONTROLLING”

Daniel González Quila

3rd BAIM
Axel Ehberger
What is Controlling? The function of the Controller.

Controlling  the whole process of defining objectives, of planning and controlling (in
the sense of steering and regulating) and includes all relevant financial and commercial
aspects.
Controlling takes places when manager and controller cooperate.
Involves such activities as taking decision, defining actions or procedures determining
alternatives, directing individuals and their activities and setting up guidelines.

Controller  provide services for managers. They design and maintain the tools for
planning and budgeting, for comparison of budgeted and actual figures and forecasts.
It is their tasks to ensure transparency of costs and results at every level of management:
from corporate policy to strategy, over operative planning down to day-to-day
operations. They make sure that the systems they have developed, and which they keep
up-to-date, are fit for management and adequate for controlling.
Controller’s design and accompany the management process of goal-finding, planning
and controlling and thus are co-responsible for reaching the objectives.

The manager operates the The controller has the economic

business authority
Manager Controlling Controller
Responsible for the result Responsible for the transparency of
the result
The controller is involved in the responsibility of achieving the company’s objectives.
This means:
- The controller is responsible for the transparency of strategies, economic and
financial results and processes.
- In this way he contributes to efficiency and higher economic profitability.

Controller’s mission statement

As partners of management controllers make a significant contribution to the

sustainable success of the organization.

Controllers 
1. Design and accompany the management process of defining goals, planning and
management control so that every decision maker can act in accordance with
agreed objectives
2. Ensure the conscious preoccupation with the future and thus make it possible to
take advantage of opportunities and manage risks.
3. Integrate an organization’s goals and plans into a cohesive whole.
4. Develop and maintain all management control systems.
5. Controllers are the economic conscience and thus committed to the good of an
organization as whole.

The three dimensions of Controlling

1.Contribution margin  may be defined as the surplus of net revenue over the costs
clearly entailed without allocating structure costs using a key. Calculated by subtracting
the proportional costs of sales (product costs) from the net revenue. Demonstrates how
much a product contributes towards covering the structure costs of a business as well as
towards the profit.

2.Product costs  costs that slip into the product. Formulated per calculation unit – per
hour, per piece, per kilogram, per order. Also described as marginal costs or
proportional costs.

3.Structure costs  costs caused through the organisational framework in purchasing,

in marketing, in research into new products, in the administration, in logistics, in
corporate culture, in the navigability of the business. It should be planned according to
quantities and qualities required for internal activities not related to products Standards
of Performance (SOP). Also called fixed costs.

Why do we need controllers?

Key task of a controller is to ensure the rationality of the management.

Reactive rationality assurance: Taking correct actions when something goes wrong. It
can even mean stopping ongoing projects.
Proactive rationality assurance: The controller must guarantee that the entire
knowledge within the organization is made available to the management. This can only
work if everyone is using the same numbers. In other words, if all of the relevant
information is made transparent within and throughout the organization.
Active rationality assurance: Consciously adopting the role of critical counterpart and
critically questioning ideas or providing new information with a view to solving
problems.

What tasks do Controllers have?

Inform
Plan
Control
Advise

How should Controllers see their managers?

Controllers help managers to make rational decisions this is the central tasks.
They should therefore have a clear idea of how managers make these decisions.
Wrong Assumption: managers make the right decisions and act loyally in the interests
of the organization.
Controllers should focus not only on the decision itself but also on the manager making
the decision only if this is the case can the rationality of the management be assured.

What is the useful information to make the best business decisions?

What are the Key Performance Factors (KPFs) that make a business successful?
- Responsibility accounting: Since managers are also responsible for the
financial results, it is important to ensure, through the creation of cost centers,
cost objects and contribution accounting, that each management person can see,
which costs, outputs and revenues she can control directly within the time-span
of one year.
- Decision taking accounting: Accounts that are prepared to help managers to
take decisions are called decision accounts. It is of central importance for the
quality of such decision accounts, that only those costs, revenues and volumes
 should be included that can really and directly be changed by the decision to be
taken.

1.The function of management accounting

Concept of Controlling and Management Accounting

Control  verifying compliance with the objectives

Effectiveness  objectives we want to achieve
Resources  meeting the budget objective

¿Main tasks?

- Organizational design
- Internal rules and regulations
- Planning and formulation the budget
- Coordinate the objectives
- Control and evaluate the progress
- Motivate and align all collaborators
- Reporting key aspects
- Coordinate the informative tasks

Management accounting vs. Financial accounting

Management accounting  Provides information to people within an organization. Not

required by law. Does not cover the entire organization.
Financial accounting  For those outside it. Required by law. Covers the entire
organization.

Examples of management control errors

- No planning, so erroneous growth, investment or financing decisions

- Lack of coordination between departments
- No adequate incentives
- Budgets are not elaborated or poorly prepared
- No cost information
- Wrong information
- Information not analysed correctly
- Deviations are not controlled
- Information generated with a lot of delay
- Excess of information, but key data are missing
- Management control system very expensive

Controlling refers to 

- Elaborating objectives
- Determining a plan
- Steering toward the agreed objectives

It is a method to have useful information of the company for the management

It allows to know what is happening in each moment related to the objectives
It helps to face the future

Management control

Management control helps the Management (in a broad sense) in the decision taking
process, and that objectives of the company are fulfilled.

10 core-elements of sustainable controlling

Different levels of Management control

First level: Existence of minimal control

- Analysis of the current situation of the company

- Preparation of periodic financial reports on the current situation
- Analysis of the income statement, balance sheet and main indicators
- Comparison with previous periods

Second level: Budget control and forecasts

- Anticipate the medium- and long-term future: forecasts and assignment of

objectives
 - Preparation of financial reports: analysis of the income statement, balance sheet
and main indicators comparing actual and expected results.
- Preparation of the monthly financial plan

Third level: Integrated management control system: Business Intelligence

- Anticipating the long-term future: strategic planning with future scenarios

- Set objectives and responsibilities of each department/ unit
- Follow up with scorecards and KPIs (financial and non-financial)
- Issuing periodic management reports

Management control styles

Family control

- Informal control by personal contact

- Typical of small and centralized companies
- No intentional process of setting objectives
- Accounting is considered more a legal obligation than an information system

Bureaucratic control

- Emphasizes authority and compliance with rules and regulations to establish

control
- Usually occurs in very bureaucratized and standardized companies
- Prioritize compliance with the rules above the results

Control by results (Performance monitoring)

- Management professionalization
- Management by objectives
- Delimitation of responsibilities
- Establishment of formal information systems

Who has to carry out the Management Control?

- As a dependent function of an accounting department or a financial-

administrative department (classical orientation)
- As a function of the general management (modern orientation)
Situation 1:

Control is mainly financial

Only financial information is used
Short-term control

Situation 2:

Global control, perspective of the whole company: sales, production, etc.

Control is exercised by different ways: accounting, statistics, economic studies,
commercial
Control has a long-term focus.

Personal requirements of controller

- University education in business administration and management, specialized in

control, accounting and finance
- Knowledge of the company’s activities is an advantage
 - Global vision of the company and its surroundings
- Technical knowledge of the control tools
- Service attitude
- Communication skills and used to working as a team.
Tasks

- Develop the management information (control) system

- Prepare and analyse management control reports (reporting)
- Analyse the budgets of the different departments and consolidate them in an
annual budget
- Monitor the overall progress of the company with identification of areas for
improvement and problems, with a perspective of the future.

All major controlling processes will be largely standardized.

Characteristics of an effective management information system

Management information system  A set of actions, procedures and tasks that are
nearly related, necessary to carry out the periodic evaluation of the operational
situation of the company.
Therefore, the Management Information System supposes:
- A control process: planning, monitoring, and analysis.
 - An information system for control: accounting, budgeting, indicators,
scorecards, meetings, and reports.
- A control structure: centres of responsibility and responsible.

