13

Management Control
Systems, The Balanced
Scorecard, and
Responsibility Accounting

© 2007 Pearson Education Canada Slide 13-1

 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

© 2007 Pearson Education Canada Slide 13-2

 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

© 2007 Pearson Education Canada Slide 13-3

 The Management Control System

Set Goals,
Measures,
Targets

Plan Feedback
and and Evaluate,
Execute Learning Reward

Monitor,
Report
© 2007 Pearson Education Canada Slide 13-4
 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.

© 2007 Pearson Education Canada Slide 13-5

 Forms of Organizational Structure

President Staff
Functional

VP VP VP VP
Marketing Production Human Resources Finance

Divisional Matrix

President Staff President Functional VPs

Mkt. Prod. H.R. Fin.

A
Divisional
VP VP VP VPs B
Division A Division B Division C C

© 2007 Pearson Education Canada Slide 13-6

 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
© 2007 Pearson Education Canada Slide 13-7
 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

© 2007 Pearson Education Canada Slide 13-8
 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
© 2007 Pearson Education Canada Slide 13-9
 Controllability and Measuring
Financial Performance

• Controllable Cost

• Uncontrollable Cost

• Measuring Financial Performance

© 2007 Pearson Education Canada Slide 13-10

 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

© 2007 Pearson Education Canada Slide 13-11

 Uncontrollable Cost

• Any cost that cannot be affected by management

of a responsibility centre within a given time span

© 2007 Pearson Education Canada Slide 13-12

 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

© 2007 Pearson Education Canada Slide 13-13

 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
Controllable Direct Contribution margin 740 300 440
Costs Costs
Fixed costs controllable by manager 260 100 160
Contribution controllable by manager 480 200 280
Fixed costs controllable by others 200 90 110
Uncontrollable Contribution by segment 280 $110 $170
Costs
Indirect Unallocated costs 100
Costs Income before income taxes $180

• Evaluate manager on "contribution controllable by segment

manager" (all controllable costs)
• Evaluate segment on its "contribution by segment" (all direct
costs)
© 2007 Pearson Education Canada Slide 13-14
 Nonfinancial Performance Measures

• Control of Quality

• Control of Cycle Time

• Control of Productivity

© 2007 Pearson Education Canada Slide 13-15

 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

© 2007 Pearson Education Canada Slide 13-16

 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

© 2007 Pearson Education Canada Slide 13-17

 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

© 2007 Pearson Education Canada Slide 13-18

 Successful Organizations and
Measures of Achievement

FINANCIAL
STRENGTH

CUSTOMER SATISFACTION

BUSINESSS PROCESS IMPROVEMENTS

ORGANIZATIONAL LEARNING

© 2007 Pearson Education Canada Slide 13-19

 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 Organizational
Satisfaction Learning

Business Process
Improvement
© 2007 Pearson Education Canada Slide 13-20
 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

© 2007 Pearson Education Canada Slide 13-21

 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
© 2007 Pearson Education Canada Slide 13-22
 The Future of Management Control Systems
• A changing environment requires changes in the management control
system
Organizational
Four key Goals
factors must
be monitored Organizational Responsibility
at all times Structure Centres
Performance
Measurement

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

© 2007 Pearson Education Canada Slide 13-23