Controllership

Today's controllers are no longer seen as technicians who process transactions; they are now seen as business executives with a wide-ranging knowledge of total business operations, best practices, and corporate strategy. Providing a comprehensive overview of the roles and responsibilities of controllers in today's environment, this Eighth Edition of Controllership continues to provide controllers and vice presidents of finance with all aspects of management accounting from the controller's perspective, including internal control, profit planning, cost control, inventory, and financial disclosure.

About the Author xvii Preface xix Part I the Broad Management Aspects of Controllership 1 Chapter 1 Accounting in the Corporation 3 Tasks of the Accounting Function 3 Role of the Accounting Function 5 Role of the Controller 6 Impact of Ethics on the Accounting Role 7 Evolving Role of Accounting 10 Chapter 2 Controller’s Responsibilities 13 Variations on the Title 13 Planning Function 14 Control Function 15 Reporting Function 15 Accounting Function 16 Additional Controller Functions in Smaller Companies 17 Controller’s Job Description 19 Relationship of the Controller to the Chief Financial Officer 21 Chapter 3 Cost Accounting and Costing Systems 23 Purpose of Cost Accounting Information 23 Input: Data Collection Systems 24 Processing: Data Summarization Systems 27 Processing: Job Costing 29 Processing: Process Costing 34 Processing: Standard Costing 38 Processing: Direct Costing 40 Processing: Throughput Costing 43 Processing: Activity-Based Costing 48 Processing: Target Costing 50 Outputs: Cost Variances 52 Chapter 4 Ratio and Trend Analysis 57 How to Use Ratios and Trends 57 A Caveat 58 Measures for Profitability 60 Measures for the Balance Sheet 62 Measures for Growth 66 Measures for Cash Flow 68 Measures for Nonfinancial Performance 70 Interrelationship of Ratios 85 Setting Up a System of Ratios and Trend Analyses 85 Chapter 5 Internal Control Systems 89 Objectives 89 Responsibility for Internal Controls 90 Examples of Internal Controls 92 When to Eliminate Controls 102 Types of Fraud 104 Preventing Fraud 105 How to Deal with a Fraud Situation 109 Chapter 6 Internal Audit Function 113 Reporting Relationships 113 Role of the Audit Committee 116 Internal Audit Objectives 117 Internal Audit Activities 119 Chapter 7 Recruiting, Training, and Supervision 123 Recruiting Sources 123 Factors to Consider when Recruiting 125 Factors to Consider When Promoting 127 Importance of Reduced Turnover 128 Importance of Developing Career Plans for Employees 132 How to Motivate Employees 134 Chapter 8 Controller’s Role in Investor Relations 137 Objectives of the Investor Relations Function 137 Communication Vehicles for Investor Relations 138 Investor Relations Message Recipients 138 Information Needs of the Financial Analyst 139 Information Needs of Other Groups 141 Providing Guidance 141 Forward-Looking Statements 144 Organization Structure for Investor Relations 146 Role of the Controller and Other Principals 147 Part II the Planning Function of Controllership 151 Chapter 9 Business Plans and Planning: Interrelationship of Plans, Strategic Planning 153 Business Planning Defined 153 Framework for Business Planning 154 Time as Related to Planning 154 Planning Period: How Long Is “Long Range”? 155 System of Plans 156 Strategic Plan: An Overview 156 Corporate Development Plan 157 Operations Plan 158 Basic Elements in Any Plan 158 Planning Process 159 Plan Frequency 161 Plan Guidelines 162 Supplemental Planning: Alternative Scenarios 162 Planning Timetable or Schedule 163 Strategic Planning: An In-Depth Review 163 Environmental Analysis 165 Critical Success Factors 167 Business Mission or Purpose 168 Long-Range Business Planning Objectives 170 Developing Strategies 174 Strategies and the Planning Period 177 Role of the Controller 177 Chapter 10 Financial Impact of the Strategic Plan: Long-Range Financial Plan 181 Key Elements of a Strategic Plan 181 Capital Investments 182 Risk Analysis 183 Objectives of the Long-Range Financial Plan 184 Consolidation and Testing Process 185 Illustrative Financial Exhibits in the Plan Presentation 186 Role of the Controller 193 Chapter 11 Profit Planning: Annual Plan 201 Purpose of Budgeting 201 Planning Benefits 202 Coordination Benefits 203 Control Benefits 205 Problems with the Annual Plan 205 Annual Planning Cycle: Illustrative 206 Supportive Financial Statements and Budgets 208 Sales Budget 209 Production Budget 210 Purchases Budget 210 Direct Labor Budget 211 Manufacturing Expense Budget 211 Inventory Budget 212 Operating Expense Budget 212 Capital Expenditures Budget 213 Cost of Goods Sold 213 Statement of Estimated Income and Expense 214 Cash Budget 214 Statement of Estimated Financial