The Management Control Process – Sequence of activities to start the control

process

1. Set targets and responsible

Delimit and quantify the objectives for each area or centre according to the
strategic objectives set in the strategic planning
Assign responsible for the achievement of the objectives

2. Capture real results

 Consist of registering the values obtained from the variables to be controlled.
Define frequency of monitoring; How do we get the relevant figures?
“Management Control System”

3. Variance analysis

Identify variances between the checked value and a reference value.

Search for causes.

Actual/ previous period

Actual/ actual
Target/ forecast
Forecast/ actual
Forecast/ forecast

In the evaluation process, we must distinguish between:

- Evaluation of the unit
- Evaluation of the responsible of the unit

Why does the actual value vary from the target value?
1.Sales forecast has not come true
2.Intended price could not be achieved
3.Neither the sales nor the price could be kept up
4.An evaluation and/or a calculation error has occurred

Causes of variances?
- Planning errors
- Implementation errors
- Evaluation errors

Selection of significant deviations

- Materiality: amount
- Recurrence: permanent deviation
- Nature: importance
- Evolution: foreseeable

Causes of deviations?
- Planning: factor of the environment
- Execution: something has not been done well or as planned
- Objectives: unrealizable objective
- Measurement: differences in the way of measuring
- Registration: error in data entry
- Fortuity: you do not know

4. Implantation of corrective measures

a. No measures because the differences do not justify any action
b. Review the objectives (PLANNING ERRORS)
Evaluation according to:
- The internal characteristics of the company: for example, with the available
machines, the production set as objectives was not realistic.
 - The external circumstances: for example, an economic crisis that does not allow
to achieve the planned sales level, an unexpected increase in the price of the
inputs.

c. Implantation of corrective measures

- Modify production, e.g.: not offer more elective subjects because costs cannot be
covered
- Modification of job tasks, e.g.: free workload/ train more staff
- Personnel substitutions: change positions or dismiss
- Change the incentive system for staff, e.g.: incentives to sellers to sales instead
of to profit
- Change the structure, e.g.: close a plant

How do we communicate these measures?

Introduce a message
- Map situation: “Mapping the situation means compiling and presenting the
related facts”  “Our goal is 20% profit on sales” Situation
- Explain problem: “Make everyone aware of an interesting, critical, or even
dangerous problem”  “The profit forecast is 3%” Problem
- Raise question: “How can we achieve our goal?” Question

Deliver a message
Messages in reports and presentations can detect, evaluate, explain, warn, complain,
threaten, excuse, suggest, or recommend something interesting.
- Detection
- Explanation
- Suggestion
The Management Control Reporting

If you think that knowledge is expensive, ignorance is even more so.

You have to invest in knowledge and information, because ignorance is much more
expensive. (Luis Muñiz).

Reporting  Informing the managers of the company of the situation they are facing
and of the results obtained.

Management control reports  Periodic reports that to keep informed the different
responsible (Responsibility accounting), To control their performance in the fulfilment
of the agreed objectives, and Help them make decisions, in the event of deviations
(Decision taking accounting).

Reporting requirements 
- Specify the responsible organizational unit
- Help decision-making: contain only relevant and clearly expressed information
- Contain the planned objectives of the variables to be controlled
- The obtained values of these variables (real/actual data).
- Deviations between what has been achieved and what is desired and the causes:
internal or external
- The corrective actions to be carried out and the period of time foreseen for the
implementation of said actions
Every manager must be able to express himself in writing clearly and write reports well.
Reports are often used to convey ideas and recommendations to superiors, colleagues
and to inform them of their progress.

Characteristics of a good report

The purpose of each report is to analyse and explain a situation, to propose and approve
a plan. It must therefore be logical, practical, convincing and concise.
To write a report well first and foremost is to have something worth saying. There are
three fundamental rules for the writing of a good report:
- Provide the report with a logical structure
- Use simple words to convey ideas
- Remember how important it is to present the material correctly and clearly.

Structure

Every report must have a beginning, a core and an end.

If it is long or complex, it is important to add a summary to the conclusions and
recommendations.
Attachments containing detailed data and statistics may also be included.

Beginning

The introduction should explain:

- Why the report has been written
- What is the purpose
- The frame of reference
- Why it is worth reading
- Sources of information are mentioned on which it is based
- If it is divided into several sections

Core

Here the data collected during the analysis process must be mentioned, which, logically,
leads to the conclusions and recommendations that appear in the last section.
One of the most common mistakes of the reports is that this does not happen naturally;
the other is that the conclusions are not supported by data.
Summarize both the data and your observations.
If you have discovered different lines of action, give the pros and cons of each without
forgetting to make it very clear which is the most appropriate in your opinion.
Do not leave the reader in the air.
The aim of a typical report is to solve a problem and begins by describing the current
situation, listing the main difficulties or deficiencies and explain their causes.
End

Should include:
- Recommendations
- Explain how each of them will contribute to the achievement of the established
objective
- What extent it will solve some of the problems highlighted in the analysis
The costs and benefits of these recommendations must also be explained.
The next step is to propose a complete work system, with deadlines and names of those
in charge of the work.
Finally, report recipients should be told what types of measures they would like to be
adopted.
If the report is very long or complex, it is always advisable to add a summary of the
conclusions and recommendations.
In this way the reader is helped to order the ideas.

Simple words

“If the language is not correct, what is meant is not said; and, in that case, what should
be done remains undone.” (Confucius)
Do not use more words than necessary to express the ideas, otherwise, you risk
obscuring them and tiring the reader.
Specifically, avoid superfluous adjectives and adverbs and do not use circumlocutions
where a simple word suffices.
Use familiar terms and not gimmicky words, if they fulfil their purpose with the same
efficiency, because the former has the advantage of being more understandable.
You will not make big mistakes in writing a report if you follow these principles.

Your report will have a maximum effect if it is brief and timely.

It is recommended that you review the design several times to remove extraneous
phrases and clear the language.
Do not fill in the main pages with figures or data that are difficult to understand.
Summarize key statistics in compact tables, easy to follow, with clear headings and
relegate the background material to the appendix.

Incentive systems

Management control  assesses the degree of achievement of business objectives

Employees/collaborators  contribute to the achievement of business objectives
Incentives  control tool to drive EX ANTE (before the event) the actions of the
collaborators so that the individual objectives converge with those of the company.
They are usually linked to variable compensation systems.

Characteristics of the incentives

- According to how they are expressed
Monetary (% over salary)
Non-monetary (training…)
- According to the impact
Positives (Awards – salary increase)
Negatives (Punishments – salary reduction)
 - According to the objectivity when defining them
Formal (measurable results – commission on sales)
Informal (subjective criteria – good behaviour)

According to the results obtained:

- Explicit  incentive to increase sales
- Implicit  if the incentives are implicit, “perverse” incentives can be generated

Incentives in the banking system for the grating of mortgages.

The “perverse” incentives generated by the banking system were diverse:

The “bonuses of bank executives depended on the benefits and, in order to generate an
enormous flow of benefits in an environment of increasing competition, an increasingly
aggressive policy of granting loans was needed.
But the perverse incentive schemes extended from the top of the banks to the last links
of the mortgage production chain.
At the end of the chain are the “branch managers”.
These managers receive a variable compensation depending on the volume of
mortgages they sell and, in addition, they are granted ample discretion to make the
decision so it is logical to expect a relaxation of standards and an accelerated mortgage
loan concession.
In addition, the quality of a mortgage loan depends mainly on the loan/value ratio and
the Bank of Spain recommends that the ratio be not exceeded by 80%.
Thus, a customer goes to a bank to request a loan to buy a home. The bank sends an
appraisal company to value the property.
If the client cannot pay 20% of the entrance the operation will surely be lost.
But if the appraiser increases the value of the home enough, then the client can get up to
100% (or more) of the value of the home.
More than 50% of the appraisals made in Spain in a specific year were made by
appraisal companies with a majority shareholding in banks and saving banks.
Therefore, the incentives of banks, appraisal agencies and credit seekers are aligned but,
in the direction, contrary to the general interest and financial stability in the long term.

