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2007 Pearson Education Canada Slide 13-1

Management ControlSystems, The Balanced

Scorecard, andResponsibility Accounting

13


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Management Control System

A management control system is a logicalintegration of management accounting tools togather and report data and to evaluate performance

Purposes of a management control system

clearly communicate the organizations goals

ensure that every manager and employeeunderstands the specific actions required ofhim/her to achieve organizational goals

communicate the results of actions across theorganization

ensure that the management control systemadjusts to changes in the environment


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Management Control System Steps

1. Begin by specifying the organization's goals, subgoals and

objectives Goals are what the organization hopes to achieve in the long

run

Subgoals or key success factors are more specific andprovide more focus to guide daily actions

Objectives are specific benchmarks which managementwould like to see achieved

Important to keep all three in balance to avoid concentratingsolely on short-runachievements at the expense of long rungoals

2. Establish responsibility centers

3. Develop performance measures

4. Measure and report on financial performance

5. Measure and report on non-financial performance


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The Management Control System

Set Goals,

Measures,

Targets

Feedback

and

Learning

Monitor,

Report

Plan

and

Execute

Evaluate,

Reward


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Setting Goals, Objectives and

Performance Measures

Top management develops organization-wide goals, measures

and targets. They also identify the critical processes.

Top management and critical process managers develop

critical success factors and performance measures.

They also specify objectives

Critical process managers and lower-level managers

develop performance measures for objectives.


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Forms of Organizational Structure

VP

Production

VP

Marketing

VP

Human Resources

VP

Finance

StaffFunctional

Staff

VP

Division B

VP

Division A

VP

Division C

President

Divisional

Functional VPs

Divisional

VPs

Matrix

A

B

C

Mkt. Prod. H.R. Fin.

President

President


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Responsibility Centres

Set of activities assigned to a manager or a group of

managers/employees Based on principle of responsibility accounting which holds that

managers should be evaluated on the activities which they can

influence or control

Cost Centre

Area for which cost data is accumulated such as an assembly department

Expense Centre

Area dominated by discretionary expenses such as legal or accounting

Revenue Centre

Area primarily responsible for generating sales such as a sales office

Profit Centre Area responsible for controlling costs and generating revenues

Investment Centre

Area responsible for income (revenues - expenses) in relation to its

invested capital



Motivating Employees to Excel

To achieve maximum benefits at minimum cost, amanagement control system must foster goal

congruence and managerial effort

Goal Congruence exists when individuals andgroups aim for the same organizational goals

through their decision-making

Managerial Effort is an exertion toward a goal orobjective i.e. working faster andbetter

Incentives are needed for both to be achieved



Developing Measures of Performance

Good performance measures will1. Relate to the goals of the organization

2. Balance long-run and short-run concerns

3. Reflect the management of key decisions and

activities

4. Be affected by actions of managers and employees

5. Be readily understood by managers andemployees

6. Be used in evaluating and rewarding employees

7. Be reasonably objective and easily measured

8. Be used consistently and regularly



Controllability and Measuring

Financial Performance

Controllable Cost

Uncontrollable Cost

Measuring Financial Performance



Controllable Cost

Cost which is directly influenced by the manager

of a responsibility centre during a particular time

period

Absolute or total control is not required in order

for a cost to be classified as controllable

Key is to look for the manager or managers who

are in the best position to explain the resultsachieved


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Uncontrollable Cost

Any cost that cannot be affected by management

of a responsibility centre within a given time span


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Measuring Financial Performance

Principle of responsibility accounting holds that it

is fair to evaluate managers only on the costs

under their control

Uncontrollable costs should be ignored in

evaluating the manager because nothing he or

she does will affect these costs


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Contribution Income Statement for

Measuring Performance

Evaluate manager on "contribution controllable by segmentmanager" (all controllable costs)

Evaluate segment on its "contribution by segment" (all directcosts)

Whole Branch BranchCompany A B

Net sales revenue $4,000 $1,500 $2,500

Variable costs 3,260 1,200 2,060

Contribution margin 740 300 440

Fixed costs controllable by manager 260 100 160Contribution controllable by manager 480 200 280

Fixed costs controllable by others 200 90 110

Contribution by segment 280 $110 $170

Unallocated costs 100

Income before income taxes $180

Controllable

Costs

Direct

Costs

IndirectCosts

UncontrollableCosts


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Nonfinancial Performance Measures

Control of Quality

Control of Cycle Time

Control of Productivity


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Control of Quality

Quality requires meeting customers'requirements and maintaining this level

throughout the production and sales process

Four categories:

1. prevention

2. appraisal

3. internal failure

4. external failure

Total quality management (TQM) focuses on all

areas of business


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Control of Cycle Time

Cycle time is the time taken to complete a

product or service

Summary measure of effectiveness and efficiency

and an important cost driver


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Control of Productivity

Relationship of outputs to inputs for material,

labour and equipment

Multiple productivity measures may include

Labour cost as a % of sales dollars

Sales per employee

Machinery & equipment investments per

employee Total labour cost per hour


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Successful Organizations and

Measures of Achievement

CUSTOMER SATISFACTION

BUSINESSS PROCESS IMPROVEMENTS

ORGANIZATIONAL LEARNING

FINANCIAL

STRENGTH


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Balanced Scorecard

Performance reporting approach which links organizational

strategy to actions of managers and employees Combines financial and operating measures

Links performance to rewards

Recognizes diversity in organizational goals

Financial

Strength

Customer

Satisfaction

Business Process

Improvement

Organizational

Learning


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Management Control Systems in Service,

Government and Nonprofit Organizations

Control systems are more difficult to implementand maintain:

Outputs are more difficult to measure

Quality ratings are less clear

Important to properly train and motivate

employees to achieve organization's goals and

consistent monitoring of objectives in accordancewith critical subgoals


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Management Control Systems in Service,

Government and Nonprofit Organizations

Government and nonprofit organizations face furtherproblems:

Goals and objectives are less clear Professionals less receptive to control

systems Lack of profit measure makes measurements

more difficult Less pressure to improve from "owners" Budgeting is more of a bargaining game to

acquire additional funding and less of aplanning tool Motivations and incentives of organizational

employees are often drastically different fromfor-profit organizations


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The Future of Management Control Systems

ResponsibilityCentres

OrganizationalGoals

OrganizationalStructure

PerformanceMeasurement

A changing environment requires changes in the management control

system

Four keyfactors mustbe monitoredat all times

Important factors to keep in mind: Individuals will generally behave in their own self-interest Design systems so that individuals pursuing their own self-interest will also

achieve the organization's objectives Best benchmark for evaluating current performance is expected or budgeted

performance Nonfinancial performance is just as important as financial performance Periodically review the success of the management control system Learn from your and your competitors' mistakes