CHAPTER 12 MANAGEMENT PLANNING AND CONTROL

A.      INTRODUCTION

Global competition that occurs along with advances in technology are constantly changing significantly the scope of business and internal reporting requirements. Reduction in national trade barriers on an ongoing basis, a floating currency, sovereign risk, restrictions on sending funds across national borders, differences in national tax system, interest rate differentials and the influence of commodity prices and equity swings against the assets, earnings , and the cost of capital is a variable that complicates management decisions. At the same time, the development of the Internet, video conferencing, and electronic transfer change the economics of production, distribution, and financing. Production of more and more given to companies that perform best in the world of production or part of the process. Value chain is coordinated globally by the alliance strategy of understanding a reasonable replace the relationship between manufacturers, suppliers, and consumers. It is understandable, given the increasing pressure to information providers who understand the needs of upper management who have the information and analytical skills and good presentation.

Global competition and rapid dissemination of information to support the limited national differences in management accounting practices. Additional pressures include, among others, changes in markets and technology, growth privitisasi, incentive costs, and performance, and coordination of global operations through joint ventures (joint ventures) and other strategic links. Does it improve the management of multinational companies to not only implement internal accounting techniques that can be compared, but also use these techniques in the same way.

B.      Business Modeling

Recent survey found that management accountants spend more time in strategic planning issues than before. Determination of the business models areAlpha the big picture, and consists of the formulation, implementation and evaluation of long-term business plan of a company. It includes four main dimensions:

1.       Identify the major factors relevant to the company's progress in the future.

2.       Formulate an adequate technique to predict future developments and analyze the company's ability to adapt or take advantage of these developments.

3.       Develop data sources to support the strategic choices.

4.       Certain choices translate into a series of specific actions.

C.      Planning Tool

In identifying the factors relevant in the future, scanning the external and internal environment will greatly assist companies in recognizing the challenges and opportunities. A system can be applied to gather information on competitors and market conditions. Both competitors and market conditions are analyzed to see the influence of both the standing of the competition and the level of corporate profits. Inputs obtained from this analysis are used to plan the measures used to maintain or increase market share or to recognize and utilize the new product and market opportunities.

One such tool is the WOTS-UP analysis. This analysis regarding the strengths and weaknesses of the company relating to the company's operating environment. This technique helps in generating a series of management strategies that can be run.

Strengths (Strengths-S) Analysis WOTS-UP

·         The quality of the products increased by 20% from a year earlier.

·         The potential for research and development (research and development) is greater than other automotive companies.

·         The market share of 50% on car limousine.

·         Made ​​by Daimler Benz truck market leader.

·         Break-even point decreased from 1.0 million to 0.7 million vehicles.

·         Several acquisitions (eg, AEG, Dournier, MBB) has increased the potential for synergistic Daimler Benz.

·         The scope of the economy is higher.

Weaknesses (W-Weaknesses) Analysis WOTS-UP

·         The acquisition of high-tech companies led to coordination problems.

·         The wage rate is high (most production is located in Germany).

·         Less joint venture undertaken (international alliance) than Japanese carmaker.

Decision tools that are currently used in system planning strategy depends entirely on the quality of information about internal and external environment of an enterprise. Planners will be able to assist companies to obtain useful data in strategic planning decisions. Most of the required information comes from sources other than the accounting records.

D.      Capital Budgeting

The decision to invest abroad is a very important element in the global strategy of a multinational company. Foreign direct investment generally involves large amounts of capital and the prospects are uncertain. Investment risk, followed by the foreign environment, complex and constantly changing. Formal planning is a must and is generally performed in a capital budgeting framework that compares the benefits and costs of the proposed investment. For example the two-dimensional model of the company described above, the capital budget analysis helps to ensure that appropriate strategic plan is funded and profitable.

Approach to more complex investment decisions are also available. There are several procedures to determine the optimum capital structure of a company, measuring the cost of capital of an enterprise, and evaluating alternative investments under conditions of uncertainty. Decision rule for investment options generally require a discounted cash flow investment based on risk-adjusted interest rates are adequate: the weighted average cost of capital. Generally, companies can increase the prosperity of the owner to make an investment that promises a positive net present value. When considering the options that are mutually separated or mutually independent (mutually exclusive), a rational firm will choose the option that promises the net present value of the maximum possible.

In the international environment, investment planning is not that simple. Differences in tax law, accounting system, the rate of inflation, the risk of nationalization, currency framework, market segmentation, restrictions on the transfer of retained earnings, and differences in language and culture adds to the complexity of elements that are rarely found in domestic environments. The difficulty for the quantification of these data make existing problems worse.

Adaptation (adjustment) by multinational companies for investment planning models have traditionally been carried out in three areas of measurement: (1) determine the relevant returns for multinational investments, (2) measure of cash flow expectations, and (3) calculate the cost of multinational capital. This adaptation provides data that support the strategic choices, the third step in the process of enterprise modeling.