Advantages of the incentive system

- Increase of effort
- Loyalty of the staff
- Commitment of the staff
- Better internal communication
Disadvantages of incentive system
- It penalizes when the objectives are not achieved
- Objectives are difficult to achieve
- Extra wage with no return for the company
2. Management information systems

Defining a controlling system means:

1. Establish a controlling process:

Objectives – planning – monitoring/analysis

2. Define the components of the controlling information system:

Accounting, Budgeting, Indicators, Scorecards, Meetings, Reporting reports.

3. Definition of the control structure:

Centres of responsibility and responsible

Management Information Systems (MIS)

Provides the decision-maker with the required information at the right time in the
desired form online.
The Decision Support System (DSS) and also the Executive Information System (EIS)
are in principle the same.
At DSS, the focus is on supporting decision-making. The EIS is more focused on the
presentation and operation of the upper management, so easy operation and quick
overview are in the foreground.

Management Information System (MIS) includes:

The information that is generated in order to carry out the management control and the
instruments that allow capturing, processing, analysing and transmitting this
information.

Which information is important for control purposes?

External information – ¿How to obtain it?

- In the Commercial Register (Trade Register): financial information of the

competitors
- In the Business reports provided by companies such as axesor
- Multiple market research companies.

Internal information - ¿How to obtain it?

- Captured internally
- Formal and informal meetings
- Suggestion programs
- Surveys
- Financial accounting
- Analytical accounting
- Inventory management
- Personnel records
- Systems of indicators

What instruments are used as information systems?

The Business Intelligence Lexicon

ERP (Enterprise Resource Planning)

¿Objective?
- Use the resources available in a company most efficiently for the operational
flow and, through that, optimize business processes.
- Offer business information at any point of the company.
The ERP-system is a software to plan resources and manage information in a structured,
integrated way.

ERP systems typically include the following characteristics:

- An integrated system
- Operated in (or near) real time
- A common database that supports all the applications
- A consistent look and feel across modules
- Installation of the system with elaborate application/data integration by the
Information Technology (IT) department, provided the implementation is not
done in small steps.

Allow the processing of daily transactions such as order entry, invoicing, purchasing,
warehouse management, personnel management, payroll accounting, financial
accounting, etc.
Are also referred to as online transaction processing systems (OLTP systems).
ERPs do not support individual areas but all functions of the value chain.
¿Examples for ERP systems? SAP R/3, Baan, Mesonic, DATEV or Oracle

Without an ERP

With an ERP
The basic idea:
- There should still be a core ERP solution that would cover most important
business functions
- Other functions will be covered by specialist software solutions that merely
extend the core ERP.

ERP – Moduls
How to select an ERP consulting company?

Size provider vs. customer

- Large provider vs. Small client  small project with little relevance within the
provider
- Small provider vs. Large client  possible lack of resources

Provider experience with ERP

Experience in the business
Guarantee
Closed price

ACCID Technical Note – KEY ERP ASPECTS

The recording of accounting events is not the Controller’s responsibility, but the choice
of the compute system that records the accounting and non-accounting events that occur
in a company.

The advantages of having a single program are:

- Duplicity of data entry is avoided (data is only entered once).
- There is only one source of data, thus gaining consistency.
- The status of an order in the supply chain is known (status of an order: whether
it is confirmed, expected date of completion, whether production has started,
whether production has finished, what its costs has been, whether it has been
shipped, whether it has been invoiced and whether it has been paid).
- Global reports can be prepared, with quantitative and qualitative information
from all areas of the company.

Custom ERP or buy a “standard” one from the market:

The advantages of “standard” of the market are:
- It does not require so many technical resources in the company
- You can adapt it to the needs of the company
- Nowadays, there are competitively priced ERP packages with the right service.

During implementation, it is important that:

 - There is a person at a high level in the organization chart who is the executive
responsible (the Controller is most recommended).
- There is a person who knows the software to be implemented very well (who
has extensive previous experience).
- This person often ends up becoming the company’s ICT Director or manager.

ACCID Technical Note – KEY ERP ISSUES

Common mistakes
- Failure to properly calibrate the technical and human resources required for the
correct implementation of an ERP.
- Appointing only the technical manager of the project, but not an executive
manager

Prices

- Difficult to find a clear answer

- Price depends on the characteristics of the company
- Cost of consultancy
- Licence cost per user
- Hardware cost
- ERP maintenance costs can be up to 15% of the total cost of ERP licences.
- Hidden costs

Characteristics of ERPs

Actualmente vivimos en un mercado global que ha repercutido en una mayor

complejidad e incertidumbre en el desarrollo de la actividad empresarial, por este
motivo, el control de gestión se ha convertido en una herramienta vital para la
supervivencia de toda empresa, de aquí, la importancia de la implantación de un sistema
de información que recoja, trate y sintetice todos los datos que se genera en la empresa,
facilitando su procesos hasta convertirlos en información relevante para la toma de
decisiones.

Cuando se ha de implantar un sistema de control de gestión en una empresa hemos de

pensar en un sistema de información que, dentro de un coste razonable según la
capacidad de la empresa, nos facilite la entrada de los datos y su intercambio entre
departamentos, con el objetivo principal de separar el ruido de la información mediante
la parametrización correcta de los datos que darán como resultado los indicadores
claves. Una opción seria crear nuestro propio programa, el cual se adaptaría al 100% a
nuestras necesidades, pero su coste económico y tiempo son muy elevados, encontrando
problemas para poder migrar datos de nuestro programa propio a otros programas del
mercado como por ejemplos los de mecanización de los almacenes. Actualmente en el
mercado disponemos de una serie de ERP (Entreprise Resource Planning) de gran
calidad adaptable a las necesidades de todo tipo de organización y compatible con otros
programas del mercado. También podemos utilizar programas estándares como por
ejemplo los de contabilidad financiera, pero esto solo seria recomendable para pequeñas
y microempresas donde no hay una gran cantidad de datos a tratar y estos programas
pueden cubrir sus necesidades, son fáciles de instalar, fácil de usar y tiene un bajo coste.
En el caso de empresas medianas y grandes, la generación de gran cantidad de datos y
las sinergias entre departamentos hace vital la implantación de sistemas complejos para
conseguir un flujo óptimo de la información.

Un ERP (Entreprise Resource Planning) es una completa herramienta de gestión

adaptable a todo tipo de empresa, la cual, integra en una misma aplicación diferentes
módulos especializados en áreas funcionales como puede ser logística, activos fijos,
facturación, contabilidad, control de gestión.
Características:
 Registro de todas las operaciones dentro de la empresa en potentes bases de datos
(SQL Server o Oracle) que facilitan su almacenamiento y su posterior seguimiento
y control.
 Integración única de los datos, todos los departamentos están relacionados entre si,
el resultado de un proceso es el inicio del siguiente, eliminando la duplicidad de las
tareas y reduciendo los errores humanos.
 Sistemas compuesto por un conjunto de módulos adaptables a la idiosincrasia de
cada empresa que interactúan entre si consolidando todas las operaciones.
 Mediante la correcta parametrización de los datos obtenemos los indicadores del
Cuadro de Mando Integral para cada centro de responsabilidad y para la dirección.
 Facilita el seguimiento de las desviaciones al poder entrar los costes estándares por
unidad productiva y su posterior comparación con los datos introducidos en el
modulo de contabilidad.
Data warehouse

A database orientated to what is required to support management decisions.

- Subject orientated: necessary subjects to get the relevant information
corresponding to the company’s strategy.
- Integrated: integrates and consolidates data from multiple external data sources
- Non-volatile: data will not be changed or deleted but supplemented by new data.
- Time variant: the information is referenced to a period of time.
- The information is organized in cubes and can be made available for reporting
following the OLAP concept.

OLAP (Online Analytical Processing)

Multidimensional Data Structure

- Slicing: choosing a single value for one of its dimensions
- Dicing: to pick specific values of multiple dimensions
- Pivoting: allows an analyst to rotate the cube in space to see its various faces
- Drill Down/Up allows the user to navigate among levels of data ranging from
the most summarized (up) to the most detailed (down).

What is a dimension?

Dimensions are elements that are used to restrict and group the data stored in a fact table
when querying the data.
Dimensions are used to study and analyses values (facts).
What is a value or measure?

