Chapter 19 Budget Reports Usually List The Variance 2014

CHAPTER 19

MANAGING QUALITY AND PERFORMANCE

CHAPTER OUTLINE

What Is Your Attitude Toward Organizational Regulation and Control?

I. The Meaning of Control

II. Feedback Control Model

A. Steps of Feedback Control

B. The Balanced Scorecard

III. Budgetary Control

A. Expense Budget

IV. Financial Control

A. Financial Statements

B. Financial Analysis: Interpreting the Numbers

V. The Changing Philosophy of Control

ANNOTATED LEARNING OBJECTIVES

After studying this chapter, students should be able to:

1. Define organizational control and explain why it is a key management function.

Organizational control is defined as the systematic process through which managers regulate

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2. Explain the four steps in the control process.

Based on our definition of organizational control, a well-designed control system consists of the

following four key steps:

• Establish standards of performance. Managers define goals for organizational departments in

specific, operational terms that comprise a standard of performance against which to compare

3. Explain the benefits of using the balanced scorecard to track the performance and control of

the organization.

The balanced scorecard is a comprehensive management control system that balances traditional

4. Discuss the use of financial statements, financial analysis, and budgeting as management

controls.

Budget and financial controls tell whether the organization is on sound financial footing and they

5. Contrast the hierarchical and decentralized methods of control.

An organization’s approaches to quality are based on its basic philosophy of control. With many

organizations moving toward participation and employee empowerment, a choice must be made

between hierarchical and decentralized approaches. Hierarchical control involves monitoring

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6. Identify the benefits of open-book management.

Open-Book Management allows employees to see for themselves – through charts, computer

affects the financial future of the organization.

7. Describe the concept of total quality management (TQM) and major TQM techniques, such

as quality circles, benchmarking, Six Sigma principles, quality partnering, and continuous

improvement.

Total quality management (TQM) is a philosophy of organizationwide commitment to

continuous improvement, with the focus on teamwork, increasing customer satisfaction, and

Benchmarking is the continuous process of measuring products, services, and practices against

the toughest competitors or those companies recognized as industry leaders. The key to

successful benchmarking lies in analysis. A company must honestly analyze its current

procedures and determine areas for improvement. A company carefully selects competitors

worthy of copying and emulates their internal processes and procedures.

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8. Identify current trends in quality and financial control, including ISO 9000 and corporate

governance, and discuss their impact on organizations.

International Quality Standards – Many countries have endorsed a universal framework for

quality assurance called ISO 9000, a set of international standards for quality management

LECTURE OUTLINE

WHAT IS YOUR ATTITUDE TOWARD ORGANIZATION REGULATION AND CONTROL?

Managers have to control people for organizations to survive, yet control should be the right

amount and type. Companies are often less democratic than the society of which they are a part.

I. THE MEANING OF CONTROL

Organizational control is the systematic process through which managers regulate

organizational activities to make them consistent with the expectations established in plans,

Discussion Question #2: You’re a manager who employs a participative control approach.

You’ve concluded that corrective action is necessary to improve customer satisfaction, but first

you need to convince your employees that the problem exists. What kind of evidence do you think

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employees will find more compelling: quantitative measurements or anecdotes from your

interactions with customers? Explain your answer.

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II. FEEDBACK CONTROL MODEL Exhibit 19.1

A. Steps of Feedback Control

1. Establish Standards of Performance

a. Within the organization’s overall strategic plan, managers define goals for

organizational departments in specific, operational terms. These include

2. Measure Actual Performance

a. Most organizations prepare formal reports of quantitative performance

measurements that managers review daily, weekly, or monthly. These

3. Compare Performance to Standards

a. The third step in the control process compares actual activities to performance

4. Take Corrective Action

a. Managers also determine what changes are necessary.

Discussion Question #6: Think of a class that you’ve taken in the past. What standards of

performance did your professor establish? How was your actual performance measured? How

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was your performance compared to the standards? Do you think the standards and methods of

measurement were fair? Were they appropriate to your assigned work? Why or why not?

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B. The Balanced Scorecard Exhibit 19.2

1. The balanced scorecard is a comprehensive management control system that

balances traditional financial measures with operational measures relating to a

company’s critical success factors. A balanced scorecard contains four major

perspectives.

a. The financial performance perspective reflects a concern that the organization’s

activities contribute to improving short- and long-term financial performance.

Managers focus on various elements of the scorecard to set targets, evaluate performance,

and guide discussion about what further actions to take. The balanced scorecard is not

Discussion Question #3: Describe the advantages of using a balanced scorecard to measure and

control organizational performance. Suppose you created a balanced scorecard for Walmart.

What specific customer service measures would you include?

