Management Control Systems

Agenda Cost Accounting Systems Visualize how an organization maps resources into products Management Control Systems Delegation of Authority Performance Measures Reward Systems Takeaway

Management Control Systems Why can’t top management make all the decisions on how to map Resources to Products? Lack of time Lack of local knowledge How should we assign decision authority to various employees? How can we ensure that employees act in the best interests of the firm? How should we measure and reward employee performance? Management Control Systems Use accounting systems to “control” employee behavior

Decision Rights In a decentralized organization, top management must decide whether to make certain decisions or delegate these to subordinates Production Hiring Marketing Strategic Investment (financing) Note: A divisional manager with the above responsibilities is more likely to have information necessary to make the division’s budget

Performance Measures The performance measurement system must then be consistent with the assignment of decision rights If employees are given certain decision rights, an effective control system must include measures of performance that reflect the results of these decisions If employees are compensated on the basis of certain measures, they must have the authority to make decisions that affect these measures All performance measures have some shortcomings

Reward Systems The reward system links pay to performance If too little weight is placed on the performance measure, it does not provide enough incentive If too much weight is placed on the performance measure, it places too much risk on the employee All reward systems have some shortcomings

Takeaway: Overview of Internal Accounting Systems Business environment Technology Markets Regulation Business Model Visualize the Physical Map Resources  Products Employee Control system Decision rights Performance measures Reward systems Our focus People’s Incentives & actions Firm value creation