Strategic Control

Control

is taking measures that synchronize

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

Strategic Control
Strategic

Control Methods

Integrates Quantitative & Qualitative Measures

Uses Financial and Non-financial information
Customer (External) focus
Rewards based upon relative contributions to

organization success
Encourages desired organizational behavior
Implementing

Planning
Control Cycle
Adjusting

Measuring

Strategic Control and Control Systems

Should motivate people toward desired organizational
behavior rather than promote dysfunctional behavior
Traditional

What is
Measured?

1990s thru 21st

Century

Meeting Budget

Customer Satisfaction

Production Efficiency

New Product
Development Rates

Inputs
Quantitative
Performance(Mostly
Financial)

Outcomes
Quantitative & Qualitative
Performance

Who is evaluated?

Traditional
Individuals
Functions
Responsibility
Centers

1990s thru 21st

Century

Individuals
Teams (Groups)
Cross-Functional
People

Basis of Rewards control Systems

Traditional

1990s thru 21st

Century

Efficiency

Quality

Profits

Innovation

ROI

Creativity
Overall Company
Performance

Focus of Contemporary Control Systems

Traditional

Internal

1990s thru 21st

Century

Macro Environment
Industry Environment
Internal

Capacity Management
Capacity is the potential or capability, of a set of resources to do work

of

some type to create value for the customer.

Importance of capacity management (control) of organizations

Huge initial outlays
Sunk costs
Inflexible
Long-run costs
Mostly Fixed Costs
Goal of capacity management is to manage fixed costs (plant assets)
in a manner that spreads costs over the largest possible volume
A very difficult area of management because it involves long-range
planning

Strategic Control of Capacity

Must

have right amount of

capacity to produce to
customer demands

*If there is excess capacity fixed costs

must be spread over fewer units thereby
making the units cost more
*If there is insufficient capacity the
company must incur additional costs to
generate more capacity

A Capacity Management Example

Company A and Company B each manufacture one product that is very
similar in nature. Company A recently invested in modern machinery
(new technology) that reduces its manufacturing labor cost. Company B
continues to be labor intensive using its older machinery. Accordingly,
Company A has much more fixed factory overhead annually than
Company B ($ 1,500,000 compared to $ 600,000). The respective selling
price and variable costs per unit are as follows:

Company A
Selling Price
Direct Mat.
Direct Labor
Var. Overhead

$20.00
$2.00
$1.00
$1.00

Company B
$20.00
$2.00
$6.00
$1.00

Required: Compute the gross margins on the product of each company. Assume
an annual volume of production and sales of 100,000 units; then 200,000 units.

Solution:
(100,000 Units)

Company A

Company B

Cost:
Variable Costs/Unit
Fixed Cost/Unit
6.00
Total Cost/Unit
Selling Price

$4.00

$9.00

15.00
$19.00

$15.00

$20.00

$20.00

Total Gross Margin

$100,000

$500,000

(200,000 Units)
The only Change is Fixed
costs per unit

$7.50

$3.00

$1,700,000

$1,600,000

Total Gross Margin

Cost-Volume-Profit Analysis

Break
Even
Point

Fixed
Costs
& Total
Costs
Line

of
r
P

e
r
it A

ea
r
sA
s
Lo

Revenue Line

Contribution
Margin

Variable Cost Line

Activity Level