E.       Viewpoint Financial Results

A manager must determine the level of return the relevant to analyze foreign investment opportunities. However, the relevant rate of return is a matter of perspective. Should the international financial managers to evaluate the return on investment expectations in terms of overseas projects or from the perspective of the parent company? Returns from these two viewpoints may differ significantly due to several reasons such as: (1) restrictions on repatriation of profits by the government and capital, (2) license fee, royalty and other payments which is the profit for the parent company but is a burden for subsidiaries , (3) differences in national inflation rate, (4) changes in foreign exchange rates, and (5) differences in taxes.

Someone might argue that the rate of return and the risk of foreign investment enterprises may be evaluated from the viewpoint of the parent company's domestic shareholders. Nevertheless, it can be said also that this approach is no longer sufficient. First, the investor in the parent company of the more that comes from the world community. Investment objectives must reflect the interests of all shareholders, not just from domestic. Observations also show that multinational companies have long-term investment horizon (and not short term). Funds generated abroad tend to be reinvested rather than repatriated to the parent company. Under these conditions, would be more appropriate to evaluate the return from the standpoint of the host country. The emphasis on local projects of return consistent with the objective to maximize the value kosolidasi group.

Adequate solution is to recognize that financial managers must meet multiple objectives, by providing a response to investor groups and noninvestor in organization and in its environment. The host country government is one of the group for foreign investment. Match between the goals of multinational investors and host countries should be achieved through two financial return calculations: one from the standpoint of the host country, and the other from the viewpoint of the parent company's country. The host country's point of view assumes that a favorable foreign investment (including the local opportunity cost of capital) will not be wrong in allocating resources are scarce host country. Evaluation of investment opportunities from the local viewpoint also provides useful information for the parent company.

If a foreign investment does not promise a return on risk adjusted value is higher than the return obtained by local competitors, the parent company's shareholders would be better to invest directly in local companies.

At first glance, the effect of accounting for multiple rates of return calculations look simple. But this is not really accurate. In the previous discussion, we assume that the calculation of return on projects is an approach to the evaluation of the host country of a foreign investment. In practice, the analysis becomes much more complicated.

F.       Measuring Expected Returns

Expectations of a measure of cash flow of foreign investment is quite a challenge. Let's say for discussion purposes only, the unit of Daimler-Chrysler manufacturing operations in the U.S. are considering buying a 100 ownership of manufacturing facilities in Russia. The U.S. parent company will fund half of these investments in cash and equipment; the rest will be financed by local borrowing with interest rates prevailing market. The Russian facility will import half of the raw materials and components from the U.S. parent company and will export half of its production to Hungary. To restore funds to the parent company, the Russian facility will pay for the license, royalties for the use of patent holding companies, and technical fees received for management services. Profit from the Russian facility will be mailed to the parent company as dividends.

G.     Multinational Cost of Capital

If foreign investment is evaluated by using a discounted cash flow models, the appropriate discount rate should be developed. The theory of capital budgeting in particular using cost of capital as the level diskontonya and thus a project must generate returns at least equal to the cost of capital in order to be acceptable. The level of the benchmark (hurdle rate) This relates to the proportion of debt and equity in the company's financial structure as follows:

Ka = the average than the cost of capital (after tax)

Ke = cost of equity

Ki = before tax cost of debt

E = the value of corporate equity

D = the value of corporate debt

S = the value of the company's capital structure (E + D)

T = marginal tax rate

It is not easy to measure the cost of capital of a multinational company. The cost of equity capital can be calculated in several ways. One popular method that combines the expectations of return on dividend expectations of dividend growth rates. Assuming Di = expectations of dividend per share at the end of the period. P0 = the price of the stock market is now at the beginning of the period and g = growth rate in dividend expectations, the cost of equity, to be calculated as follows to the Di / P 0 + g. While it is easy to measure the price of the shares present, in most countries where shares of listed multinational companies, often quite difficult to measure D and g. Di first place because of the expectations. Expectations of dividends depends on the company's operating cash flow as a whole. Measure of cash flow is complicated by the consideration of environmental factors such as those mentioned in the previous example of Russia. Moreover, measurements of the dividend growth rate, a function of expectations of future cash flows, is complicated by the foreign exchange control and other government restrictions on the transfer of funds across borders.

A similar problem is also related to the debt component of the measurement of the average cost of capital. In a State, the cost of this debt is an effective interest rate multiplied by (1-t) because the interest is generally a deductible expense against tax. However, if a multinational company to borrow foreign currency, there are additional factors that must be seen. Effective after-tax interest costs are now included foreign exchange gains or losses that arise when foreign exchange rates fluctuate during the period between the date of transaction and settlement.

Other tax considerations also apply where a multinational company to borrow funds at a foreign capital market. Current and prospective tax rates in each overseas market during the period of the loan should be considered. Status of interest payments tax deductible should be checked again, because not all of the national tax authorities recognize the interest deduction (especially if the loan is made ​​between parties related to a related-party special).

To implement the theory of international capital budgeting in prkatik, it is not always direct and easy to implement. The entire capital budgeting approach that has been our concern assumes that the required information has been available. Unfortunately, in real practice, aspects of the capital budgeting process of the most difficult and most important is to obtain accurate and timely, especially in an international environment, where differences in climate, culture, language, and information technology increasingly complicates this issue.