The measure/value is the fact (numerical data) to be analysed.

- Each dimension forms an axis in the coordinate system

- The values are stored at the intercepts
- Each value requires one piece of information per dimension
- The data room is called a cube

The introduction of a MIS is a complex undertaking

 - Analysis of the needs
- Definition of the dimensions of the cubes
- The linking of numerous systems
- The implementation and testing
- Problem of “Shit in, shit out!” or “A fool with a tool is still a fool!”.

Business Intelligence

Tools and models for the creation of knowledge from data analysis
Data  Information  Knowledge

Business Intelligence systems are based on:

- Key Performance Areas/Factors: those factors that explain the success or failure
of the company
- Key Performance Indicators (KPI): indicators to measure the Key Factors of
Success

Definition of Peter Drucker

- Describes eight Key Performance Areas

- To be considered in the elaboration of the strategy
- A company should concentrate all efforts and resources in these areas to ensure
the sustainable development of the company.

¿Areas?
- Market Position
- Innovation
- Productivity
- Physical and Financial resources
- Profitability
- Manager Performance and Development
- Worker Performance and Attitude
- Public Responsibility

In this KPA, the strategic goals are to be developed.

The success of the strategy implementation is measured with appropriate key figures.
Key Performance Indicators.

For the development of a Key Figure System:

- Differentiate between the ratios that measure the implementation of the strategy
- And those that measure the operational processes.

¿Basic idea?
What objectives do I want to achieve and how can I make them measurable?
What do I have to do to achieve my objectives and how can I make the effectiveness
measurable?
How can I counteract deviations and make the success of these measures measurable?
How to develop Key Performance Indicators

How to identify Key Performance Factors?

Depend on:
- Activity/sector
- Environment: threats and opportunities
- Strengths and weaknesses of the company
- Strategy
 - Key Performance Factors of the competition

In this example, it can be seen that to achieve the “punctuality” goal, each level needs
different metrics to make its contribution to the overall goal.
At the lowest level, there is no direct link to the overall goal of punctuality.
However, if you follow the path up the levels, it becomes clear that each level has
different goals and measures that overlap.

Key Figure Systems

- A set of ordered measures
- Show the relationships between the different key figures
- Make a meaningful statement about the company
- Facilitate navigation through indicator combinations
- Facilitates the analysis

The system has to be clear

Meaningfulness and concrete key figure definitions
Relevant key figures only
A classic example is the ROI-tree
In addition to the Key Figure Systems for analysis, there are systems for managing the
company.
The best-known system is the BSC. It is used to implement strategy.

Business Intelligence System – Definition

Analysis  Reporting  Planning tools

Help to perform the core tasks of management accounting.

What happens in the companies?

Overload of data and at the same time a lack of information and insight “data
graveyards”.

Enable an easy processing of the data so that they lead to information and ultimately to
knowledge and insight in companies.

¿Benefits?
- Time savings
- Improved analytical capabilities
- Simple and fast
- Reduced burden on source systems
- Company-wide commonly defined and centrally accessible standard reports with
equally standardized defined terms and key figures
- Improvement of the quality of the information preparation using simple
presentations in tables, graphics, cockpits, etc.
- Personalized information access via intranet or portal
- Substantial reduction of the throughput time of the planning process
- Support for planners by: direct decentralized input options for the plan data,
variable distribution functions, and immediately consolidated/summarized
presentation form
¿Tools?
- Reports  What happened? Something that has already happened

- Dashboards  What is happening?

 Dashboards are usually a series of graphics, charts, gauges and other visual
indicators that can be monitored and interpreted. Originates from the automobile
dashboard. The drivers monitor the major functions.

- Scorecards 
Must contain:
The KPF or other operative aspects according to the type of activity carried out
by the company.
KPIs that allows to measure the achievement or evolution of the company’s
objectives.
The deviations produced.
The solutions/actions/measures to be taken in each case.

Example for KPF and KPIs for Human Resources

Example for KPF and KPIs for the Financial industry.

There should be a standardization in terms of formats and contents.

It should allow the different responsible to know the development of their
activities in relation to the objectives assigned to them.
The periodicity of elaboration will be based on the needs; usually:
 Top Management receives its scorecard monthly
 Departmental managers weekly

¿Problems of the conventional scorecards?

Vision with indicators mostly focused on financial aspects (sales, benefits…)
The relationship between the indicators of the different areas is not determined
There is no comprehensive vision of the overall progress of the company.

Scorecards and Dashboards have been linked together as if they were

interchangeable.
Both visually display critical information.
The difference is in the format: scoreboards can open the quality of an operation
while dashboards provide calculated direction.
A balanced scoreboard has what they called a “prescriptive” format.

¿Key figures?
Inform  about important facts and contexts of the business
Quantify  provide information on quantifiable facts
Condense  complex economic facts into an “operand”
Assure rationality of management when “knowledge problems” occur
Inform quickly and in a condensed form about complex situations
They are numerically comprehensible, measurable and countable

There is a “magical triangle” of financial analysis

Liquidity  about solvency at any time (1st)
Stability  a balanced capital structure (2nd)
Rentability  about profitability (3rd)

There is always a conflict between these three objectives.

Liquidity comes first.
A company can be profitable but can run out of cash.
Next is stability
Profitability comes last.
- Balanced Scorecards

Developed by Robert Kaplan and David Norton (early 1990s), and it is defined
as a strategy performance management tool.

¿Main idea?  A successful corporate management requires the use of a

balanced management system / A management information system with a
strategic approach.

Combines key figures from various perspectives into a conclusive whole.

It is useful to communicate the corporate strategy within the company and to the
outside.
Maximum 20-25 key figures and a clear structure.

¿Objective?  Use the KPF that sustain the strategy of the company.

4 perspective are usually differentiated:

 External scope
Financial perspective
Customer perspective

 Internal scope
Learning and development perspective
Internal/process perspective

The four perspectives of the BSC

Financial perspective: not only is the financial development of the company

taken into account. Achieving the financial goals of the financial perspective is
largely dependent on sales.  Based on the approach that the ultimate goal of
the company is to increase the value of the invested capital of the shareholders.
 The financial objectives serve as a focus for the goals and key figures of all
other scorecard perspectives.

Customer perspective: the question of which customers we want to have in the

future to generate our sales in which markets and what we have to do today is
therefore very central to achieving our financial objectives.  Reflects the
perception of the performance of the company by its customers. In which ways
must customer relationships be designed so that the financial goals can be
achieved? Focuses on the market presence and positioning of the company.
- First set  basic key figures for the market share, customer acquisition,
customer profitability, customer loyalty and customer satisfaction.
- Second set  company specific value drivers of customer results (value
propositions).

 Both are equally important for success; The same is true of the processes, the
customers are only satisfied and give us money for our products and services if
our processes have the desired quality.

Process perspective: just as important as the customer perspective and the

financial perspective. After all, every process is first brought to life by
employees who are well-qualified and motivated to get to work.
A certain minimum performance of the employees thus requires the process
quality. The employee perspective thus becomes just as important as the process,
customer and financial perspectives.  Starts with the identification of
customers wishes and includes all activities up to their satisfaction.

Learning and growth perspective: to promote a growing and learning

organization. Geared to the development of the human capital and the
infrastructure. Also, to create the conditions defined in the other perspectives
and required for the success of the company.
¿How can the success of the company be ensured at present and in the long
term?  Basically, with investment in the future of the company to stay
flexible, adaptable and versatile. Starting points may constitute the employees
and the information systems.

“THE FOUR PERSPECTIVES ARE BALANCED”

 A BSC is used for:
- Monitoring and counter-check the premises for strategy development
- Analysis of consequences for the strategic implementation

A strategic map is drawn across the four perspectives. Links the earnings figures and
the performance drivers in the form of a cause-effect relationship. All key figures
must be able to be embedded in this map.
It is an open key figure system which must be adapted to the specific conditions of the
company.
The BSC has been introduced as a tool of performance measurement.
The main issue was the implementation of the corporate strategy and a strategy
development.
In both cases, the BSC acts as a linguistic tool to communicate the understanding of the
strategy.

