Management Control Systems

Twelfth Edition Robert N. Anthony

Ross Graham Walker Professor of Management Control, Emeritus Graduate School of Business Administration Harvard University

Vijay Govindarajan
Earl C. Daum Professor of International Business Director, William F. Achtmeyer Center for Global Leadership The Tuck School of Business Dartmouth College

McGraw-Hill Irwin
Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

Table of Contents
Preface ix
Chapter 1
Case 3-2: Nucor Corporation (B) 117 Case 3-3: Rendell Company 119

Chapter 4

The Nature of Management Control Systems 1

Basic Concepts 2 Boundaries of Management Control 6 Road Map for the Reader 14 Summary 17 Case 1-1: Nucor Corporation (A) 19 Case 1-2: Wal-Mart Stores, Inc. 31 Case 1-3: Xerox Corporation (A) 34 Case 1-4: Motorola Inc. 42

Responsibility Centers: Revenue and Expense Centers 128

Responsibility Centers 128 Revenue Centers 133 Expense Centers 133 Administrative and Support Centers 139 Research and Development Centers 140 Marketing Centers 143 Summary 144 Case 4-1: Vershire Company 145 Case 4-2: New Jersey Insurance Company 151 Case 4-3: NYPRO, Inc. 159 Case 4-4: Whiz Calculator Company 170 Case 4-5: Westport Electric Corporation 175 Case 4-6: Grand Jean Company 181

PART ONE

THE MANAGEMENT CONTROL ENVIRONMENT 51

Chapter 2

Chapter 5

Understanding Strategies 53
Goals 53 The Concept of Strategy 56 Corporate-Level Strategy 58 Business Unit Strategies 62 Summary 70 Case 2-1: Encyclopaedia Britannica, Inc. (A) 72 Case 2-2: Encyclopaedia Britannica, Inc. (B) 74 Case 2-3: Encyclopaedia Britannica, Inc. (C) 76 Case 2-4: Cisco Systems (A) 79 Case 2-5: Cisco Systems (B) 91 Case 2-6: Technology Note: Internetworking Products 96

Profit Centers 185

General Considerations 185 Business Units as Profit Centers 189 Other Profit Centers 191 Measuring Profitability 194 Summary 198 Case 5-1: Profit Center Problems 200 Case 5-2: North Country Auto, Inc. 201 Case 5-3: Analog Devices, Incorporated: MEMS 209 Case 5-4: Abrams Company 225

Chapter 6

Chapter 3

Transfer Pricing 230

Objectives of Transfer Prices 230 Transfer Pricing Methods 230 Pricing Corporate Services 239 Administration of Transfer Prices 242 Summary 244

Behavior in Organizations 98
Goal Congruence 98 Informal Factors That Influence Goal Congruence 99 The Formal Control System 103 Types of Organizations 105 Functions of the Controller 110 Summary 112 Case 3-1: Southwest Airlines Corporation 114
vi

Appendix
Some Theoretical Considerations 245 Case 6-1: Transfer Pricing Problems 248 Case 6-2: Birch Paper Company 254

Table of Contents

vii

Case 6-3: General Appliance Corporation Case 6-4: Medoc Company 267

256

Chapter 10

Chapter 7

Analyzing Financial Performance Reports 425

Calculating Variances 425 Variations in Practice 432 Limitations of Variance Analysis 437 Summary 438 Case 10-1: Variance Analysis Problems Case 10-2: Solartronics, Inc. 444 Case 10-3: Galvor Company 446

Measuring and Controlling Assets Employed 270

Structure of the Analysis 271 Measuring Assets Employed 273 EVA versus ROI 283 Additional Considerations in Evaluating Managers 288 Evaluating the Economic Performance of the Entity 289 Summary 290 Case 7-1: Investment Center Problems (A) 291 Case 7-2: Investment Center Problems (B) 295 Case 7-3: Quality Metal Service Center 300 Case 7-4: Aloha Products 309 Case 7-5: Dell Computer Corporation 315 Case 7-6: Industrial Products Corporation 319 Case 7-7: Marden Company 327

440

Chapter 11

Performance Measurement 460

Performance Measurement Systems 460 Interactive Control 471 Summary 474 Case 11-1: Analog Devices, Inc. (A) 476 Case 11-2: Analog Devices, Inc. (B) 492 Case 11-3: CUP Corporation 500 Case 11-4: Enager Industries, Inc. 508

PART TWO

Chapter 12

THE MANAGEMENT CONTROL PROCESS 329

Chapter 8

Management Compensation 513

Research Findings on Organizational Incentives 513 Characteristics of Incentive Compensation Plans 514 Incentives for Corporate Officers 520 Incentives for Business Unit Managers 522 Agency Theory 530 Summary 534 Case 12-1: Lincoln Electric Company (A) 536 Case 12-2: Crown Point Cabinetry 554 Case 12-3: Worthington Industries 561 Case 12-4: Wayside Inns, Inc. 566

Strategic Planning 330

Nature of Strategic Planning 330 Analyzing Proposed New Programs 336 Analyzing Ongoing Programs 339 Strategic Planning Process 344 Summary 347 Case 8-1: Allied Office Products 348 Case 8-2: Hasbro Interactive 355 Case 8-3: Emerson Electric Co. 367

Chapter 9

PART THREE

Budget Preparation 380

Nature of a Budget 380 Other Budgets 386 Budget Preparation Process 387 Behavioral Aspects 391 Quantitative Techniques 393 Summary 394 Case 9-1: New York Times 396 Case 9-2: Corning Microarray Technologies 408

VARIATIONS IN MANAGEMENT CONTROL 575

Chapter 13

Controls for Differentiated Strategies 576

Corporate Strategy 577 Business Unit Strategy 581 Top Management Style 589 Summary 591

viii

Table of Contents

Case 13-1: Pelican Instruments, Inc. 593 Case 13-2: 3M Corporation 595 Case 13-3: Texas Instruments and Hewlett-Packard 597 Case 13-4: Texas Instruments 601

Exchange Rates Summary 694

685

Appendix
SFAS No. 52 Foreign Currency Translation 694 Case 15-1: AB Thorsten 697 Case 15-2: Falcon, Inc. 705 Case 15-3: Lincoln Electric Company (B) 712 Case 15-4: Hindustan Lever 717 Case 15-5: Xerox Corporation (B) 725

Chapter 14

Service Organizations 616

Service Organizations in General 616 Professional Service Organizations 618 Financial Service Organizations 623 Health Care Organizations 626 Nonprofit Organizations 628 Summary 631 Case 14-1: O'Reilley Associates 633 Case 14-2: Williamson and Oliver 638 Case 14-3: Harlan Foundation 647 Case 14-4: Piedmont University 650 Case 14-5: Chemical Bank 654 Case 14-6: Metropolitan Bank 669

Chapter 16

Management Control of Projects 730

Nature of Projects 730 The Control Environment 733 Project Planning 737 Project Execution 740 Project Evaluation 746 Summary 749 Case 16-1: Modern Aircraft Company

Chapter 15

751

Multinational Organizations 678

Cultural Differences 678 Transfer Pricing 680

Company Index Subject Index

753 758