H.     Management Information Systems

Preparation of the world's information system of a company is crucial in supporting the corporate strategy.

Issues Related to System

Distance is an obvious hassle. Caused by the geographic, communications generally replaces a formal information private contract between the local operations manager with office management. Developments in information technology should reduce, but will not eliminate it completely, this complexity.

Information needs of financial planners in the form of either a regional or corporate environments and operating data. Information required of management accountants in the field depends on how much decision-making power held by local managers. The greater the power of local managers, the less the information submitted to headquarters.

The spread of low to high centralization. Used by smaller organizations with limited international business operations, and 'information systems' (IS-information system) dominate domestic needs. Framework (platform) standards dominate the system data and applications of information technology (IT) throughout the world.

The spread of high-low centralization. This strategy is favored by multinational companies with operations in different geographical areas vary. Local subsidiary is given significant control over the development of information technology strategies and their associated systems.

High with a spread of high centralization. Here the information technology strategy "glocal" (global local) run by a company with a truly global strategic alliances around the world. System information is designed to reflect the needs of companies that are tailored to local circumstances.

Perhaps the biggest challenge faced by the specialist system is the design of enterprise information system that enables financial managers to provide an appropriate response to the phenomenon of global competition. Constantly changing conditions. Due to the deregulation of markets and reduction of tariff barriers, companies are increasingly able to tap into overseas markets either directly or indirectly through joint ventures, strategic alliances and other forms of cooperation. It is more and more open access to the intensity of competition in which the company adopted a strategy to: (1) protect market share at the origin, (2) to penetrate the market from its competitors to capture market share and revenues, and (3) get a share of significant market in the third major market countries.

CEOs need information systems that allow them to do the planning, coordination, and effective control of the production strategy, marketing, and finance throughout the world. To facilitate this, the developers of the software information in the United States has created a new computer language, XBRL. XBRL, which stands for extensible business reporting language (the language of business reporting is extensive) and an increase in standard computer programs that are being incorporated into the entire software financial reporting and accounting in the United States. Once added to the software, XBRL will automatically translate all the numbers and words so that each segment of data can be identified by a standard way when viewed through a Web browser or sent to a spreadsheet application (working paper) specific. Specifically, XBRL provides a mark on each segment of computerized business information with an identification marker that remains attached when the data is moved or modified. Although a software application to format or reorder the information, a marker will remain on the data. Thus, for example, a figure identified as marketable securities or accounts payable will remain recognizable as the same thing. Benefits to all companies in all industries and sizes, XBRL will reduce the cost of processing, calculation, and preparation of financial information because the data need only be created and formatted a one time only and are not based on intent of use. XBRL also improve the company's relationships with investors because it facilitates comparisons between firms in many dimensions, including financial accounts, accounting policies and related footnotes in the form of an automatic.

Information Problem

Management accountants to prepare some information for the management of companies, ranging from data collection to reporting of liquidity and operational forecasts of the various types of expenditure weights. For each group the data presented, the management company must specify the time period relevant to the report, the level of accuracy required, the frequency of reporting and the costs and benefits of timely preparation and submission.

Here, environmental factors also affect the use of internally generated information. Suppose that the influence of culture: the culture forming values ​​in a particular society. Residents who are members of the community to bring these values ​​when they are employed by business organizations. In turn, these values ​​shape organizational behavior that employees have and how they use information technology in organizations. Although organizations around the world become increasingly similar when doing business, the people who are in it tend to retain their cultural behavior patterns. For example, Johns, Smith, and Strand observe the effect of uncertainty avoidance of the use of the database. They found that cultures that are less comfortable with uncertainty and ambiguity tend to be more ready to accept information technology than those who are very uncomfortable. The main implication of their study for management accountants is that culture is a major barrier to international data flows and must be addressed clearly in the design of information systems.

The managers in different environments have different ways to analyze and solve problems, and the decision time frame to compete in different operating conditions. Different information needs is a direct consequence. Thus, there is a fundamental issue for multinational companies. Local managers may require a different decision from the information management office. For example, a hallmark of U.S. consolidation process is that the financial statements prepared according to generally accepted accounting principles abroad is first presented before the reset according to the U.S. GAAP consolidated.

The other major information problem is the question of translation. In evaluating the operation, U.S. managers prefer that reports are presented in U.S. dollars. Thus, reports of foreign operations of multinational companies are generally translated into U.S. dollar equivalent value to the managers office in the United States to evaluate their investment in dollars.

I.        Information Management and Hyperinflation

FAS No. 52 requires the use of temporal translation method. FAS No. 52 and similar national provisions provide a useful guide in preparing the report hard currency (hard currency), such provisions do not meet the information needs of companies operating in countries with high inflation. In an environment of high inflation, financial statements prepared in accordance with FAS 52 tends to cause distortion of reality through:

·         Assess the rate is more or less revenue and expenses.

·         Reporting translation gains or losses are large and difficult to interpret.

·         Distort the intertemporal comparison of performance.

