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Management Control System• A management control system is a logical integration of management accounting tools to gather and report data and to evaluate performancePurposes of a management control system• clearly communicate the organization’s goals• ensure that every manager and employee understands the specific actions required of him/her to achieve organizational goals• communicate the results of actions across the organization• ensure that the management control system adjusts to changes in the environment
Management Control System Steps1. Begin by specifying the organizations goals, subgoals and objectives – Goals are what the organization hopes to achieve in the long run – Subgoals or key success factors are more specific and provide more focus to guide daily actions – Objectives are specific benchmarks which management would like to see achieved – Important to keep all three in balance to avoid concentrating solely on short-run achievements at the expense of long run goals2. Establish responsibility centers3. Develop performance measures4. Measure and report on financial performance5. Measure and report on non-financial performance
The Management Control System Set Goals, Measures, Targets Plan Feedback and and Evaluate,Execute Learning Reward Monitor, Report
Setting Goals, Objectives and Performance MeasuresTop 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.
Forms of Organizational Structure President StaffFunctional VP VP VP VP Marketing Production Human Resources Finance Divisional Matrix President Staff President Functional VPs Mkt. Prod. H.R. Fin. A Divisional VP VP VP VPs BDivision A Division B Division C C
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 controlCost Centre• Area for which cost data is accumulated such as an assembly departmentExpense Centre• Area dominated by discretionary expenses such as legal or accountingRevenue Centre• Area primarily responsible for generating sales such as a sales officeProfit Centre• Area responsible for controlling costs and generating revenuesInvestment Centre• Area responsible for income (revenues - expenses) in relation to its invested capital
Developing Measures of PerformanceGood performance measures will1. Relate to the goals of the organization2. Balance long-run and short-run concerns3. Reflect the management of key decisions and activities4. Be affected by actions of managers and employees5. Be readily understood by managers and employees6. Be used in evaluating and rewarding employees7. Be reasonably objective and easily measured8. Be used consistently and regularly
Controllability and Measuring Financial PerformanceControllable 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 results achievedUncontrollable Cost• Any cost that cannot be affected by management of a responsibility centre within a given time spanMeasuring 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
Contribution Income Statement for Measuring Performance Whole Branch Branch Company A B Net sales revenue $4,000 $1,500 $2,500 Variable costs 3,260 1,200 2,060Controllable Direct Contribution margin 740 300 440 Costs Costs Fixed costs controllable by manager 260 100 160 Contribution controllable by manager 480 200 280 Fixed costs controllable by others 200 90 110Uncontrollable Contribution by segment 280 $110 $170 Costs Indirect Unallocated costs 100 Costs Income before income taxes $180 • Evaluate manager on "contribution controllable by segment manager" (all controllable costs) • Evaluate segment on its "contribution by segment" (all direct costs)
Nonfinancial PerformanceControl of Quality Measures• 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 businessControl 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 driverControl 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
Balanced Scorecard• Performance reporting approach which links organizational strategy to actions of managers and employees• Combines financial and operating measures• Links performance to rewards Financial Strength• Recognizes diversity in organizational goals Customer Organizational Satisfaction Learning Business Process Improvement
The Future of Management Control Systems• A changing environment requires changes in the management control system OrganizationalFour key Goalsfactors mustbe monitored Organizational Responsibilityat all times Structure Centres Performance MeasurementImportant 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 organizations 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