- Strategy development: The corporate strategy and the business model have a
high level of uncertainty. Only the success, or the failure of the company shows
if the assumptions were applicable. The literature refers to the individual skills
of the management, its vision and its sense for business development and
growth. This knowledge is made explicit during the preparation of the BSC. The
BSC opens up strategic learning processes – a strategic check of assumptions is
inherent to the BSC process.
- Strategy implementation: An unsuccessful implementation of the strategy is one
of the main reasons for unsuccessful corporate management. Deficits of all kind
become evident when the targets of management linked to the strategy and the
requirement is defined that the use of resources must be geared to the strategy.
The process of developing a BSC ensures that all essential aspects of the
strategy are understood by the entire management. For a successful
implementation the managers must understand the consequences that the
objectives have for their own actions. The BSC ensures that managers see the
bigger picture.

- Communication tool: A BSC not only serves for communicating the strategy
internally, but also for the reporting and the communication with external
stakeholders.

Connection of earnings figures and performance drivers in the strategic map

Unlike in calculation systems the key figures are not linked mathematically but with
a logical connection.
¿Purpose?  make the business model and the strategy visible.
Lagging earnings figures (ROI, EBIT) and leading indicators (performance drivers,
cycle times, error rates are integrated in the cause-effect chain.

Based on how these operating conditions develop, estimations can be made: future
orientated early indicators.
Only by linking the two types the strategy can be understood and a pro-active
management can be assured.
1. All key figures must be able to be integrated in the map
2. Makes sure that the defined performance measurements and the action
programmes are directed to the success of the company.

Development of a BSC

A creative process of discussions within the management. The small number of key
figures requires a rigorous selection.
¿Are the key figures related to the strategy?
¿Do they map variables that are critical to a successful implementation of the
strategy?
¿Can they be integrated in the cause-effect chain?

Successful attempt to combine knowledge of strategy development and

implementation. In a compact, tangible and communicable concept.
Popular, no other concept has succeeded to such impressive degree.
The BSC should be adjusted to the objectives of the company.
“Twenty is plenty” refers to the approximate number of strategic key figures that are
ultimately used to control the BSC’s performance indicator system.
No more than a KPI system with a maximum of 20 key figures, which are divided
into four perspectives.
However, it makes little sense to arbitrarily select and report key figures without
them having a concrete reference to the corporate objectives.
A BSC IS NOT A RATIO SYSTEM, BUT A BSC HAS A RATIO SYSTEM.

- Big Data Systems, Artificial intelligence, Deep learning

Treatment and analysis of huge repositories of data that cannot be treated with
conventional information systems.
 They process structured, unstructured or semi-structured data: messages in
social networks, mobile signals, audio files, sensors, digital images, form data,
emails, survey data, etc.
 They are used to understand the profile, needs and feeling of the clients
regarding the products and/or services sold.

“La madurez digital del controlling a examen”

No es una sorpresa que la innovación sea un factor diferencial recurrente en las

organizaciones más exitosas: lo importante en la actualidad no es solo producir
bien y barato, sino también ofrecer productos novedosos a una demanda que es
más global que nunca y que maneja información en tiempo real.
En este nuevo marco, volátil y cambiante, la función del control de gestión está
llamada a desempeñar un papel cada vez más estratégico como palanca para dar
estabilidad y ofrecer un mayor grado de predictibilidad a la hora de tomar
decisiones.
La función de control de gestión va mucho más allá del análisis de costes y
camina hacia un nuevo perfil promotor del cambio que tiene en la tecnología un
aliado clave: Cloud, EPM, Internet of Things, Big Data, Data Science y
Business Analyticsincrementarán exponencialmente su capacidad de elaborar
pronósticos. Pero, ¿están bien preparados los controllers para tomar las riendas?
Según las conclusiones del informe El nivel de madurez digital del
controller elaborado por KPMG en colaboración con el Global Chartered
Controller Institute (GCCI) y Microsoft, todavía queda camino por recorrer para
llegar a un nivel óptimo. El informe mide la preparación de la empresa en
materia de control y gestión en el entorno digital así como su madurez digital en
términos de estrategia, indicadores, flujo de información y operaciones digitales
(SIFO Matrix®). Estas son algunas de las conclusiones más relevantes.

Clientes, competidores y canales. Conocerles es imprescindible para

desempeñar adecuadamente la función y anticipar sus necesidades y demandas.
Por un lado, siete de cada diez aseguran que tienen claro cuál es su segmento
objetivo entre los nuevos targets de clientes. La tarea pendiente es, para la mitad
de los encuestados, poner en marcha un plan de captación. En cuanto a los
nuevos canales, es una buena noticia que el 75% las empresas hayan empezado a
operar a través de ellos y que tres de cada diez tengan en agenda ya el
lanzamiento de canales adicionales. Frente a esto, se identifica una debilidad
clara en los elementos internos a la empresa: las habilidades digitales y la
disponibilidad de nuevos perfiles.

Una de las mayores ventajas que ofrecen los canales digitales es el acceso a
indicadores claros y objetivos, en tiempo real, relacionados con la actividad de
las compañías y sus clientes. En este sentido, la mayoría utiliza aquellos
directamente relacionados con la venta (pedidos, transacciones, etc.), con el
tráfico (sesiones, tiempo en página…) o con el cliente (satisfacción, market
share…).
También se puede mejorar la clasificación que se realiza de los clientes en las
diferentes soluciones de CRM en función de los canales que utilizan. Eso sí, la
tendencia a considerar a los clientes como onmincanal es creciente, como
también lo es la manera comprar y consumir.

En la medida que el negocio avanza en la digitalización, deben incorporarse

indicadores específicos para medir el rendimiento de estos canales. Sin embargo,
el informe refleja cierto margen de mejora en este terreno. Todavía se realiza un
uso extensivo de indicadores digitales no asociados a ningún objetivo
estratégico (53% así lo indica) lo que debería animar a algunas organizaciones a
revisar su idoneidad para medir el cumplimiento de los objetivos planteados.

El Big Data es un concepto cada vez cada vez más presente en la gestión y
análisis de la información. El informe así lo corrobora y muestra una fuerte
tendencia de las empresas hacia el uso de estas tecnologías. Al menos el 52% la
utilizan bien para optimizar el tratamiento de los datos en cuanto a su volumen,
o bien para optimizar la velocidad o integración de las fuentes. En cuanto a
calidad del dato, la mitad de los encuestados asegura que aplica políticas y
estándares para garantizarla de forma integrada o mediante workflow.

Por otro lado, las tecnologías en la nube o sistemas cloud se utilizan

moderadamente, según concluye el informe, tanto para llevar a cabo labores
transaccionales de información ERP (26%) como de información de gestión
EPM (19%). A pesar de la brecha pendiente, es cierto que ya casi la mitad de las
empresas utiliza herramientas web y mobile en las operaciones cotidianas de la
empresa aunque de estas prácticamente un tercio lo haga con información en
tiempo real.

La función financiera tiene que seguir avanzando en digitalización. Según el

diagnóstico del informe, alcanza una calificación de dos puntos sobre cinco.
Aunque en España ya hemos iniciado el camino en cuanto a la visión estratégica
digital, debemos reflexionar ya que no solo estamos frente a un cambio
tecnológico. La transformación digital es todo el universo de consecuencias
derivadas de la fusión de lo físico y lo digital. Un ecosistema diferente en el que
las empresas y sus profesionales necesitan reaprender cada día.
En este nuevo paradigma, las empresas no competirán por productos, sino por
plataformas tecnológicas, hacia un mundo global, integrado y visible, donde
la función de control de gestión tendrá un papel vital.

“How is the current state of Big Data Analytics in Controlling?”

While the term “controller” is common in German-speaking countries,

“management Accountant” is a recognized term in English speaking countries
such as the USA and UK. In comparing both professions, the tasks of the
controller are generally considered to an extended range, not only focusing on
accounting issues but also on management issues.