Reporting framework that the writers can overcome these limitations and based on the following assumptions:

1.       Management objectives to maximize the value of the company is in the assumption that one currency can maintain its value (ie the hard currency). Thus, the best way to measure the performance of an affiliated company located in an environment of high inflation is to use hard currency unit.

2.       This model also implicitly assumes the rate of inflation, exchange rate and interest rate related. (This assumption is not very important in this proposal).

A common reporting practice in accounting for foreign currency transactions is to record income and expenses based on the exchange that occurred on the date of the financial statements. The better option is to record transactions in local currency rates of exchange on the date of payment. Record transactions on other dates would complicate the measurement process through the emergence of profit or loss in purchasing power of money, or in another aspect, the implicit interest rate on currency transactions.

In a perfectly competitive market, all transactions in local currency will be made in cash. Given inflation, profits arising to the buyer to delay payment as long as possible and for the sellers to expedite the collection of money. Payment date is determined by the competitive strength of the parties to the agreement. Reporting the treatment recommendations that we provide reporting numbers produce a reliable, economically and symmetry can be interpreted in the sense that similar economic transactions will result in numbers similar to the financial statements when translated into a common currency. One could say that this model uses accrual accounting to cash accounting mentality.

J.        Issues in Financial Control

Once the question of support systems and information strategy has been decided, attention will shift to the same field, namely the importance of financial control and performance evaluation. These considerations are equally important, especially because it enables financial managers to:

1.       Implement a strategy of global finance MNE.

2.       Evaluate the extent to which the selected strategy contributes to the achievement of corporate objectives.

3.       Motivate management and employees to achieve corporate financial goals as effectively and efficiently as possible.

Management control system aims to achieve corporate objectives in the most effective and most efficient. Instead the financial control system is a quantitative measurement and communication systems that facilitate control through: (1) communication of financial objectives appropriately within the organization, (2) details the criteria and standards in the performance evaluation, (3) monitoring the performance, and (4) communicate the deviation between actual and planned performance against those responsible.

Strong financial control system enables top management to focus on subsidiary activities that lead to common goals. System control consists of operational and financial policies, internal reporting structure, the operating budget procedures and guidelines that are consistent with the objectives of top management. Thus, sub-optimal behavior, which occurs when an attempt to achieve its objectives submit themselves at the expense of the entire organization, can be minimized. Timely reporting systems that constantly monitor each unit is a powerful motivator. An efficient control system also allows the management headquarters for the company's strategy to evaluate the plan and revise it if necessary. Strategic planning task is assisted by a change in the information system that provides information to management if there are environmental changes that significantly affect the company. Finally, the control system which enables top management to appropriately evaluate performance of subordinates to ensure that subordinates are responsible for the incident-peritiwa only they can control.

If a well-designed control system is useful for a national company, then this system will be invaluable for multinational companies. As repeatedly observed, the conditions that influence management decisions overseas is not only different, but also constantly changing.

Control System of Domestic versus Multinational

Parts of the system are generally shipped out include financial control and budget as well as the tendency to apply the same standard that was developed to evaluate the domestic operations. In a paper now regarded a classic, David Hawkins offers four basic reasons for this:

1.       Consideration of financial control is something that is rarely important in the early stages of the establishment of overseas operations.

2.       Will generally be less expensive to use traditional domestic system rather than having to create from scratch the whole system is designed for overseas operations.

3.       To simplify the preparation and analysis of financial statements, the company's controller must confirm that all subsidiaries that operate using the same format and list to record and transmit financial data and operations.

4.       The former executive who worked on the domestic operations of foreign companies and their superiors will be more comfortable if they can continue to use as many domestic control system, generally because they achieve the highest levels of management with domestic control system.

Differences in the environment has unlimited potential influence over the financial control processes. At the beginning, we observe that the difference in geographical distance often impede traditional methods of communication between affiliated companies and corporate headquarters. Although better technology may be able to overcome the geographical distance, cultural distance is more difficult to overcome. Culture and business environment interact to create a collection of management values ​​are unique in a State. Cultural differences, cross-cultural differences in attitudes towards risk and power, differences in levels of achievement needs and attributes of other cultures often produce bad consequences, in the form of: (1) the mistaken direction, (2) a low tolerance for criticism, (3) unwillingness to discuss business issues openly or seek help, (4) loss of confidence of foreign managers, (5) an unwillingness to delegate authority, and (6) reluctance to take responsibility. The managers of multinational companies face many difficult issues. This is particularly true for managers and employees of a company acquired in cross-border mergers and acquisitions.

Take the example of gift-giving business. Payment directly or indirectly to ensure business benefits violated the Act Foreign Corrupt Practices (the Foreign Corrupt Practices Act-FCPA) in the United States. However, in most parts of the world, business gift giving is part of daily business affairs. Government officials often have the power to prevent local operation if the gift is not expected to be paid. Unofficial payments to the sender of the letter is often a prerequisite for timely mail delivery. Apart from ethical issues, business gift giving cause performance problems. Earnings in local currency and dollar equivalent values ​​increased during inflation is very high. During the next period, if the value of foreign currency declines, the value of local income in dollars also declined even though earnings in local currency increased. Under these circumstances, measurement of the parent company's currency resulting in a random element when measuring the performance of overseas operations, if changes in foreign exchange rates do not follow the differences in the rate of inflation.