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III. BUDGETARY CONTROL

1. Budgetary control sets targets for an organization’s expenditures, monitors results,

compare them to the budget, and makes changes as needed. As a control device,

budgets are reports that list planned and actual expenditures for cash, assets, raw

materials, salaries, and other resources. Budget reports usually list the variance

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between the budgeted and actual amounts for each item. A budget is created for

A. Expense budget. An expense budget includes anticipated and actual expenses for

each responsibility center and for the total organization. It may show all expenses

or focus on a particular category, such as materials or research and development

expenses. When actual expenses exceed budgeted amounts, the difference signals

the need for managers to identify whether a problem exists and if so, take action.

B. Revenue budget. A revenue budget lists forecasted and actual revenues of the

C. Cash budget. A cash budget estimates receipts and expenditures of money on a

daily or weekly basis to ensure that an organization has sufficient cash to meet its

D. Capital budget. A capital budget lists planned investments in major assets such

as buildings, trucks, and heavy machinery, often involving expenditures over

more than a year. A capital budget is necessary to plan the impact of these

expenditures on cash flow and profitability.

E. Zero-Based budget. A zero-based budgeting is an approach to planning and

decision making that requires a complete justification for every line-item in the

IV. FINANCIAL CONTROL

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A. Financial Statements Exhibit 19.3, Exhibit 19.4

1. Financial statements provide the basic information used for financial control of an

organization. Two major financial statements—the balance sheet and the income

statement—are the starting points for financial control.

a. The balance sheet shows the firm’s financial position with respect to assets and

liabilities at a specific point in time. It provides three types of information:

Discussion Question #8: What types of analysis can managers perform to help them diagnose a

company’s financial condition? How might a review of financial statements help managers

diagnose other kinds of performance problems as well?

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B. Financial Analysis: Interpreting the Numbers Exhibit 19.5

1. Financial analysis allows managers to be able to evaluate financial reports that

compare their organization’s performance with earlier data or industry norms. The

most common financial analysis focuses on ratios, which express the relationships

between performance indicators such as profits and assets, sales, and inventory.

Managers decide which ratios reveal the most important relationships for their

businesses.

a. A liquidity ratio indicates an organization’s ability to meet its current debt

obligations. The current ratio (current assets divided by current liabilities) tells

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c. A profitability ratio states profits relative to a source of profits, such as sales or

assets. The profit margin on sales is calculated as net income divided by total

sales. The gross margin is the gross (before-tax) profit divided by total sales.

• Another profitability measure is return on assets (ROA), a percentage

representing company earnings from assets, computed as net income divided

V. THE CHANGING PHILOSOPHY OF CONTROL

A. Hierarchical versus Decentralized Approaches Exhibit 19.6

1. Hierarchical control involves monitoring and influencing employee behavior

through rules, policies, hierarchy of authority, written documentation, and reward

2. Decentralized control relies on shared values and goals to control employee

behavior. Managers operate on the assumption that employees are trustworthy and

willing to perform effectively without extensive rules and close supervision. The

B. Open-Book Management Exhibit 19.7

1. Open-book management allows employees to see the financial condition of the

company for themselves through charts, computer printouts, meetings, and so forth.

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2. In some countries, managers have trouble running an open-book company because

3. The Opacity Index indicates the degree to which various countries are open regarding

economic matters. The higher the rating, the more opaque, or hidden, is the

economy. The U.S. has an opacity rating of 23, which is fairly low. In countries with

VI. TOTAL QUALITY MANAGEMENT (TQM)

One popular approach based on decentralized control philosophy is total quality management

(TQM). TQM infuses quality into every activity in a company through continuous

A. TQM Techniques

1. Quality Circles

a. A quality circle is a group of six to 12 volunteer employees who meet regularly

2. Benchmarking Exhibit 19.8

a. Benchmarking is the continuous process of measuring products, services, and

practices against the toughest competitors or those companies recognized as

industry leaders to identify areas for improvement. Organizations may also use

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3. Six Sigma Exhibit 19.9

a. Six Sigma is a highly ambitious quality standard that specifies a goal of no more

than 3.4 defects per million parts. That means being defect-free 99.9997 percent

of the time. Six Sigma has become a generic term for a quality control approach

4. Quality partnering

a. Quality partnering involves assigning dedicated personnel with a particular

functional area of the business. In this approach, the quality control personnel

5. Continuous Improvement

a. Continuous improvement, or kaizen, is the implementation of a large number of

small, incremental improvements in all areas of the organization on an on-going

NEW MANAGER SELF-TEST: IMPROVEMENT ATTITUDE

In organizations, continuous improvement in quality sometimes competes with managerial

desires for production efficiency. Efficiency can be maximized by eliminating changes and

quality improvements. Continuous improvement, however, is an attitude that productivity can

always get better, and each employee can take responsibility to improve it. This attitude is

appropriate for quality conscious managers striving for continuous improvement.

B. TQM Success Factors Exhibit 19.10

1. Many organizational contingency factors influence the success of a TQM program.

Some of these factors include:

a. Quality circles are most beneficial when employees have challenging jobs.