The terms “controller” and “management accountant” are used for the same
meaning, as commonly found in controlling and management accounting
literature.

The features of big data analytics have facilitated the advanced analytics to
construct a picture of an event, a scenario, or objects of interest from pieces of
trivial information that are scattered across different databases.

Companies, in particular their controlling units, can apply the insight they gained
from big data analytics to enhance their decision-making processes to achieve
their business objectives successfully. With the overall focus on extracting the
essential insights, big data analytics is based on data mining and statistical
techniques. Actions from executives that were previously based on gut feeling
could now be made using data-driven mathematical models.

Now, a controller could also utilize big data analytics for scenarios and consider
seasonal fluctuations. Forecast accuracy affects the efficiency of the company
 planning process, the degree of goal achievement, total costs, and the level of
customer fulfillment needs.

TOP 10 RULES - IBCS

1. Message: Reports and presentations have messages. Present them at the top
of each slide or page
2. Titles: Titles identify pages, charts and tables. Name at least organizational
unit(s), measure(s) and time period(s).
3. Time and structure: Time and structure are the most important analysis type.
Arrange time series horizontally and structural comparisons vertically.
4. Time periods: Time periods such as “years” and “months” should be
identified by different category widths.
5. Charts: Charts are key for perception. Prefer columns, bars and lines to pies
and gauges.
6. Labels: Labels are data. Integrate labels for data series and values in charts.
7. Scenarios: Scenarios represent the data categories to be compared. Use
standard notations for actual, planned, and forecasted data.
8. Variances: Variances are differences between scenarios. Unify colors for
good and bad variances. Use pins for relative variances.
9. Scaling: Comparisons require consistent scaling. Don’t cut axis. Use the same
scale for same units. Add scaling indicators if necessary.
10. Highlighting: Highlighting accelerates comprehension.

What  IBCS stands for International Business Communication Standard and are
practical proposals for the design of business communications. One focal point concerns
the proper conceptual, perceptual and semantic design of charts and tables in reports,
presentation and dashboards.

Who  IBCS Standards is an ongoing process controlled by the IBCS Association (a

not-for-profit organization that publishes the standards for free, engages in extensive
consultation and discussion prior to issuing new versions? This includes worldwide
solicitation for public comment. Wikipedia style.

Purpose  Explain how visual consistency helps better understand reports, presentations
& dashboards.
If we want to make business communication more effective, then things that mean the
same have to look the same. Prof. Rolf Hichert

2.IBCS Top Ten Topics

The same color in the same page tells us four different things.
There is a standard communication in different countries referring to “stop signs”.

1. Message: Reports and presentations have messages. Present them at the top
of each slide or page
2. Titles: Titles identify pages, charts and tables. Name at least organizational
unit(s), measure(s) and time period(s).
3. Time and structure: Time and structure are the most important analysis type.
Arrange time series horizontally and structural comparisons vertically.
4. Time periods: Time periods such as “years” and “months” should be
identified by different category widths.
5. Charts: Charts are key for perception. Prefer columns, bars and lines to pies
and gauges.
6. Labels: Labels are data. Integrate labels for data series and values in charts.
7. Scenarios: Scenarios represent the data categories to be compared. Use
standard notations for actual, planned, and forecasted data.
8. Variances: Variances are differences between scenarios. Unify colors for
good and bad variances. Use pins for relative variances.
9. Scaling: Comparisons require consistent scaling. Don’t cut axis. Use the same
scale for same units. Add scaling indicators if necessary.
10. Highlighting: Highlighting accelerates comprehension.
Sales Controlling

¿Objectives?

- Identify costs for customer and product analysis

- Understand the usefulness of a Customer Profitability Analysis
- Analyze the contribution margin
- Use the contribution margin of different levels for the analysis

The starting point for Sales Controlling: activities!!!!!!!!

For designing an activity-based product costing system you need:

- An activity analysis
- Assigning costs to cost pools/cost centers for each activity
- Determining the cost driver for each major activity

AN IMPORTANT INFORMATION FOR SALES CONTROLLING IS THE COST OF

ACTIVITIES RELATED TO THE CUSTOMER!!!!!

Cost objects – activities – cost driver

In cost accounting the term “cost object” is used: any item for which a separate cost
measurement is made.
That is, if users of accounting information want to know the cost of ‘something’ is called
a cost object.

Output  the most common cost object are a company’s products and services, as the
company wants to know the cost of their production for the profit and loss account and
for pricing. They are also called “cost carriers”.
Operational  a cost object can be within an enterprise, such as a department, a
machining operation, a production line, or a process or activity, e.g., the cost of
designing a new product, or a customer service call, or reworking a returned product.
Business relationship  a cost object may be external to the company: it may, for
example, be necessary to accumulate the costs of a supplier or a customer, in order to
determine the cost of the relationship with that entity.

In full cost accounting, cost centers and work units are used as intermediate cost objects
in order to allocate indirect costs via overhead rates or cost rates to the final cost object
(the “cost carrier”).
In activity-based costing the activities performed by a company are identified as
intermediate cost objects and then indirect costs are allocated to the final cost objects (the
cost carrier) by means of “cost drivers”.
Analyze the reason to understand why indirect cost are so high in the client 1.
It is important to make a point in the “Delivery of the goods” and understand which is
the cause to have a value so high.

¿Should we be stop working with this client? NO

Activities consume resources – people, materials and equipment – and this consumption
can be measured.
Managing activities requires:
- An understanding of what factors cause activities to be performed (cost driver)
- And what causes activity costs to change

Goal? Satisfy customer needs while making fewer demands on organizational resources
(i.e., cost reduction)

PRODUCT OR CUSTOMER CONTRIBUTION

- Product and customer profitability: at this level a meaningful comparison can be

made between products and/or between customers.
- Exposes small or negative values, prompting a serious review of which products
or customers to keep, or at least take action to try and turn the relationship into
one that provides positive contributions.
Traditional budget and control reports analyze costs:
- By types of expense
- By responsibility center

Activity based analyses:

- Costs by activities
- Provides management with information on why costs are incurred
- The output from the activity (in terms of cost drivers)

A business process is a collection of activities that are linked together in a

coordinated manner to achieve a specified objective.

Why is a customer profitability analysis important? Because the customer pays our
salaries!!!!
Not every customer is a “good” customer – customers also “cause” costs.

A customer profitability analysis, structured with contribution margins, can illustrate the
value that a single customer or even a whole customer group has.

This transparency can be used for multiple purposes and objectives:

- Objective view of customer profitability
- Insights about customer support expenses
- Creation of an individual support strategy for single customers or entire customer
groups.
- Important input for the risk management system
- Customer contribution margin as an objective for the key account manager for
key or strategic customers
- Help for planning resources and costs
- Management of price reductions or discounts
- Argumentation aid during customer meetings

Contents?
- Individual costs are directly allocated to the customer
- Costs allocated by allocation key are like distributing costs by the watering can
principle
- The focus is on tracking differences in behavior to be able to use and influence
them in the company interest
= CB I  customer specific promotion costs
= CB II  customer specific costs – order fulfilment process
= CB III  customer specific cost of order tracking
= CB IV  customer specific cost – customer support
= CB V  imputed costs of assets, utilized by a customer
= CB VI

¿INTERPRETATION OF THE CONTRIBUTION MARGINS?

Negative CB I:
- Direct loss caused by sales to the customer based on the selling procedure
- Requires immediate mitigation by the sales department

Positive CB I, but further CB levels are negative:

- There is a contribution to cover the structure costs
 - However, not enough to cover all costs which are considered directly related to
the customers
What to do with a negative contribution?
- Increase CB I, (price, product cost…)
- The direct costs can be reviewed
- Simplification of processes and utilizing the processes less often are common
approaches
- If a single customer causes only a low utilization of a process, then a cost
reduction can only be reached with the whole customer group.
¿How to improve contribution?