In the long run, one must consider the value of an investment unit overseas as seen from the currency's country of origin. Point of view of the parent company's currency appropriate to be used for strategic planning and long-term investment decisions. However, the basic framework of the currency used to evaluate management performance must depend on who should provide explanation the exchange rate risk. (This issue is separate from who be responsible to exchange rate risk). If the finance company to manage exchange rate risk, it is reasonable to measure the performance abroad in local currency. The size of the parent company's currency is just as valid if the gains and losses in foreign exchange rates are not used when evaluating a foreign manager. If local managers have the tools necessary to control the gain and loss exchange rates, then take measurements of their performance in the currency of the parent company can be justified.

Consider some aspects of the budget process. Control over network domestic and foreign operations budget in need of foreign currency denominated in the parent company in order to be comparable.

If the numbers in the parent company's currency is used, changes in the exchange rate used to create a budget for monitoring the performance of a variance will lead to other changes that are outside. Three rates of exchange may be used when preparing draft operating budget at the beginning of the period:

1.       Spot exchange rate prevailing when the budget prepared.

2.       An exchange rate is expected to apply at the end of budget period (rate projection).

3.       Exchange rate at the end of the period when the budget be adjusted if the exchange rate change (closure rate).

A comparable exchange rate can be used to track the relative performance against the budget. If the combination of different exchange rates used to prepare the budget and to track performance, this will cause differences in the allocation of responsibility for exchange rate changes and lead to the possibility of different management responses. Suppose some of the following possibilities.

1.       Budgets and tracking performance based on the initial spot rate. Exchange rate changes have no effect on the performance evaluation of overseas managers. Local managers have little incentive to enter the anticipated exchange rate changes into operating decisions.

2.       Budget at the end of the exchange rate (as adjusted) and tracking based on the current exchange rate of closing. Combination of both producing the same. Local management does not need to consider the currency exchange rate used for budgeting and evaluation are the same.

3.       Budgeting based on the initial rate and tracking based on the closing exchange rate. Local managers have full responsibility for exchange rate changes. Possible negative effect that can arise include waste budget by local managers or hedge may not be optimal for the company.

4.       Budgets and tracking performance using the exchange rate projections. This system reflects the point of view of local currency. Local managers are encouraged to include estimates of exchange rate changes into the plan of operation but is not responsible for the unexpected changes in exchange rates, which should be taken over by the parent company.

5.       Budget based on the exchange rate projections and tracking based on the closing exchange rate. This combined rate does not make local managers must be able to explain the changes in exchange rates that have been estimated. Managers should be responsible for unanticipated changes in exchange rates (thus encouraged to hedge).

K.      Strategic Cost Determination

When control costs at the manufacturing stage, many companies around the world using a standard costing system that essentially estimates how much it cost to produce a product that is used as the basis for determining the appropriate price. Actual production costs were then compared with the estimated cost. Variances that arise between standard cost and actual cost is analyzed as a basis for corrective action in the process of production or procurement. This process is considered a cost-based pricing model.

In contrast, many Japanese companies use a method of determining cost-based pricing. Besides being known as the determination target cost, strategic costing methodology is based on the assumption to design and build products with prices that are meant for market success. Take for example the Daihatsu Motor Company. Product development cycle (which normally lasts for 3 years) began with the production manager who ordered the departments in Daihatsu to propose the design and performance specifications that they believe must be met by a car. This was followed by a cost estimate that is based not on some of the costs to build a car, but based on the costs that can be set aside for each car. Costs may be set aside these targets are based on the reduction of profit margin that reflects the strategic plan and financial projections of the target company's selling price which is believed by the company will be accepted by the market.

When used as a target, which can be set aside fee is not static. During the production process, reduced costs that can be set aside each month to a certain level of cost reduction based on short-term profit goals. In the ensuing years, the actual cost of the previous year is the starting point for subsequent reduction, thus ensuring that the ongoing cost reductions for cars is still being produced. System is based on the market, known as Kaizen costing, significantly reducing the reliance on standard costing system. Determining the standard cost system tries to minimize the variance between budgeted costs with actual costs. Kaizen Costing stressed to do what is necessary to achieve the desired levels of performance in a competitive market conditions.

The concept of determining the cost of other strategic introduced by the Japanese is determination of cost behavior. In a process costing system, overhead is applied to the goods or services using the divulging routine application of overhead rates. From the standpoint of traditional cost accounting, manufacturing overhead allocated to the product according to the principles and effect. Apart from the capital intensity of most companies manufakktur Japan, the use of direct labor as the basis for setting the allocation of overhead expenses continues. This practice encourages the production manager to reduce costs and not just to accumulate (ie pushing automation). A production manager who wishes to reduce the overhead burden is motivated to replace capital with labor.

