Management Control Systems and Responsibility Accounting Session 13 & 14

What are the functions of Management – towards Goal What is Management? What are the functions of Management – towards Goal

Elements of Control System Detector, Assessor, Effector, Communication Network Example of Driving a car

What is Management Control? Management Control is the process by which managers influence other members of the organisation to implement the organisation’s strategies. Management control is a process of assuming that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives

Management Control System? It is a system designed to influence subordinates to act in the organization’s interest. Principals (owners) use this system to influence agents’ (managers’) behavior. All the more important at a decentralized organisation. A management control system is designed to influence subordinates to act in the organization’s interest. 12 - 5

The Management Control System Set goals, measures, targets Feedback and learning Plan and execute Evaluate, reward An effective management control system must allow for delegation of decision authority, performance and evaluation measurement, and compensation and reward systems. Monitor, report

Boundaries of Management Control Systems Lies between these two: Strategy Formulation Management Control Task Control Ex-Walmart

Features of MCS Definite pattern Coordinated System Existence of goals & plans Forward looking Continuous process Emphasis on Planning & Control People oriented

Scope of MCS Control over Organisation policies People Costs Techniques Capital Expenditure

Goal Congruence, Managerial Effort, and Motivation Goal congruence is achieved when employees, working in their own perceived best interests, make decisions that help meet the overall goals of the organization. But that should be in the right direction….reducing cost by reducing quality is not goal congruence by managers. Managerial effort must accompany goal congruence.

Factors influencing goal congruence Informal factors External (attitude, loyality, spirit etc) Internal (Culture, Management style, perception, communication)

Factors influencing goal congruence Formal factors Management Control system itself Rules: ( Physical controls, Manuals, Systems safeguards, Task control systems)

Choice of Organisation Structure Organisation structure also influences the design of MCS. It can be: Functional, Business Unit & Matrix

Example Part of a multinational group, Sundaram Shoe Company(SSC), established its own facilities in India over 75 years ago and enjoyed an excellent record-high market share for its diverse range of shoes, growth and profits. SC markets its products through company owned shops and its own personnel. Organization structure is functional. Since 2011, profitability, market share are slipping. Pressure from cheap Chinese shoes and also premium shoes like Nike has made the company think< of organizational restructuring and introducing Commensurate Control System to regain its position. Although SSC outsources, 30% of products, it is seen as a production oriented company. SSC wants to adopt measures to reduce costs, strengthen marketing and be in a position to produce and meet unexpected and unusual customer demands. How should the company reorganize to achieve Goal Congruence.

Identifying Responsibility Centers A responsibility center is a set of activities assigned to a manager, a group of managers, or other employees. System designers apply responsibility accounting to identify what part of the organization has responsibility for each action.

Responsibility Centers A subunit in an organization whose manager is held accountable for specified financial results.

Identifying Responsibility Centers Expense centers Revenue centers Profit centers Investment centers

Types of Responsibility Centers Expense Center Segment has control over the incurrence of costs. Revenue Center Segment is responsible for the revenue of a unit. The Paint Department in an automobile plant. The Reservations Department of an airline.

Segment has control over both costs and revenues. Types of Responsibility Centers Profit Center Segment has control over both costs and revenues. Investment Center Segment has control over profits and invested capital. A division of a large corporation. Company-owned restaurant in a fast-food chain.

Engineered & Discretionary Expense centers In engineered expense centers proper amount can be estimated with reasonable reliability e.g direct labour etc In discretionary no engineered estimates are available, depends upon management’s judgment e.g R & D, Industrial relations etc..

Evaluating Performance Controllability concept: Managers should be held responsible for costs or profits over which they have decision-making authority. Relative performance evaluation (RPE): Compares divisional performance with that of peer group divisions When evaluating managers’ performance, managers should only be held responsible for costs or profits over which they have decision-making authority. 12 - 21

Controllability and Measurement of Financial Performance Management control system Controllable events Uncontrollable events Controllable costs Uncontrollable costs

Controllability and Measurement of Financial Performance An uncontrollable cost is any cost that cannot be affected by the management of a responsibility center within a given time span. Controllable costs include all costs that a manager’s decision and actions can influence.

Segments Segments are responsibility centers for which a company develops separate measures of revenues and costs.

Retail Grocery Company Net sales $1,500 $2,500 $4,000 Variable costs 1,200 2,060 3,260 Contribution margin $ 300 $ 440 $ 740 Controllable costs 100 160 260 Segment margin $ 200 $ 280 $ 480 Allocated costs 90 110 200 Income $ 110 $ 170 $ 280 Unallocated costs 100 Income before taxes $ 180 East Division West Total

Discussion on Management Control systems at Infosys & HUL Class discussion Discussion on Management Control systems at Infosys & HUL