©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Management Control Systems and Responsibility Accounting Chapter 9

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Learning Objective 1 Describe the relationship of management control systems to organizational goals.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Management Control Systems This is a logical integration of techniques for gathering and using information. Planning and control MotivatingEvaluating

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton The Management Control System Set goals, measures,targets measures,targets Monitor,reportMonitor,report Evaluate,rewardEvaluate,rewardPlanandexecutePlanandexecute FeedbackandlearningFeedbackandlearning

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 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. Critical process managers and lower-level managers develop specific performance measures for each objective.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Organizational Goals Goals provide a long-term framework around which an organization will form its comprehensive plan for positioning itself in the market.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Key Success Factors Key success factors are characteristics that managers must achieve in order to drive the organization toward its goals.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Learning Objective 2 Use responsibility accounting to define an organizational subunit as a cost center, a profit center, or an investment center.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Identifying Responsibility Centers System designers apply responsibility accounting to identify what part of the organization has responsibility for each action. A responsibility center is a set of activities assigned to a manager, a group of managers, or other employees.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Identifying Responsibility Centers Cost centers Profit centers Investment centers

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Learning Objective 3 Develop performance measures and use them to monitor the achievements of an organization.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Developing Performance Measures Good performance measures will… 1.relate to the goals of the organization. 2.balance long-term and short-term concerns. 3.reflect the management of key actions and activities. 4.be affected by actions of managers and employees. 5.be readily understood by employees. 6.be used in evaluating and rewarding key personnel. 7.be reasonably objective and easily measured. 8.be used consistently and regularly.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Nonfinancial Measures of Performance These measures include average speed of answer, abandon rate, and application processing time. AT&T Universal Card Services uses 18 performance measures for its customer inquiries process.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Nonfinancial Measures of Performance Financial measures are often lagging indicators that arrive too late. Often the effects of poor nonfinancial performance do not show up in the financial measures until considerable ground has been lost.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Monitoring and Reporting Results At all points in the planning and control process, it is vital that effective communication exists among all levels of management and employees. Feedback and learning are at the center of the management control system.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 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 FINANCIALSTRENGTH Product profitability EBIT

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Learning Objective 4 Explain the importance of evaluating performance and how it impacts motivation, goal congruence, and employee effort.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Goal Congruence, Managerial Effort, and Motivation Managerial effort must accompany goal congruence. Goal congruence is achieved when employees, working in their own perceived best interests, make decisions that help meet the overall goals of the organization.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Goal Congruence, Managerial Effort, and Motivation Managerial effort is exertion toward a goal or objective. Supervising Planning Thinking

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Goal Congruence, Managerial Effort, and Motivation Motivation is a drive for some selected goal. It creates effort. action toward that goal.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Learning Objective 5 Prepare segment income statements for evaluating profit and investment centers using the contribution margin and controllable-cost concepts.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Controllability and Measurement of Financial Performance Management control system Controllable costs Uncontrollable costs Controllable events Uncontrollable events

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Controllability and Measurement of Financial Performance Controllable costs include all costs that a manager’s decision and actions can influence. An uncontrollable cost is any cost that cannot be affected by the management of a responsibility center within a given time span.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Segments Segments are responsibility centers for which a company develops separate measures of revenues and costs.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 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 Segment margin$ 200$ 280$ 480 Allocated costs Income$ 110$ 170$ 280 Unallocated costs 100 Income before taxes$ 180 EastDivisionWestDivisionTotal

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Contribution Margin Managers may quickly calculate any expected changes in income by multiplying increases in dollar sales by the contribution margin ratio. The contribution margin is especially helpful for predicting the impact on income of short-run changes in activity volume.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Learning Objective 6 Use a balanced scorecard to recognize both financial and nonfinancial measures of performance.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton The Balanced Scorecard A balanced scorecard is a performance measurement and reporting system that strikes a balance between financial and operating measures. It links performance to rewards. It gives explicit recognition to the diversity of organizational goals.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton The Balanced Scorecard What are key performance indicators? They are measures that drive the organization to achieve its goals.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton The Balanced Scorecard The scorecard measures an organization’s performance from four key perspectives: Financial Internalprocesses Customers Employee growth and learning

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Learning Objective 7 Measure performance against quality, cycle time, and productivity objectives.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Quality Control Quality control is the effort to ensure that products and services perform to customer requirements. Annual award for being #1 in total customerservice.Congratulations!

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Cost of Quality Report Prevention Internal failure Appraisal External failure

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Cost of Quality Report Prevention costs are the costs incurred to prevent the production of defective products or delivery of substandard services. Appraisal costs are the costs incurred to identify defective products or services.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 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 services to customers, such as field repairs, returns, and warranty expenses.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 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.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Quality-Control Chart /123/193/264/24/94/164/234/305/75/14 Week of Percentage of Defects Goal = 0.6% Actual

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Six Sigma It is an analytical method aimed at achieving near-perfect results on a production line. It has broadened into a general process to define and measure a process, analyze it, and improve it to minimize errors.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Control of 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. The longer a product or service is in process, the more costs it consumes.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Control of Productivity Productivity is a measure of outputs divided by inputs. Productivity measures vary widely according to the type of resource with which management is concerned.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Control of Productivity How should outputs and inputs be measured? Labor-intensive organizations are concerned with increasing the productivity of labor, so labor- based measures are appropriate.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Control of Productivity Highly automated companies are concerned with machine use and productivity of capital investments, so capacity-based measures, such as the percentage of time machines are available, may be most important to them.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Measures of Productivity Equipment Expected machine hours for good output Actual machine hours× Materials Weight of output Weight of input × Labor Standard direct labor hours allowed for good output Actual direct labor hour used ×ResourcePossibleoutputs(numerator)Possibleinputs(denominator)

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Learning Objective 8 Describe the difficulties of management control in service and nonprofit organizations.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Service, Government, and Nonprofit Organizations Most service, government, and nonprofit organizations have more difficulty implementing management control systems.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Service, Government, and Nonprofit Organizations Outputs of service and nonprofit organizations are more difficult to measure than are the cars or computers that are produced by manufacturers.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton Future of Management Control Systems A changing environment often means that organizations must set different goals or or key success factors. Different goals create different actions and related targets.

©2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton End of Chapter 9