Log in / Register

Home arrow Accounting arrow Managerial and Cost Accounting
< Prev   CONTENTS   Next >

2.7. Controlling

Things rarely go exactly as planned, and management must make a concerted effort to monitor and adjust for deviations. The managerial accountant is a major facilitator of this control process, including exploration of alternative corrective strategies to remedy unfavorable situations. In addition, a recent trend (brought about in the USA by financial legislation most commonly known as Sarbanes-Oxley or SOX) is for enhanced internal controls and mandatory certifications by CEOs and CFOs as to the accuracy of financial reports. These certifications carry penalties of perjury, and have gotten the attention of corporate executives - leading to greatly expanded emphasis on controls of the various internal and external reporting mechanisms.

Most large organizations have a person designated as "controller" (sometimes termed "comptroller"). The controller is an important and respected position within most larger organizations. The corporate control function is of sufficient complexity that a controller may have hundreds of support personnel to assist with all phases of the management accounting process. As this person's title suggests, the controller is primarily responsible for the control task; providing leadership for the entire cost and managerial accounting functions. In contrast, the chief financial officer (CFO) is usually responsible for external reporting, the treasury function, and general cash flow and financing management. In some organizations, one person may serve a dual role as both the CFO and controller. Larger organizations may also have a separate internal audit group that reviews the work of the accounting and treasury units. Because internal auditors are reporting on the effectiveness and integrity of other units within a business organization, they usually report directly to the highest levels of corporate leadership. As you can see, "control" has many dimensions and is a large task!


2.7.1. Monitor

Let's begin by having you think about controlling your car (aka "driving")! Your steering, acceleration, and braking are not random; they are careful corrective responses to constant monitoring of many variables - other traffic, road conditions, destination, and so forth. Clearly, each action on your part is in response to you having monitored conditions and adopted an adjusting response. Likewise, business managers must rely on systematic monitoring tools to maintain awareness of where the business is headed. Managerial accounting provides these monitoring tools, and establishes a logical basis for making adjustments to business operations.

Standard Costs - To assist in monitoring productive efficiency and cost control, managerial accountants may develop "standards." These standards represent benchmarks against which actual productive activity is compared. Importantly, standards can be developed for labor costs and efficiency, materials cost and utilization, and more general assessments of the overall deployment of facilities and equipment (the overhead).

Variances - Managers will focus on standards, keeping a particularly sharp eye out for significant deviations from the norm. These deviations, or "variances," may provide warning signs of situations requiring corrective action by managers. Accountants help managers focus on the exceptions by providing the results of variance analysis. This process of focusing on variances is also known as "management by exception."

Flexible tools - Great care must be taken in monitoring variances. For instance, a business may have a large increase in customer demand. To meet demand, a manager may prudently authorize significant overtime. This overtime may result in higher than expected wage rates and hours. As a result, a variance analysis could result in certain unfavorable variances. However, this added cost was incurred because of higher customer demand and was perhaps a good business decision. Therefore, it would be unfortunate to interpret the variances in a negative light. To compensate for this type of potential misinterpretation of data, management accountants have developed various flexible budgeting and analysis tools. These evaluative tools "flex" or compensate for the operating environment in an attempt to sort out confusing signals. As a business manager, you will want to familiarize yourself with these more robust flexible tools, and they are covered in depth in subsequent chapters.

Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
Business & Finance
Computer Science
Language & Literature
Political science