Hidden benefits
- Large orders
- Purchase of standard products
- Purchase of high-margin products
- Reduced price pressure
- Easy demand forecasting and ordering
- No changes to orders in the short-term or afterwards
- Requires little assistance from the sales department
- Pay bills on time
- No need for specialized company resources

Hidden losses
- Low quantity orders
- Purchase of special products
- Buying products with small margins
- They demand big discounts
- Unpredictable purchasing behavior
- Constantly changing delivery conditions
- Great need for technical and commercial assistance
- Bad payment habits
- Contribution of specialized assets for the client

Customer Profitability Analysis can be used to work out which customers comprise the
top 20% and the bottom 2%.
It can also be used to help companies to understand:
- How dependent they are on the most profitable customers
- What proportion of resources are used for different customers
- The full cost of servicing a customer including advertising, service and returns
- Which customers are targeted by competitors.

The general approach to CPA is based on segmenting the customer base

This is often combined with an activity-based costing (ABC) approach
Once the profitable and non-profitable segments are identified, profitable segments are
maximized while non-profitable segments are improved, reduced or eliminated.

Disadvantages of CPA

Companies may not have the data capture systems to produce an accurate estimation of
customer segmental revenues and costs.
There may be practical difficulties in calculating costs attributable to each segment.
Implementing ABC is often challenging for many companies.

SUMMARY

Step 1 – Customer segmentation

Step 2 – Revenue attributable to each segment
Step 3 – Use ABC to determine the cost attributable to each customer or segment
Step 4 – Analyze the profitable versus the less profitable or unprofitable customer
segments.
Step 5 – Develop strategies to maximize profits from profitable customers and improve,
reduce or eliminate less profitable or non-profitable customers.
3. Responsibility Centers in the context of Management Accounting

¿Objectives?
- Identify responsibility centers
- Identify the advantages of the responsibility centers to improve control
- Understand the control criteria in each type of center
- Learn to carry out budget control

Elements of a Management Control System

1.Management Accounting
2.Management Information Systems
3.Structure for analysis and control: Responsibility centers

Operation of a Management Control System

1.Identify KPF and KPIs linked to the strategy

2.Determine strategic and tactical objectives derived from the strategy
3.Establish a network of responsibility centers
4.Determine variables with the control of each center of responsibility and
monitoring through the control process

What are Responsibility Centers in the context of Management Control?

Organizational units around which the control system is built:

- They have specific objectives assigned
- They are managed by a responsible
- They have some resources that must be managed
- They allow to delegate responsibilities and decentralize the management of the
company
 What should be taken into account when establishing Responsibility Centers?

Coherent objectives
- The objectives of a center must be compatible with that of the other center and
converging with those of the company as a whole.

Sometimes problems arise:

- The sales department is focused on maximizing income.
- If the sales are pushed with low prices, the benefit of the company may suffer.
- The objective of the purchasing department is to minimize costs.
- If it does so at the expense of quality, this can negatively affect the company’s
income and profitability.

How should Responsibility Centers be defined in the context of Management

Accounting?

They are usually established from the organizational chart of the company.
They are usually defined by the economic variables that are considered crucial to each of
them:
- Operating cost centers
- Indirect cost centers
- Income centers
- Profit and investment centers

A cost center is a business unit that incurs expenses or costs but does not generate any
revenue or money from selling goods and services for the company.
A profit center is a department that incurs costs but also earns revenue by selling its
goods and services to customers.

Network of Responsibility Centers

The company as a whole can be considered as a responsibility center (either profit or

investment).
From here, and depending on the size of the company, a network of Responsibility
Center will be configured as needed.
This subdivision is raised to a level beyond which a separate control is no longer
compensated.
Any result obtained in the company should be attributable to a Responsibility Center.

Operating cost centers

Those cost centers in which there is a clear relationship between the cost necessary to
carry out the activity of the center and its output.
There is proportionality between the cost and the number of units.

Indirect cost centers

Indirect costs are those whose amount is not linked to the level of activity and therefore
is usually determined by a management criteria.
Difficulty in controlling these centers.
- The result of the activity is hardly measurable
- Difficult to establish a relation between the objectives of these centers and the
global objectives of the company.

Income centers

They are set up to evaluate the management of the centers, where the relevant variable
and thus the responsibility of the center lies in the optimization of income.

Profit or investment centers

The company itself.

- Decentralized parts of the company, which act as more or less independent
entities.
- In a profit center, the responsible person controls the profit achieved.
- In an investment center, the person in charge also makes decisions about the
investments to be made.
Budget control by center of responsibility

- Economic-financial control of the business activity.

- On the tactical level of planning and control (at the level of Responsibility
Center), once strategic planning has been carried out.

Budget control in OPERATING COSTS CENTERS

1. Set objectives/targets and name responsible persons

- The center’s objectives are quantified by the center’s budget.

- Costs
- The amount or volume of activity is estimated
- The standard costs (planned unit costs) of each variable cost component are
estimated  of material; of direct labor
2. Collect real data

- Real volume of activity is recorded to calculate the real costs of the center
- Real costs of the center are collected (variable and fixed costs)
- The real unit costs of each variable cost component are calculated

3. Analysis of deviations and corrective actions

4. Analysis of deviations and corrective actions
- Elaboration of the flexible budget  adapting the planned cost to the real volume
of activity
- Calculation of deviations
 initial budget – flexible budget: activity volume deviations
 flexible budget – actual costs: cost deviation
- Determine significant deviations
- Analysis of the causes of deviations
- Establishment of corrective actions according to the causes of the deviations
Budget control in INDIRECT COSTS CENTERS

1. Set objectives and name responsible persons

- Objectives are quantified by the center’s budget

- Costs are indirect, so they are not proportional to the operational volume
- The management plans a global amount based on the center’s needs
- The budget setting already includes the control itself

2. Collect real data

- The actual costs of the center are recorded, distinguishing between controllable
costs and non-controllable costs.

3. Deviation analysis

- These costs are structure costs/fixed costs  the objective is to adjust as much as
possible to the established budget.
Budget control in INCOME/REVENUE CENTERS

1. Set objectives and responsible

- Center’s objectives are quantified by the center’s budget.

- The head of the center can be responsible for the amount to sell or the sale price;
and the fix and variable costs of the center
- Incomes is estimated (planned income)  amount expected to sell*expected sale
price

2. Collect real data

- The real volume of sales

- The real income
- Controllable and noncontrollable center costs are recorded
- Elaboration of the flexible budget  adapting the budgeted revenues/costs to the
real sales volume.

3. Deviation analysis and corrective actions

- Calculation of deviations  sales price deviation, sales volume deviations, and
cost deviations of the center
- Determine significant deviations
- Cause-analysis  sales price deviation, market share deviation, market
dimension deviation, and commercial cost deviation

4. Deviation analysis and corrective actions

- Establishment of corrective actions according to the causes of the deviations.

4.Budgeting

Budgeting is most useful when it is integrated with a company’s strategy. The strategy specifies
how an organization matches its capabilities with the opportunities in the marketplace to
accomplish its objectives.

Creating a budget for decision-making → 5 steps decision-making process to facilitate the

budget process:

1. Identify the problem and uncertainties

2. Obtain information
3. Make predictions about the future
4. Make decisions by choosing among alternatives
5. Implement the decision, evaluate performance and learn
Objectives:

- Understand the purpose of budgeting.

- Understand the budgeting process.
- Learn how to prepare consolidated budgets.
- Learn how to interpret consolidated budgets.

Definition:

A plan (quantities and values) in line with the objectives of the company for decision-making
units with a certain degree of obligation for a period of time.

Characteristics:

- Future orientation
- A decision-making framework
- Internal objectives

Budgeting means preparing, approving and monitoring budgets.

- “Coordination through plans”

Corporate Planning

- Strategic Planning (are we doing the right things) LT planning

DOING THE RIGHT THINGS
Long term planning – guidance and leadership function
- Tactical Planning
DOING THINGS RIGHT
Specifies the determined framework
- Operational planning

Measures and actions

THE LONG-TERM STRATEGY IS BROKEN DOWN INTO SEPARATE PLANNING

PACKAGES
Once we decided the units to sell, our performance can start
Top Down: top management's make decisions

Bottom up: everybody proposes what they feel and they communicate it to top management's

Normally, we use the mix of them.