L.       Performance Evaluation of Foreign Operations

Evaluate the performance of the system is central to effective control. Performance evaluation systems are designed with proper allow top management to: (1) consider the profitability of existing operations, (2) determine the areas that are not performing as expected, (3) allocating resources are limited by productive enterprises, (4 ) evaluate management performance, and most importantly, (5) ensure the management of behavior consistent with strategic priorities. Develop an effective performance evaluation system is more accurate to say as an art than a science. Increasing complexity for operations abroad. Performance evaluation for overseas operations have to deal with complexities such as exchange rate volatility, inflation abroad, transfer pricing, different national cultures, and a host of other environmental influences. If these factors are ignored, the head office to accept the risk measures of operating results are distorted. Appropriate performance standards are less likely to motivate managers to take action abroad is not in accordance with company objectives. A direct consequence is the reduction in efficiency resulting company and the possibility of reduced competitiveness.

Consequence

The results showed that the main purpose of performance evaluation is to ensure profitability. However, there is potential for conflict if the performance evaluation system does not correspond to the specific nature of foreign operations that may have different goals than short-term profits. Similarly, the emphasis on short-term profitability and efficiency can divert the attention of corporate strategy and an important manufacturing and negate the company's employees. For example, Awasthi, Chow, and Wu observed that influence the behavior of the performance evaluation in the context of cultural differences. They found that the performance evaluation and incentive systems lead to different behavioral responses depending on the national culture.

Based on the uniqueness of each mission overseas subsidiaries, the performance evaluation system should allow for what purpose subsidiary in accordance with overall corporate goals. For example, if the purpose of an overseas subsidiary is to produce key components for other units within the company system, the objective must be evaluated in terms of how to price, production, quality, and delivery schedules when compared with other sources of supply. Subsidiary managers should participate fully in setting goals to be achieved. Participation is helpful in ensuring that they will be evaluated based on the framework that are sensitive to local operating conditions and are consistent with overall corporate goals. Companies must be sure not to sacrifice long-term goals because subsidiary managers are too busy with short-term results. Adherence to long-term goals can be achieved by ensuring that short-term performance goals and incentives are met in the management of the company's strategic plan.

Performance Management Unit versus

Should we separate the unit's performance and the performance of managers when evaluating a foreign operation? Although some people believe that there is no separation, this position can be maintained in some circumstances.

Actions of the parties, each with different interests in the results, it can affect the performance of overseas operations. These parties include (but are not limited to) local management, office management, recipient country governments and state government holding company.

Local managers clearly affect reported earnings through operating decisions. Decisions made by the head office abroad also affect earnings. For example, to protect the value of assets located in countries that are vulnerable to devaluation, the company's treasury unit are often instructed to send funds overseas to subsidiaries located in countries with strong currency.

Actions and policies of the host country government also directly affect the reported results of a foreign subsidiary. Minimum capitalization ratio of provisions in various countries often increase the value of the investment earnings on which to base comparisons. Foreign exchange controls that restrict the availability of foreign currency to pay for necessary imports will often emphasize the performance of subsidiaries. Control wages and prices may also damage the performance reported by local managers.

These considerations should be made clear that the separation between managers and unit performance. Local managers should be evaluated only on the balance sheet items and income statement that they can influence. Specific evaluation can be done in practice by dividing each post balance sheet and income statement into components that can be controlled and which can not be controlled.

Performance Criteria

Apparently a single criterion can not accommodate all the performance factors of good office management attention. Two of financial performance criteria of the most widely used by the MNC when evaluating foreign operations is the return on investment (ROI-return on investment) and budgeted performance. ROI link corporate profits on the basis of certain investments; performance of the budgeted operating performance compared to budget. Control of the budget means any difference between budget and actual performance can be traced to the manager or the responsible unit. A classic study showed that budgetary control is better than the comparison ROI when used to evaluate management performance. ROI size may be more appropriate to measure the performance of the unit, while the ratio of the budget may be more useful in evaluating managers.

Many companies that do not limit the extent of measurement criteria on financial factors. Non-financial criteria pressing financial measures with particular attention to actions that may significantly affect long-term performance. This criterion is especially important in separating the performance management unit.

Non-financial measures that are important include market share, product and process innovation, personnel development (related in terms of the number of people who are promoted relative to the number of people who can be promoted) and employee morale (which is determined based on internal opinion surveys) and measure productivity. Which can not be regarded as less important is the performance in social responsibility and relations with host country governments. Non-financial factors are critical to ensuring the continued success overseas.

Despite the difficulties in measurement, non-financial criteria are considered important in prkatik. Previous survey shows that market share is important, followed by an increase in productivity, relationships with host country governments, development and quality control and employee safety. Fullerton and Whales reported that companies that implement the appropriate level of practice in-time (JIT-just in time) is higher as a strategy of lean manufacturing and continuous quality improvement, the possibility of using non-financial criteria. These criteria include measures of quality outcomes, benchmark competition, quality and supplier of waste, the installation, damaged goods, and machine down time.

