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International Accounting, 6/eFrederick D.S. Choi

Gary K. Meek

Chapter 10: Managerial Planning and Control

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Learning Objectives What are the critical dimensions of business modeling? What is involved in measuring the returns on a foreign investment. How

does it differ from the domestic case? How does one calculate a multinational company’s cost of capital? Are there any issues involved in designing multinational information and

control systems? What is financial control and what are some international control

issues? How does Kaizen costing differ from traditional standard costing

concepts? What is involved in an exchange rate variance analysis? What issues do managers face in evaluating their foreign operations? What are some approaches employed by multinational companies to

cope with exchange rate changes and inflation in performance evaluation of foreign operations?

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What Are the Critical Dimensions of Business Modeling? Identifying key factors likely to affect the

future progress of the company. Forecasting future developments and

assessing the firm’s ability to undertake appropriate responses.

Developing information systems to support strategic choices.

Translating selected options into specific courses of action.

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Planning Tools - WOTS-Up Analysis Involves assessing corporate strengths and

weaknesses as a basis for strategy formulation.

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Planning Tools - Capital Budgeting Involves analyzing the benefits and costs of a proposed investment. Multinational adaptations of traditional investment planning models:

Home country vs. host country perspective. Return perspectives may vary owing to: Repatriation restrictions Licensing fees and other payments Differing rates of inflation Foreign exchange risk Differential taxes

Measuring expected returns is more complex owing to: Choice of project vs. parent cash flows Choice of financing Subsidized financing Political risk See Exhibit 10-2 on the next slide.

Measuring the cost of capital is complex due to: Foreign exchange risk. Inflation risk. Differential taxation.

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Issues in Designing Multinational Information Systems Why is the design of management

information systems so complicated in an international setting?

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Issues in Designing Multinational Information Systems (contin) Systems issues

Geographical distance Corporate strategies

Low dispersal/high centralization High dispersal/low centralization High dispersion/high centralization

Global competition XBRL

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Issues in Designing Multinational Information Systems (contin) Information issues

Cultural differences GAAP restatements Currency translation Hyperinflation

Overstating or understating revenues and expenses Reporting translation gains and losses that are difficult

to interpret Distorting performance comparisons over time

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What is Financial Control? Financial control: a measurement and

communication system that assures that all of a firm’s organizational units work toward the accomplishment of enterprise goals as opposed to working at cross-purposes.

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What is Financial Control? (contin) How is financial control achieved?

Communicating financial goals throughout the organization. Specifying criteria and standards for evaluating performance. Monitoring actual performance. Communicating deviations between actual and expected

performance to those responsible. Issues?

Should control systems be tailored to the local environment? Unforseen consequences of environmental diversity.

Language Attitudes toward risk and authority Differences in need achievement levels Diversity in business practices Governmental regulations

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Operational Budgeting Local vs. parent currency perspectives Exchange rate combinations to establish foreign

currency budgets and monitor performance To establish budgets

Spot rate in effect when budget is established Projected rate Ending rate

To monitor performance Initial spot rate Projected rate Ending rate

Managerial responses to exchange rate combinations

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Operational Budgeting (contin) Two-way variance analysis

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Operational Budgeting (contin) Three-way

variance analysis

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Strategic Costing Cost control using standard costing systems

Estimated production costs vs. actual production costs

Target costing Price-based costing

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Strategic Costing (contin) Kaizen costing

Continuous cost reduction

Behavioral costing Cost allocations to

encourage cost reduction

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Performance Evaluation Issues Objectives of performance evaluation

Align managerial behavior with strategic goals. Measure profitability of organizational units. Identify sub-par performance. Allocate corporate resources optimally. Evaluate managerial performance.

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Performance Evaluation Issues (contin)

Performance evaluation issues

Unit vs. managerial performance

Non-controllable influences on unit performance Headquarters

management Host government Parent country’s

government

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Performance Evaluation Issues (contin)

Performance criteria Financial vs. non-financial Measurement issues

Inflation distortions Cost of goods sold understated Capital employed understated Returns on capital doubly overstated Spurious comparisons of divisional performance Meaningless inter-country performance comparisons Invalid performance comparisons over time Performance evaluation practices: ICI vs. GE

Performance standards Foreign subsidiaries should not be evaluated as independent profit centers when their

mission is strategic. Company-wide ROI criteria should be supplemented by performance measures tailored to

the mission and local operating environment. Performance budgets should take into account each unit’s internal and external environment. Subsidiary managers should not be held responsible for non-controllable events. Subsidiary managers should participate in the budgeting process. Both financial and non-financial measures should be used in multinational performance

evaluation systems.

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Other Chapter Exhibits

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Other Chapter Exhibits (contin)