1. Management Control Systems and Responsibility Accounting
Session 13 & 14

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

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

4. 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

5. 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

6. 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

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

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

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

10. 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.

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

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

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

14. 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.

15. 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.

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

17. Identifying Responsibility Centers
Expense centers
Revenue centers
Profit centers
Investment centers

18. 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.

19. 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.

20. 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..

21. 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.

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

23. 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.

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

25. Retail Grocery Company
Net sales $1,500 $2,500 $4,000
Variable costs , , ,260
Contribution margin $ $ $ 740
Controllable costs
Segment margin $ $ $ 480
Allocated costs
Income $ $ $ 280
Unallocated costs
Income before taxes $ 180
East
Division
West
Total

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