Management Control Systems -- AMIS 635 -- Winter 1999

Professor Richard A. Young


 


Organization of Topics

In this course, we study management controls systems in decentralized organizations. Examples of management controls include: variance reporting, responsibility accounting, bonus plans, capital budgeting protocol, and internal audit practices. Decentralized organizations are miniature economies wherein differentially informed individuals interact, perhaps in cooperation, perhaps in conflict. In some situations, individuals may benefit by sharing or concealing information -- sometimes to the detriment of the organization. The obvious example is the familiar managers vs. shareholder (agency) problem. The objective of this course is to take a coherent, organized approach to study the costs and benefits to the organization of different types of managerial controls.

Our objective departs a bit from that represented in many management accounting textbooks, which typically start with traditional cost accounting concepts, laced with discussion of modern costing approaches. The main focus often is on "how to." In contrast, in this course we build an operational framework to help us focus on "why." One advantage of establishing a general framework is it can provide guidance for dealing with an ever-changing environment.

Constructing a framework for analysis and discussion of management control in organizations requires a small amount of rigor (and patience). We will build and analyze formal models of conflict and cooperation, the essential phenomenon that gives rise to management control issues. Some basic intuition from game theory and a little probability and optimization will facilitate this activity.

Performance EVALUATION

1. Class Preparation and Participation 20%
2. Written Case Solutions (in teams) 20%
3. Oral Case Presentations (in teams) 20%
4. Midterm Examination 20%
5. Final Examination 20% Class Preparation and Participation: Class participation is important. Our learning will be improved by active class discussions. Besides, it makes class a lot more fun for all of us if we are "on the same page." Questions or comments that improve the learning environment are always appreciated. Most days, at least one team from the class will give an oral presentation of an assigned case. Class members not presenting a case on that day are responsible to turn in written case solutions (see below). In addition, they should be prepared for class, ask questions, and participate in discussions. At the end of each class, I will ask each of you to provide a written evaluation of the presentations made on that day. Please treat the peer evaluation task seriously because: (1) it will provide useful feedback to your colleagues, (2) your ratings will be used as input in my evaluation of the case presenters, and (3) your ratings will be used as input in my evaluation of your own preparation and participation.

Written Case Solutions: On days your team is not presenting you are expected to write up a brief analysis of the case or cases presented in class. I would prefer that each team turn in a single assignment. Your first assignment is to find a study partner with whom you may: (1) prepare for class and (2) analyze and present your cases.

Oral Case Presentations: The cases will be challenging, but if you do your best you need not get uptight (at least not dysfunctionally so). You are welcome to discuss the case with me prior to class. For some cases there are supplemental readings in the course packet that may be helpful. Oral presentations (including discussion) should last 30-40 minutes. Presenters must turn in an outline of their presentation and may use handouts and overhead transparencies or other visual aids. Presenters will be graded on the outline and effectiveness of their oral presentation.

Midterm and Final Examinations: The written examinations are in-class, closed-book, closed-note exams. The final examination will be given on the date indicated by the University schedule.

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-- Tentative outline --

Management Control: Consistency and Coordination Issues

1. J 5 Course introduction
Reading:     Demski Ch. 1
                    BSZ Ch. 1 and 7

2. J 7 Business decisions and risk
Reading:     Demski Ch. 4; "Value of an Information System: Ch. One"
Cases:         Ralph's Lottery Evaluation; Demski 4-14

3. J 12 Using information
Reading:     "Value of an Information System: Ch. Two"
Case 1:         Ralph's Capacity

4. J 14 Cost-benefit analysis of information systems
Case 2:         Demski 4-10 and 4-13
Case 3:         Ralph’s Decision

5. J 19 Multiple sources of information
Reading:     "Using Excel …"
Case 4:         Ralph’s Coordination

6. J 21 Multiple users of an information system
Reading:     "Sequential Bayesian Analysis in Accounting Settings"
Case 5:         Alice’s Delegated IS Choice

7. J 26 Risk sharing
Reading:     "Sharing Risk"
Case 6:         Ralph's Decomposition I

8. J 28 Decentralization
Reading:     Kaplan-Atkinson, "Decentralization: Ch. 13"
Case 7:     Comox Corporation and Monroeville Chemicals
Case 8:     Ralph's Partnership

9. F 2 Incentives
Reading:     "The Stewardship Role of Accounting;" Salomon Brothers incentive plan
Case 9:         Ralph’s Risk Neutral Incentives

10. F 4 Midterm

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Management Control: Incentives and Operational Controls


 


11. F 9 Performance measurement
Reading:    Demski Ch. 18; Kaplan-Atkinson "Executive Compensation and Bonus Plans: Ch. 16"
Case 10:    Ralph's Cost Control

12. F 11 More performance measurement
Reading:     Antle-Demski "The Controllability Principle and Responsibility Accounting," "Budgeting and Responsibility Accounting," Dilbert Cartoon
Case 11:     Ralph's Comprehensive Incentives

13. F 16 Controllability and responsibility accounting
Reading:     Demski Ch. 19
Case 12:     Alice’s Monitor
Case 13:     McDonald’s

14. F 18 Costly observation and selecting employees
Reading:     "Pay for Performance for Middle Managers;" "Simulating Ownership for Line Managers"
Case 14:     Alice’s Costly Monitor
Case 15:     Ralph's Skill II

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Management Control: Participative Budgets and other Communication


 


15. F 23 Organizational slack
Reading:     "Capital Budgeting: Some Exceptions to the Net Present Value Rule;" "Capital Budgeting in the Forest Products Industry"
Case 16:     Decentralized Ralph
Case 17:     Ralph’s Influence

16. F 25 Repetition and reputation
Reading:     "On the Role of Historical Cost Accounting"
Case 18:     Historical Ralph
Case 19:     Western Pants

17. M 2 Inducing managerial competition
Reading:     BSZ Ch. 8; "Public Company, Private Fiefdom?"
Case 20:     Alice’s Two Divisions

18. M 4 Influence costs and information system choice
Reading:     BSZ Ch. 9; "CEO Right;" "Those Big Executive Salaries May Mask a Bigger Problem"
Case 21:     Ralph’s Hold-up
Case 22:     St. George’s Press

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Management Control: Summary


 


19. M 9 Power of incentives
Reading:     BSZ Ch. 12; "CEO Incentives – It’s Not How Much You Pay, But How"
Case 23:     Ralph’s Sensitivity

20. M 11 Course wrap-up

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Required materials: Handout readings and cases (purchase at Cop-Ez at Ohio Union). Included are chapters from Brickley-Smith-Zimmerman’s Managerial Economics and Organizational Architecture, Demski’s Managerial Uses of Accounting Information, and Atkinson-Kaplan’s, Advanced Management Accounting.

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