Strategic planning

- Key Success Factors

- Key Performance Indicators

This two are what we use in the BSC

Operative planning

- Functional budgets on responsibility centre level.

- Operating budget: Revenue’s budget + multiple schedules + budgeted income
statement.

Financial planning

- Planned (economic) result

- Cash budget
- Planned balance sheet
- Financial planning models: Mathematical representations of the relationships among
operating activities, financing activities and other factors that affect the master budget.
- Financial budget: Capital expenditure budget + cash budget + budgeted balance sheet +
budgeted statement of cash flows

Functional budgets address expenses and revenues for a particular function, such as a
department, centre or process, within a company.

Examples of functional budgets include budgets for functions such as:

- Production
- Sales
- Business development
- Procurement of materials

What is a budget or a financial plan?

- The planned activities of a company expressed in monetary terms

 - The budget tries to cover all the activities of the company and that each of them is
reflected in a budget line

A budget is the quantitative expression of a proposed plan of action by management for a

specific period.

It’s an aid to coordinating what needs to be done to implement that plan.

A budget generally includes the plan’s both financial and nonfinancial aspects and serves as a
road map for the company to follow in the upcoming period.

Budget helps managers to:

- Communicate directions and goals to different departments of a company to help them

coordinate the actions they must pursue to satisfy customers and succeed in the
marketplace.
- Judge performance by measuring financial results against planned objectives, activities
and timelines to learn about potential problems.
- Motivate employees to achieve their goals.

Objectives:

- Achieve the company’s objectives.

- Combine the available company resources towards the common goal.
- Detail the resources to achieve the objectives.
- Make responsible act efficiently and effectively.

Achieving the budget is to be aimed at and not a favourable variance in sales or costs.

Otherwise, the budgeting process would encourage the formation of reserves and short-term
oriented behaviour, endangering the long-term corporate objectives.

Components of the budget can be:

- Guidelines (production cost)

- Maximum values (advertising budget)
- Minimum values (staff training)

It is recommendable to elaborate different scenarios:

 - Optimistic
- Realistic
- Pessimistic

For the various areas of responsibility there should always be only one budget to work as
“timetable”.

If there is additional “shadow budget” it is to be feared that neither the one nor the other will be
taken seriously.

The budget is not to be changed within the budget period; but the consequences of the variances
(changes) are to be communicated in a forecast to year end.

(NO ENTREN AQUESTES FOTOS)

Step 6: control the achievement of our plan

1. Definition and transmission of general guidelines

The controller can act in this phase as management staff helping to develop guidelines.

The controller is the moderator.

 2. Preparation of plans, programs and partial budgets

The responsible of each activity area:

- Define action plans to achieve the goals.

- Plan the various actions that make up these plans (time schedule)
- Translates the actions foreseen in the plans into monetary terms (revenues/expenses and
receivables/payments) leading to the partial or sub- or functional budgets.

In this stage, the controller:

- Coordinates the work of the different areas and promotes the collaboration between
departments when preparing plans.
- It is a support element for those responsible for each of the areas in obtaining and using
the information.

Examples:

- If the marketing department wants to introduce a new product format, it needs to know
if it can be produced.
- To create the production plan, you must know the units of this new format that are
expected to be sold.

3. Negotiation

Iterative phase in which each responsible negotiates their plans, programs and budget with the
management.

The controller acts as coordinator, as a moderator.

 4. Review and coordination

Review of the various plans and programs regarding their coordination.

If necessary, changes are introduced to achieve a better balance between the areas.

The controller prepares the draft of the CONSOLIDATED BUDGETS:

- Planned income statement

- Planned cash flow
- Planned balance sheet

Based on what are the drafts of the consolidated budgets evaluated?

- Evaluation of the planned results

- Evaluation of the planned cash flow
- Evaluation of the planned balance sheet

5. Final approval

With the approval of programs and budgets by the general management, these become the
short-term objectives to be achieved by each of the areas.

6. Monitoring: budgetary control

- Check: have the objectives been achieved?

- Follow up before the close of each month.
- Serves to evaluate the causes and responsible for the deviations.
- Serves to establish how and when to act on the deviations found: corrective actions.

Budgeting Techniques

There are different ways to determine the budget items.

- Fix cost budget (not related to units)

The amount for a budget item that is fixed has to be considerable reasonable.
Usually used for general expenses (which generally do not depend on the level of activity).

Ex.: administrative expenses, R&D, advertising…

- Variable cost budget

The amounts for the budget items are fixed according to different levels of activity.

It is necessary to set standard costs (which will be the ones that will fix the budget according to
the level of activity). Ex.: sales revenue budget, production cost, commercial expenses…

- Increasing (“classic”) budget

The amounts for the budget items are determined by increasing them by a percentage based on
the value of the previous period.

- Zero base budget

Requires the analysis of all expenses and income concepts, to decide from scratch, which
activities are maintained, which are eliminated and how resources are allocated.

BAD HABITS:

- Wrong approach: not based on strategic planning.

- Unawareness of costs: bad estimation
- Not work with the heads of the departments: budgets of others
- Excessive rigidity: they do not go readapting

VUCA - it is not easy to plan. There’s risk management.

- Volatility
- Uncertainty
- Complexity
- Ambiguity

TYPES OF BUDGETS:

Partial budgets:
Consolidated budgets:

1. Income statement.
2. Cash flow
3. Balance sheet

a. Sales budget: Income centers.

Formula: Planned units * Planned sales price = Income centers.

b. Production / procurement budget: Operating cost centres.

- Production program:
○ Units to be produced / bought = units to be sold – Initial Stock + Final
Stock
- Production / procurement budget
○ Total planned production cost/ Total amount of planned units bought.
c. Budget of commercial expenses:
➢ General expenses:
- Administration and management of internal services: commercial
department, billing, customer tracking, mailing...
- Commercial studies: promotions, market studies, advertising, product
development…
➢ General operating costs:
- Direct sales expenses: search of the client through sellers,
representatives, commercial agents...
- Warehouses and delivery: packing, transport...
- After-sales service: guarantee of labour, parts,
d. Budget of overhead or structure costs. They are usually carried out in indirect cost
centres.
- EXAMPLES:
➢ Administrative expenses.
➢ Financial expenses.
➢ Personal expenses.
➢ Maintenance expenses.
PREPARATION OF THE CONSOLIDATED BUDGET: The consolidated summary of the
partial budgets.

1. Budget of results (or operations) = Planned Income Statement : Serves to evaluate the
different margins obtained with the activity carried out.

ASPECTS TO EVALUATE THE PLANNED INCOME STATEMENT

a. Consistency between the sales budget and expenditure budgets.

b. Profitability of sales: EBIT / sales
c. Sales profitability threshold: break even in monetary units.
d. Break Even = [Fixed Costs / (sales price – variable cost) ] * p

2. Cash Flow budget: Measure the surplus / cash needs for a given period, to:
- Maximize the flow of productive money
- Minimize the flow of unproductive money

ASPECTS TO EVALUATE THE CASH FLOW BUDGET

a. Negotiate additional credit lines.

b. Increase control of debtors and creditors.
c. Delay or cancel investments in fixed assets.
d. Change purchase guidelines.
e. Increase cash sales.
f. Replace surplus cash

3. Planned Balance Sheet: To evaluate the evolution of the different assets.

- Budget of debtors: Initial amount + sales – received payments.
- Creditors' budget: Initial amount + purchases - payments.
- Stock Budget: Initial amount + purchases- sales cost.
- Fixed asset budget
- Financing budget

ASPECTS TO EVALUATE THE PLANNED BALANCE SHEET:

a. Indebtedness = Debt Funds / Equity Funds

b. Solvency = Current assets / short-term receivables
c. Profitability ratios:
- Economic profitability = EBIT / Asset
- Financial profitability = Net Result / Equity
d. Ratios of rotation:
- Asset = sales / asset
- Of capital = sales / equity
- Of stocks = Cost of sales / final stocks
- From customers = Sales / customer balance.
- From suppliers = Purchases / balance suppliers