Additional issues include the identification of ROI and budgets of relevant indicators and measurement. Variations in the ROI and budget comparison of income related to the elements and foundation-related investments. Thus, should the profit is the difference between revenues and expenses as seen in conventional income statement subsidiaries, or shall return it to enter another dimension? Although these measures may reflect the conventional profit company to better outcomes than measures of cash flow is tight, in an international environment size can be misleading. For starters, net income may include allocation of corporate expenses that can not be controlled by the unit manager. Net income may not reflect the total contribution.

To overcome this deficiency, accounting firms need to determine as accurately as possible, the return can be specifically attributed to the presence of foreign subsidiaries. Therefore, to reported earnings, the company accountant should add back such things as: (1) payment of royalties, fees, and allocations are charged to the company's foreign subsidiaries, and (2) return on sales between companies to subsidiaries. If sales to the subsidiary is not done according to fair prices, profits of foreign subsidiaries should be tailored to the transfer price subsidies. The amount of profit that is used for better management evaluation includes only items of income and expenses can be controlled by the unit manager.

Measurement Issues in the Evaluation and Price Changes

Designer of the evaluation system for overseas operations also have to deal with the contents of accounting measurement. Is the value in local currency should be adjusted to price changes when inflation is a significant motivating factor? Presentation as it would affect the re-direct measurement of the various components of ROI and performance statistics for budgeting and performance evaluation. For example, not carrying inflation in general would rate higher on measures of return on investment. As a result, enterprise resource may not be directed to the use of the most promising in the company.

M.    Evaluation of Practice Performance: ICI

Observations on the effect of inflation on historical accounts reveal six negative consequences: (1) cost of goods sold valued lower than the sale date, (2) capital employed associated with lower assessed present value, (3) as a result of (1 ) and (2), return on capital is double scored higher, (4) comparison of the performance of the division that is based on similar assets in different public is something that is not appropriate, (5) comparison of performance between countries are not significant subsidiaries, and (6 ) intertemporal performance comparison is not valid.

To eliminate this distortion, ICI has set a fee adjustment (Current Cost Adjustment-CCA) into the internal reporting system. According to a spokesperson for the company, this will provide the primary management tool that is indispensable.

ICI divides performance measures into two categories: long-term (at least 1 year) and short-term. Cash flow generated by the product and long-term ROI is a measure of the primary. With a measure of cash flow, ICI sought to determine whether a product will generate enough money to pay for the replacement of plant, parts for the company's costs and result in sufficient income to fund a realistic growth. When creating a model of operation, the ICI found that the CCA rate of return required is different for each country. For example, ICI operations in Germany requires twice the rate of return in the UK to fund the same growth rate, mainly caused by tax factors.

As a measure of ROI, ICI uses the ratio of the current cost operating profit (before interest, taxes, dividends) with the current cost of fixed assets plus net working capital. Assets valued based on replacement cost and net of depreciation for the major business units and not deductible depreciation for smaller production lines to eliminate the distortion caused by the general assets (ie the denominator will decrease in some time solely because of depreciation, thereby increasing the rate of return).

In Western Europe, earnings before interest and tax is measured because this expense is the responsibility of the central office and it is difficult to link the loan to a specific project or determine the actual tax paid when a product is made in a country and sold in several other countries. If performance is evaluated based on the subsidiary (eg, Brazil and Australia), measured earnings after interest and taxes. ICI reasons why doing this is because these subsidiaries do your own loan and investment decisions there is influenced by local taxes and tax incentives. By using the ROI in the current cost and historical cost rather than the return, it generally protects ICI returns the size of local taxes, tax incentives, and inflation. Thus, the ICI can compare business units in several different countries and at different times.

Although ICI uses primarily the cash flow generated and ROI to measure the performance of long-term, short-term performance measures that the primary is to compare the results with the actual budget, with special attention on financial ratios such as gross profit margin (ie profit before corporate expenses). The company uses 3-year plan: The first year of the plan into its operating budget period. Performance tracked per month and per quarter. Quarterly results are considered more significant.

Like most MNC, ICI incorporate inflation expectations when setting the selling price and operating costs such as labor expense estimate for the local budget. ICI prefer to include the present value of the budget and forecasting system for the price of the replacement value of goods sold and depreciation. The reason stated for this approach is that if oil prices rise or fall and derivatives very rapidly, companies must use the cost to be incurred to replace the raw materials and factors of production which will then be entered into the sale price. If the company uses historical costs, profits there may be insufficient to continue to purchase oil to the price level now.

Thus, performance tracked by using the actual cost of goods that takes place every month. Unit managers are held accountable for variances that occurred (if any), due to unforeseen cost increases (ie, greater than the predicted) can be offset by raising prices.

The budget also includes a forecast depreciation expense based on local indexes that reflect the replacement cost of assets. Local manager is not responsible for the variance (which is calculated each quarter) between the predicted and actual depreciation. Local managers are considered inadequate to digest and react to changes in the forecast depreciation expense. However, the product manager is expected to achieve budgeted profit after depreciation of the actual.

ICI also include forecasts of monetary working capital adjustment (monentary working capital adjustment-MWCA) into the budget. ICI did not consider the difference between forecast and actual MWCA as something that is meaningful because this variant is considered to occur due to changes in costs and selling price and will appear in another part of the profit and loss account.