Condition 216 Approval of Budget 218 Linking the Bonus Plan to the Budget 218 Controller’s Role: A Key Player 219 Management Approval of the Plan 223 Chapter 12 Profit Planning: Supporting Financial Analysis for the Annual Plan 225 General Comments on the Cost-Volume-Profit Relationship 225 Breakeven Chart 226 Changes in Sales Revenue 228 Changes in Sales Mixture 228 Changes in Sales Price 230 Changes in Costs 231 Analysis by Product 232 Application of Cost-Volume-Profit Analysis 235 Selecting the Most Profitable Products 236 Increased Sales Volume to Offset Reduced Selling Prices 236 Most Profitable Use of Scarce Materials 237 Advisability of Plant Expansion 238 Some Practical Generalizations 239 Program Evaluation Using Discounted Cash Flow 240 Financial Analysis of Unacceptable Operating Results 243 More Sophisticated Analyses 258 Chapter 13 Taxation Planning 259 Accumulated Earnings Tax 260 Cash Method of Accounting 261 Inventory Valuation 262 Mergers and Acquisitions 262 Net Operating Loss Carryforwards 263 Nexus 264 Passive Activity Losses 265 Project Costing 266 Property Taxes 267 S Corporation 267 Sales and Use Taxes 268 Transfer Pricing 269 Unemployment Taxes 271 Management of the Taxation Function 272 Part III Planning and Controlling Operations 275 Chapter 14 General Discussion of Standards 277 Definition of Standards 277 Advantages of Standards 278 Relationship of Entity Goals to Performance Standards 280 Types of Standards Needed 281 Trend to More Comprehensive Performance Measures 285 Benchmarking 287 Setting the Standards 289 Use of Standards for Control 291 Procedure for Revising Standards 293 Chapter 15 Planning and Control of Sales 295 Sales Management Concerns 295 Controller’s Assistive Role in Sales Management Problems 296 Controller’s Independent Role in the Planning and Control of Sales 299 Sales Analysis 300 Sales Planning: Basis of All Business Plans 304 Steps in Developing the Near-Term Sales Plan/Budget 305 Methods of Determining the Sales Level 308 Useful Sources of Forecasting Information 311 Forecasting the Business Cycle 312 Sales Standards 318 Sales Reports 322 Product Pricing: Policy and Procedure 328 Chapter 16 Planning and Control of Marketing Expenses 339 Definition 339 Factors Increasing the Difficulty of Cost Control 341 Marketing Expense Analysis 341 Types of Analyses 342 Planning Marketing Expenses 353 Special Comments on Advertising and Sales Promotion Expense 354 Marketing Expense Standards 360 Chapter 17 Planning and Control of Manufacturing Costs: Direct Material and Direct Labor 367 Direct Material Costs: Planning and Control 372 Labor Costs: Planning and Control 379 Chapter 18 Planning and Control of Manufacturing Costs: Manufacturing Expenses 389 Proper Departmentalization of Expenses 389 Variations in Cost Based on Fixed and Variable Costs 390 Variations in Cost Based on Direct Labor 392 Variations in Cost Based on Batch Size 394 Variations in Cost Based on Overhead 396 Variations in Cost Based on Time 398 Cost Estimation Methods 399 Normal Activity 404 Allocation of Indirect Production Costs 405 Budgetary Planning and Control of Manufacturing Expenses 407 Securing Control of Overhead 409 Control with Throughput Analysis 415 Role of the Controller 416 Chapter 19 Planning and Control of Research and Development Expenses 425 R&D Activities in Relation to Corporate Objectives 425 Organization for the R&D Financial Functions 425 Elements of R&D Costs 426 Role of the Financial Executive in R&D 429 Determining the Total R&D Budget 429 Establishing the R&D Operating Budgets 430 Detailed Budgeting Procedure 438 Other Control Methods 438 Effectiveness of R&D Effort 442 Chapter 20 Financial Planning and Control in a Service Company 447 Data Classification 447 Cost Accounting in a Service Organization 449 Planning System 454 Strategic Planning 459 Chapter 21 Planning and Control of General and Administrative Expenses 461 Components of G&A Expense 461 Control over G&A Expenses 462 Reducing G&A Expenses 468 Spend Management Systems 473 Budgeting G&A Expenses 474 Chapter 22 Payroll 477 Improving the Payroll Process 479 Compensation 485 Federal Income Taxes 489 Social Security Taxes 491 Medicare Tax 491 State Income Taxes 491 Payroll Taxes for Employees Working Abroad 492 Remitting Federal Taxes 492 Payroll Deductions for Child Support 494 Payroll Deductions for Unpaid Taxes 495 Unemployment Insurance 496 Part IV Planning and Control of the Balance Sheet 499 Chapter 23 Planning and Control of Cash and Short-Term Investments 501 Objectives of Cash Planning and Control 501 Duties of the Controller versus the Treasurer 501 The Cash Forecast 502 Cash Collections 514 Cash Disbursements 520 Internal Control 521 Reports on Cash 524 Cash Flow Ratio Analysis 526 Variations in Cash Requirements by