Cost Management 6th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 35

Financial versus Operational Control; Behavioral Considerations in the Standard-Setting Process
You have been assigned to a strategic leadership committee that has been charged by the CEO with developing and implementing a comprehensive management accounting and control system. At the first planning session that you attended the subject of financial control systems arose, but there was some uncertainty regarding the nature of such systems and some of the behavioral considerations that might have to be made in the design process. You have been asked by the chair of the committee to prepare a short written document that could be used as the basis of discussion at the next meeting. Specifically, you have been asked to: define and distinguish between operational control and financial control and how such systems relate to an organization's management accounting and control system; explain the theory behind the use of flexible budgets, standard costs, and variance analysis as elements of a financial control system; and how standards/budgets for performance evaluation should be set (i.e., whether authoritative standards, or participative standards, or a consultative approach should be used in the standard-setting process). Compose your response as requested.