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9 - 12002 Prentice Hall Business Publishing,Introduction to Management Accounting12/e,Horngren/Sundem/Stratton

Chapter 17

Management Control Systems

and Responsibility Accounting

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2002 Prentice Hall Business Publishing,Introduction to Management Accounting12/e,Horngren/Sundem/Stratton 9 - 3

Management Control System

What is a management control system?

It is a logical integration of techniquesto gather and use information.

Planningand Control

Motivate Evaluate

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Set Goals,Measures,

Targets

Feedbackand

Learning

Monitor,Report

Evaluate,Reward

Planand

Execute

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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 needed to achieve the goals.

Top management and critical process managers

develop key success factors and performance

measures. They also identify specific objectives.

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Setting Goals, Objectives, and

Performance Measures

Critical process managers and lower-level

managers develop specific performancemeasures for each objective.

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7/532002 Prentice Hall Business Publishing,Introduction to Management Accounting12/e,Horngren/Sundem/Stratton 9 - 7

Organizational Goals

A well-designed management control system

aids and coordinates the process of making

decisions and motivates individuals throughout

the organization to act in concert.

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Critical Process

A criticalprocessis a series of related

activities that directly affect the

achievement of organizational goals.

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Key Success Factors

Key success factors are actions that must be

done well in order to drive the organization

towards its goals.

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Learning Objective 2

Use responsibility accounting

to define an organizationalsubunit as a cost center,

a profit center, or aninvestment center.

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Responsibility Center

A responsibility center is a set of activities

assigned to a manager, a group of managers,

or other employees.

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Responsibility Accounting

Responsibility accounting is used to identify

what parts of the organization have primary

responsibility for each objective, developperformance measures and targets to

achieve, and design reports of these

measures by organization subunitor responsibility center.

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Types of Responsibility Centers

A cost centers manager is accountable

for costs only.

Profit centers have responsibility for

controlling revenues as well as costs.

Investment centers have responsibilityfor revenues, expenses, and the

investment used by the center.

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Compare financial and

nonfinancial performance,and explain why planning

and control systems shouldconsider both.

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Measures of Performance

Good performance measures will

relate to the goals of the organization.balance long-term and short-term concerns.

reflect the management of key actions and

activities.be readily understood by employees.

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Measures of Performance

be used in evaluating and rewarding

managers and employees.

be affected by actions of managers and

employees.

be reasonably objective and easily

measured.

be used consistently and regularly.

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Nonfinancial Measures of

Performance

AT&T Universal Card Services uses 18

performance measures for its customer

inquiries process. These measures include average speed of

answer, abandon rate, and application

processing time.

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Nonfinancial Measures of

Performance

Often the effects of poor nonfinancial performance

do not show up in the financial measures until

considerable ground has been lost.

quality productivity satisfaction

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Monitoring and

Reporting Results

Feedback and learning are at the center of

the management control system.

At all points in the planning and controlprocess, it is vital that effective

communication exists among all levels of

management and employees.

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A Successful Organization and

Measures of Achievement

ORGANIZATIONAL LEARNING

Training Time, Turnover, Staff Satisfaction Score

BUSINESS PROCESS IMPROVEMENT

Cycle Time, Defects, Activity Costs

CUSTOMER SATISFACTION

Market Share, Survey Scores, Complaints

FINANCIAL

STRENGTH

Product Profitability,

EBIT

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The Balanced Scorecard

A balanced scorecard is a performance

measurement and reporting system that

strikes a balance between financial andoperating measures.

It links performance to rewards.

It gives explicit recognition to the

diversity of organizational goals.

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The Balanced Scorecard

The scorecard measures an organizations

performance from four key perspectives:

Financial strength

Customer

satisfaction

Business processes

improvement

Organizational

learning

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Key Performance Indicators

What are key performance indicators?

They are measures that drive theorganization to achieve its goals.

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Explain the importance of

evaluating performance andhow it impacts motivation, goal

congruence, and employee effort.

