1

CHAPTER
19

Quality and
Performance

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 Learning Outcomes
2

 Define organizational control and explain why it is a key management

function.
 Explain the benefits of using the balanced scorecard to track performance
and control of the organization.
 Explain the four steps in the control process.
 Discuss the use of financial statements, financial analysis, and budgeting as
management controls.
 Contrast the hierarchical and decentralized methods of control.
 Identify the benefits of open-book management.
 Describe the concept of total quality management and major TQM
techniques, such as quality circles, benchmarking, Six Sigma principles,
reduced cycle time, and continuous improvement.
 Identify current trends in quality and financial control, including ISO
9000, economic value-added and market value-added systems, activity-
based costing, and corporate governance, and discuss their impact on
organizations.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 The Meaning of Control
3

 Organizational control refers to the systematic

process of regulating organizational activities to
make them consistent with the expectations
established in plans, targets, and standards of
performance.

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 The Meaning of Control
4

The Balanced Scorecard

 A more balanced perspective of company
performance, integrating various dimensions of
control that focus on markets and customers as well
as employees and financials
 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.

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 5

Exhibit 19.1
Example of the
Balanced
Scorecard

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 Steps of Feedback Control
6
Establish standards of Measure actual performance
performance  if the organization has identified
 Managers should carefully assess appropriate measurements, regular
what they will measure and how review of these reports helps
managers stay aware of whether the
they will define it. organization is doing what it should
or not.

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 Steps of Feedback Control
7
Compare performance to
standards
 Comparing actual activities
to performance standards

Take Corrective action

 Managers determine what
changes, if any, are needed

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 Budgeting
8

 Budgetary control, one of the most commonly used

methods of managerial control, is the process of
setting targets for an organization’s expenditures,
monitoring results and comparing them to the
budget, and making changes as needed.

 The fundamental unit of analysis for a budget control

system is the responsibility center
 any organizational department or unit under the supervision
of a single person who is responsible for its activity.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Budgeting
9

 Expense budget

 Revenue budget

 Cash budget

 Capital budget

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 Budgeting
10

 Expense budget
 includes anticipated and actual expenses for each responsibility
center and for the total organization

 Revenue budget
 lists forecasted and actual revenues of the organization

 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
obligations

 Capital budget
 lists planned investments in major assets such as buildings, heavy
machinery, or complex info tech systems

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Budgeting
11

 Top-down budgeting
 Budgeted amounts of the coming year are literally imposed on
middle and lower level managers

 Bottom-up budgeting
 Lower level managers anticipate their department's resource
needs and pass them up to top management for approval

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 Financial Control
12

Financial Statements
 Balance sheet
 Income statement

Financial analysis
 Liquidity ratio
 Activity ratio
 Profitability ratio
 Leverage ratio

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 Changing Philosophy of Control
13

Hierarchical vs. Decentralized

 Hierarchical control involves monitoring and influencing employee
behavior through extensive use of rules, policies, hierarchy of
authority, written documentation, reward systems, and other formal
mechanisms.

 Decentralized control relies on cultural values, traditions, shared

beliefs, and trust to foster compliance with organizational goals.

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 14

Exhibit 19.6
Hierarchical vs.
Decentralized
Methods of
Control

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 Open-Book Management
15

Open-book management
 allows employees to see for themselves— through charts,
computer printouts, meetings, and so forth—the financial
condition of the company.
 shows the individual employee how his or her job fits into
the big picture and affects the financial future of the
organization.
 ties employee rewards to the company’s overall success.
 goal of open-book management is to get every employee
thinking and acting like a business owner.

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 Total Quality Management
16

 An organization-wide effort to infuse quality into

every activity in a company through continuous
improvement.

 Quality circles
 Group of 6-12 volunteer employees who meet regularly to discuss
and solve problems affecting the quality of their work

 Benchmarking
 Continuous process of measuring products, services and practices
against the toughest competitors or those companies recognized as
industry leaders to identify areas for improvement

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 Total Quality Management
17

 Six sigma
 Highly ambitious quality standard that specifies a goal of no more
than 3.4 defects per million parts

 Reduced cycle time

 Reducing the steps taken to complete a company process

 Continuous improvement
 Kaizen
 Implementation of a large number of small, incremental
improvements

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Total Quality Management
18

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 Trends in Quality and Financial Control
19

International quality standards

 ISO 9000 Standards
 international consensus of what constitutes effective
quality management as outlined by the International
Organization for Standardization
 Europe continues to lead in total number of
certifications

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 Trends in Quality and Financial Control
20

New Financial Control Systems

 Economic value-added (EVA)
 Measurement systems gauge financial performance in terms of after-
tax profits minus cost of capital invested in tangible assets

 Market value-added (MVA)

 A control system that monitors the stock market’s estimate of the
value of a company’s past and expected capital investment projects

 Activity-based costing (ABC)

 Control system that identifies various activities needed to provide a
product and allocates costs accordingly

 Corporate governance
 Framework of systems, rules, practices which an organization ensures
accountability, fairness, transparency in the firm’s relationship with
its shareholders
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 21

Summary
 The Meaning of Control
 Choosing Standards and Measures
CHAPTER  The Balanced Scorecard
 Feedback Control Model
19  Steps of Feedback Control
 Application to Budgeting
 Financial Control
Quality and  Financial Statements
 Financial Analysis: Interpreting the Numbers
Performance
 The Changing Philosophy of Control
 Hierarchical versus Decentralized Approaches
 Open-Book Management
 Total Quality Management
 TQM Techniques
 TQM Success Factors
 Trends in Quality and Financial Control
 International Quality Standards New Financial
Control Systems
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.