ICI reporting solution for inflation is essentially focused on the balance sheet and income statement aggregates. Next offered internal reporting system that allows managers to observe the figures reported in a more separated.

Effect of Foreign Currency

Economic effects caused by exchange rate changes on performance can be greater than that seen through accounting measures alone. To be able to more fully analyze the effects of inflation and currency volatility, and strengthen their ability to react, companies need to analyze the competitive market position and the effect of currency changes on costs and revenues and to competition. As with most of the MNC, ICI uses forecasts of foreign exchange rates when making a budget and using the actual exchange rate at end of period for measuring performance. Unlike most of the MNC, ICI believes that the variance arises when the actual exchange rate is different from the budget is not very meaningful. For instance, the company has budgeted exchange rate of euro to subsidiaries in France and the exchange rate at the end of the month proved to forecast the exchange rate. There are no variants of arithmetic, but ICI might lose some sales volume in France. The reason is probably its competitors are the exporters of Canada has weakened against the euro. As a result, the Canadians may have a gain margin of ICI and can lower prices in the euro to maintain the same level of profits when converted into Canadian dollars.

Thus, the ICI believes that changes in exchange rates had a greater influence than can be explained by the size of the accounting. ICI found that further analysis is needed to determine the real impact of financial fluctuations on performance, to provide an effective response and to determine how far local managers assumed responsibility for protecting the budgeted profit in sterling. To achieve these goals, ICI see the currency in which prices and incomes increase when compared to its competitors.

Approach to analyze the economic impact of currency movements affect the ICI evaluation of its managers, with the freedom to react to external circumstances like that are restricted. When measuring the performance of managers, company managers take into account the extent to which it is affected by factors beyond its control and the reaction was taken against those factors.

N.     Performance Standards

A company may already have some of the standards within the company, such as the required minimum level of ROI, which applies to its own subsidiaries or to its product line, or the company may specify different levels of ROI or other references (such as gross margin) for the subsidiary or different product lines. These standards can be incorporated into the budget and can then be compared with the results achieved. Performance can also be measured antawaktu. Companies can establish an official increase in specific ratios or earnings. Past performance is usually significantly used to make the next budget period. Finally, companies can compare their own performance with the performance of its foreign competitors, or compare themselves with one unit to another unit.

Comparing the performance of foreign units to the performance of its competitors can be beneficial. At the same time, this comparison has many drawbacks. For example, if a competitor is a local company, then the problem of data limitations and the adequacy of a significant problem, especially if a competitor is a private company. If data are available, comparisons may be still difficult. Transfer pricing policies and accounting principles adopted by competitors may be impossible to determine. Increasingly cross-border comparisons reinforce this issue further.

Subsidiary goal difference will automatically get the comparison of performance, unless it is directly taken into account. Even if the same purpose subsidiary, the difference in the risk profile of the State should be considered. If a higher level of risk must be balanced with a higher rate of return, it is reasonable to expect higher profitability of operating in countries at higher risk. However, to date, there is no single agreed definition of how to incorporate risk lead this country when analyzing the performance of subsidiaries.

Many companies determine the payback period is shorter, adjust the cash flow projections to the risk or increase the rate of return is determined when considering investing in a riskier country. ROI can be quickly adapted to the political risk because the company can determine the desired ROI to cover the premiums according to risk in a particular country (which is offset in some cases with a lower risk stemming from the geographical diversification of the portfolio of a company's overseas operations).

Determination of the risk premium against ROI goals can not be avoided anymore is subjective, but the process can be carried out systematically. One approach is to adjust the company's ROI with a numeric risk index is created for each State.

Performance evaluation based on a single standard companies are generally not satisfactory. Budget performance is a more useful comparison standard for multinational operations. Realistic budget that allows performance targets include comparisons that are unique to a particular unit. Comparison of actual performance with budget management is also possible to separate the headquarters of the results is the responsibility of the subsidiary manager of the results of which are beyond the control of the manager.

Here are some entries that might be useful for those who demand to evaluate the results of foreign operations:

1.       Foreign subsidiaries should not be evaluated as an independent profit center into a strategic component of a multinational system.

2.       Criteria for making the investment company shall be equipped with yanag performance measures geared to the objectives and the specific environment of each unit overseas.

3.       Specific purpose of considering internal and external environment of each subsidiary should be included in the budget performance.

4.       Performance of the subsidiary should be evaluated in terms of whether there is any deviation from the goal, the reason for the deviation and the management response to the unexpected development.

5.       Subsidiary managers should not be held responsible for the results of which are beyond their control (whether in the State of origin or abroad).

6.       Subsidiary managers whose performance is measured should participate fully in setting goals that will be used to assess them.

7.       Various performance measures, both financial and non financial, should be used when evaluating foreign operations.

Referensi:

1. Choi, Frederick D.S., and Gerhard D. Mueller, 2005., Akuntansi Internasional – Buku 1, Edisi 5., Salemba Empat, Jakarta.
2. Choi, Frederick D.S., and Gerhard D. Mueller, 2005., Akuntansi Internasional – Buku 2, Edisi 5., Salemba Empat, Jakarta.