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International Accounting, 6/e

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  1. International Accounting, 6/e Frederick D.S. Choi Gary K. Meek Chapter 10: Managerial Planning and Control

  2. 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?

  3. 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.

  4. Planning Tools - WOTS-Up Analysis • Involves assessing corporate strengths and weaknesses as a basis for strategy formulation.

  5. 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.

  6. Issues in Designing Multinational Information Systems • Why is the design of management information systems so complicated in an international setting?

  7. 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

  8. 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

  9. 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.

  10. 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

  11. 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

  12. Operational Budgeting (contin) • Two-way variance analysis

  13. Operational Budgeting (contin) • Three-way variance analysis

  14. Strategic Costing • Cost control using standard costing systems • Estimated production costs vs. actual production costs • Target costing • Price-based costing

  15. Strategic Costing (contin) • Kaizen costing • Continuous cost reduction • Behavioral costing • Cost allocations to encourage cost reduction

  16. 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.

  17. 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

  18. 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.

  19. Other Chapter Exhibits

  20. Other Chapter Exhibits (contin)