Industry 528 Investment of Short-Term Funds 529 Chapter 24 Planning and Control of Customer Credit and Receivables 533 Credit Procedures and Systems 533 Collection Procedures and Systems 542 Measurement of Accounts Receivable 548 The Bad Debt Forecast 549 Budgeting for Accounts Receivable Balances 550 Chapter 25 Planning and Control of Inventories 553 Costs and Benefits of Carrying Inventory 553 Role of the Controller 555 Material Requirements Planning Systems 557 JIT Manufacturing Systems 558 Inventory Purchasing 561 Production Issues Impacting Inventory 563 Inventory Quantity Management 565 Obsolete Inventory 567 Inventory Cutoff 570 Budgeting for Raw Materials 572 Budgeting for Work-in-Process 577 Budgeting for Finished Goods 578 Significance of Proper Inventory Valuation 582 Selection of the Cost Base 582 Chapter 26 Accounting and Reporting for Selected Investments and Employee Benefit Plans 585 Improving the Investment Decision Process 585 Role of the Controller 586 Accounting Records for Selected Investments 587 Financial Reports on Selected Investments 587 Accounting and Disclosure Requirements and Practices for Employee Benefit Plans 590 Chapter 27 Planning and Control of Plant and Equipment or Capital Assets 601 Controller’s Responsibility 601 Capital Budgeting Process 603 Information Supporting Capital Expenditure Proposals 604 Methods of Evaluating Projects 605 Payback Method 606 Operators’ Method 607 Accountants’ Method 608 Discounted Cash Flow Methods 609 Cash Flow Modeling Issues 614 Hurdle Rates 615 Cost of Capital—A Hurdle Rate 616 Throughput Method 617 Classifying and Ranking Proposed Capital Projects 620 Problems with the Capital Budget Approval Process 621 Using Expected Commercial Value for Project Ranking 622 Board of Directors’ Approval 624 Project Authorization 628 Accounting Control of the Project 630 Postproject Appraisals or Audits 630 Other Aspects of Capital Expenditures 632 Chapter 28 Management of Liabilities 637 Objectives of Liability Management 637 Direct Liabilities 638 Planning the Current Liabilities 639 Standards to Measure and Control Current Liabilities 642 Corrective Action 644 Some Benefits from Debt Incurrence 644 Standards for Debt Capacity 645 Leverage 648 Managing Liabilities: Some Practical Steps 649 Management of Accounts Payable 652 Accounting Reports on Liabilities 656 Internal Controls 656 Chapter 29 Management of Shareholders’ Equity 659 Role of the Controller 659 Growth of Equity as a Source of Capital 660 Return on Equity as Related to Growth in Earnings per Share 661 Growth in Earnings per Share 661 Cost of Capital 663 Components of Cost of Capital 664 Calculating the Cost of Debt 665 Calculating the Cost of Equity 666 Calculating the Weighted Cost of Capital 669 Dividend Policy 670 Other Transactions Affecting Shareholders’ Equity 672 Long-Term Equity Planning 673 Short-Term Plan for Shareholders’ Equity 678 Other Considerations 680 Part V Financial and Related Reports 683 Chapter 30 Internal Management Reports 685 Rules of Reporting 685 Status Reports 688 Margin Reports 690 Cash Reports 694 Capacity Reports 695 Sales and Expense Reports 696 Payroll Reports 698 Graphical Report Layouts 703 Chapter 31 External Reporting 705 Purpose of the Annual Report to Shareholders 705 Controller and the Annual Report 706 General Contents of the Annual Report 706 Importance of Form 709 Other Reports to Shareholders 711 Disclosure Issues 712 SEC Forms 713 Contents xv Part VI Some Administrative and Special Aspects of the Con- Troller’s Department 719 Chapter 32 Mergers and Acquisitions 721 Acquisition Strategy 721 The Acquisition Process 723 Locating Acquisition Targets 726 Due Diligence 729 Valuing the Target 739 Legal Documents 743 Acquisition Integration 753 Types of Acquisitions 760 Chapter 33 The Reporting Period and How to Close It 763 Selecting the Fiscal Year 763 Selecting the Number of Interim Reporting Periods 764 Reasons for Accelerating the Closing Period 766 How to Achieve a Fast Close 766 Chapter 34 Inventory Tracking 781 Differences between Perpetual and Periodic Inventory Systems 781 Setting Up a Perpetual Inventory System 783 Auditing and Measuring a Perpetual Inventory System 787 Physical Inventory Procedure 788 Physical Inventory Complications: The Cutoff 791 Reconciling Inventory Variances 792 How to Avoid the Inventory Tracking Problem 794 Chapter 35 Tax Records and Procedures 797 Tax Organization 798 Centralized Tax Department 798 Functions Of the Tax Manager 800 Tax Communications 801 Tax Records in General 801 Tax Calendar 802 Tax Information Records 802 Tax Working Papers and Files 805 Internal Revenue Code and Record Requirements 805 Proper Classification of Accounts 805 Other Taxes 806 Income Taxes and Business Planning 806 Special Tax Reports 806 Index 807