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Managerial Effort

is exertion toward

a goal or objective.

Supervising

Planning

Thinking

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Motivation

is a drive for some selected goal.

It creates

effort.

It creates

action toward

that goal.

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Prepare segment income

statements for evaluating profitand investment centers using

the contribution margin andcontrollable-cost concepts.

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Controllability


Controllable events Uncontrollable events

Controllable costs Uncontrollable costs

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Controllability

Controllable costs include any costs that are

influenced by a managers decisionsand actions.

An uncontrollable cost is any cost thatcannot be affected by the management of

a responsibility center within a given time span.

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Contribution Margin

The contribution margin is especially

helpful for predicting the impact on income

of short-run changes in activity volume. Managers may quickly calculate any

expected changes in income by multiplying

increases in dollar sales by the contributionmargin ratio.

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Segments

Segments are responsibility centers for which a

separate measure of revenues and costs is obtained.

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Segments

Net sales $950,000 $1,950,000 $2,900,000

Variable costs 750,000 950,000 1,700,000

Contribution margin $200,000 $1,000,000 $1,200,000

Controllable costs 75,000 60,000 135,000

Segment margin $125,000 $ 940,000 $1,065,000

Allocated costs 70,000 80,000 150,000Income $ 55,000 $ 860,000 $ 915,000

Unallocated costs 300,000

Organization profit $ 615,000

EastDivision

WestDivision Total

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Measure performance against

quality, cycle time, andproductivity objectives.

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Quality Control

Quality control is the

effort to ensure that

products and services

perform to customer

satisfaction.

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Cost of Quality Report

Prevention costs are the costs incurred to

prevent the production of defective productsor delivery of substandard services.

Appraisal costs are the costs incurred toidentify defective products or services.

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Cost of Quality Report

Internal failure costs are the costs of defective

components and final products or services

that are scrapped or reworked.

External failure costs are the costs caused by

delivery of defective products or servicesto customers, such as field repairs,

returns, and warranty expenses.

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Quality-Control Chart

The quality-control chart is a statistical plot

of measures of various product dimensions

or attributes. This plot helps detect process deviations

before the process generates defects.

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0

0.5

1

1.5

2

3/12 3/19 3/26 4/2 4/9 4/16 4/23 4/30 5/7 5/14

Week of

Percentageof

Defects

Actual Goal .6%

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Cycle Time

Cycle time, or throughput time, is the time

taken to complete a product or service, or

any of the components of a product or service.

One key to improving quality is to reduce

cycle time.

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Control of Cycle Time

Lowering cycle time requires smooth-

running processes and high quality, and also

creates increased flexibility and quickerreactions to customer needs.

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Productivity

Productivity is a measure of outputs

divided by inputs.

Productivity measures vary widelyaccording to the type of resource with

which management is concerned.

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Control of Productivity

More than half the companies in the United Statesmanage productivity as part of the effort to

improve their competitiveness.

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How should outputs and inputs be

measured?

Labor-intensive organizations are concernedwith increasing the productivity of labor, so

labor-based measures are appropriate.

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Highly automated companies are concerned

with machine use and productivity of

capital investments, so capacity-basedmeasures, such as the percentage of time

machines are available, may be most

important to them.

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Describe the difficulties of

management control inservice and nonprofit

organizations.

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Service Government and

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Service, Government, and

Nonprofit Organizations

Outputs of service and nonprofit

organizations are more difficultto measure than are the cars or

computers that are produced by

manufacturers.

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Understand how a management

control system uses accountinginformation.

Future of

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Future of

Management Control Systems

A changing environment often means that

organizations must set different subgoals

or critical success factors.

Different subgoals create different targets

and different benchmarks for evaluating

performance.

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Accounting Information

A management control system uses

management accounting tools such as

budgets and performance reports to focusresources and talents of the individuals in

an organization on such goals as quality,

cost, and service.

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End of Chapter 9

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