International Accounting, 6/e Frederick D.S. Choi Gary K. Meek Chapter 10: Managerial Planning and Control
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?
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.
Planning Tools - WOTS-Up Analysis • Involves assessing corporate strengths and weaknesses as a basis for strategy formulation.
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.
Issues in Designing Multinational Information Systems • Why is the design of management information systems so complicated in an international setting?
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
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
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.
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
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
Operational Budgeting (contin) • Two-way variance analysis
Operational Budgeting (contin) • Three-way variance analysis
Strategic Costing • Cost control using standard costing systems • Estimated production costs vs. actual production costs • Target costing • Price-based costing
Strategic Costing (contin) • Kaizen costing • Continuous cost reduction • Behavioral costing • Cost allocations to encourage cost reduction
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.
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
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.