1. 13
Management Control Systems, The Balanced Scorecard, and Responsibility Accounting

2. Management Control System
A management control system is a logical integration of management accounting tools to gather and report data and to evaluate performance
Purposes 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

3. Management Control System Steps
1. Begin by specifying the organization's 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 goals
2. Establish responsibility centers
3. Develop performance measures
4. Measure and report on financial performance
5. Measure and report on non-financial performance

4. The Management Control System
Set Goals,
Measures,
Targets
Plan
and
Execute
Feedback
and
Learning
Evaluate,
Reward
Monitor,
Report

5. Setting Goals, Objectives and Performance Measures
Top 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.

6. Forms of Organizational Structure
President
Staff
Functional VP
Marketing VP
Production VP
Human Resources VP
Finance
Divisional
Matrix
President
Functional VPs
Staff
President
Mkt. Prod. H.R. Fin. A B C
Divisional
VPs VP
Division A VP
Division B VP
Division C

7. 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 control
Cost Centre
Area for which cost data is accumulated such as an assembly department
Expense Centre
Area dominated by discretionary expenses such as legal or accounting
Revenue Centre
Area primarily responsible for generating sales such as a sales office
Profit Centre
Area responsible for controlling costs and generating revenues
Investment Centre
Area responsible for income (revenues - expenses) in relation to its invested capital

8. Motivating Employees to Excel
To achieve maximum benefits at minimum cost, a management control system must foster goal congruence and managerial effort
Goal Congruence exists when individuals and groups aim for the same organizational goals through their decision-making
Managerial Effort is an exertion toward a goal or objective i.e. working faster and better
Incentives are needed for both to be achieved

9. Developing Measures of Performance
Good performance measures will
1. Relate to the goals of the organization
2. Balance long-run and short-run concerns
3. Reflect the management of key decisions and activities
4. Be affected by actions of managers and employees
5. Be readily understood by managers and employees
6. Be used in evaluating and rewarding employees
7. Be reasonably objective and easily measured
8. Be used consistently and regularly

10. Controllability and Measuring Financial Performance
Controllable Cost
Uncontrollable Cost
Measuring Financial Performance

11. Controllable 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 achieved

12. Uncontrollable Cost
Any cost that cannot be affected by management of a responsibility centre within a given time span

13. Measuring 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

14. 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 2,060
Contribution margin
Fixed costs controllable by manager
Contribution controllable by manager
Fixed costs controllable by others
Contribution by segment 280 $110 $170
Unallocated costs 100
Income before income taxes $180
Controllable
Costs
Direct
Costs
Uncontrollable
Costs
Indirect
Costs
Evaluate manager on "contribution controllable by segment manager" (all controllable costs)
Evaluate segment on its "contribution by segment" (all direct costs)

15. Nonfinancial Performance Measures
Control of Quality
Control of Cycle Time
Control of Productivity

16. Control of Quality
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 business

17. Control 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 driver

18. Control 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

19. Successful Organizations and Measures of Achievement
FINANCIAL
STRENGTH
CUSTOMER SATISFACTION
BUSINESSS PROCESS IMPROVEMENTS
ORGANIZATIONAL LEARNING

20. Balanced Scorecard
Performance reporting approach which links organizational strategy to actions of managers and employees
Combines financial and operating measures
Links performance to rewards
Recognizes diversity in organizational goals
Financial
Strength
Customer
Satisfaction
Organizational
Learning
Business Process
Improvement

21. Management Control Systems in Service, Government and Nonprofit Organizations
Control systems are more difficult to implement and maintain:
Outputs are more difficult to measure
Quality ratings are less clear
Important to properly train and motivate employees to achieve organization's goals and consistent monitoring of objectives in accordance with critical subgoals

22. Management Control Systems in Service, Government and Nonprofit Organizations
Government and nonprofit organizations face further problems:
Goals and objectives are less clear
Professionals less receptive to control systems
Lack of profit measure makes measurements more difficult
Less pressure to improve from "owners"
Budgeting is more of a bargaining game to acquire additional funding and less of a planning tool
Motivations and incentives of organizational employees are often drastically different from for-profit organizations

23. The Future of Management Control Systems
A changing environment requires changes in the management control system
Four key
factors must
be monitored
at all times
Important 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 organization's 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
Organizational
Goals
Organizational
Structure
Responsibility
Centres
Performance
Measurement