Horngren Ima16 Inppt09-2

Copyright © 2014 Pearson Education, Inc.
publishing as Prentice Hall 99 - 1

Chapter 9
Management Control Systems

and Responsibility Accounting
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 - 2

Chapter 9 Learning Objectives
1. Describe the relationship of management

control systems to organizational goals.
2. Explain the importance of evaluating

performance and describe how it impacts
motivation, goal congruence, and employee effort.
3. Develop performance measures and use them

to monitor the achievements of an organization.
4. Use responsibility accounting to define an

organizational subunit as a cost center, a profit
center, or an investment center.

Chapter 9 Learning Objectives
5. Prepare segment income statements for

evaluating profit and investment centers using the
contribution margin and controllable-cost
concepts.
6. Measure performance against nonfinancial

performance measures such as quality, cycle time,
and productivity.
7. Use a balanced scorecard to integrate financial

and nonfinancial measures of performance.
8. Describe the difficulties of management control

in service and nonprofit organizations.
Learning
Objective 1 Management Control Systems
This is a logical integration of techniques

for gathering and using information.
Motivating
Planning Evaluating
and control
Budgeting Forecasting

Planning and Control

Key Success Factors
Key Success Factors are characteristics or

attributes that managers must achieve in
order to drive the organization toward its
goals.
Goals provide a long-term framework around

which an organization will form its
comprehensive plan for positioning itself in
the market.

Translating Goals and Objectives
into Performance Measures

Learning
Objective 2 Evaluating Performance
Good management control systems foster goal

congruence and managerial effort.
Goal congruence is achieved when employees,

working in their own perceived best interests,
make decisions that help meet the
overall goals of the organization.
Managerial effort must accompany

goal congruence.

Managerial Effort
Managerial effort is exertion

toward a goal or objective.
Planning
Thinking
Supervising
Effort means working

harder, faster, and better.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 10
Motivation
Motivation is a drive toward some selected goal.
It creates
effort.
It creates
action toward
that goal.

Learning Developing Performance
Objective 3
Measures
Effective performance measurement requires
multiple performance measures, both financial
and nonfinancial.
Effective performance measures will:

1. Reflect key actions and activities that relate to the
organization’s goals
2. Be affected by actions of managers and employees
3. Be readily understood by employees
4. Be reasonably objective and easily measured
5. Be used consistently and regularly to evaluate
and reward
6. Balance long-term and short-term concerns

Financial Measures of Performance
Financial measures are often lagging

indicators that arrive too late.
Operating Profit Return on

Budgets Targets Investments
Often the effects of poor nonfinancial

performance do not show up in the
financial measures until considerable
ground has been lost.
Nonfinancial Measures of
Performance
Nonfinancial measures often motivate

employees toward achieving important
performance goals.
AT&T Universal Card Services uses 18

Performance measures for its customer
inquiries process.
These measures include average

speed of answer, abandon rate,
and application processing time.

Monitoring and Reporting Results
Feedback and learning are at the center

of the management control system.
At all points in the planning and control process,

it is vital that effective communication exists
among all levels of management and employees.

A Successful Organization and
Measures of Achievement

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

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 decisions and actions can influence.

Learning
Objective 4 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.

Identifying Responsibility Centers
Cost centers
Profit centers
Investment centers

Cost centers
In a cost center, managers are responsible

for costs only. A cost center may encompass
an entire department, or a department may
contain several cost centers.
The determination of the number of cost centers

depends on cost-benefit considerations—do the
benefits exceed the higher costs of reporting?

Profit centers
Profit-center managers are responsible for

controlling revenues as well as costs—that is,
profitability.
Profit centers exist in nonprofit organizations,

despite the name, (though it might not be
referred to as such) when a responsibility
center receives revenues for its services.

Investment centers
An investment center adds responsibility for

investment to profit-center responsibilities.
Investment-center success depends on both
income and invested capital, measured by
relating income generated to the value of the
capital employed.

Contribution Margin
The contribution margin is especially helpful

for predicting the impact on income of
short-run changes in activity volume.
Managers may quickly calculate any expected

changes in income by multiplying increases in
dollar sales by the contribution margin ratio.

Contribution Controllable by
Segment Managers
Managers help explain the total segment contribution,

but they are responsible only for the controllable
contribution.
Controllable fixed costs are deducted from the

contribution margin to obtain the contribution
controllable by segment managers.
Controllable costs are usually discretionary

fixed costs such as local advertising and some
salaries, but not the manager’s salary.

Learning
Objective 6 Performance Measures
Many organizations, in recent years, have

developed an awareness of the importance
of controlling aspects of nonfinancial
performance measures.
Quality Control Cycle Time
Productivity

Quality Control
Quality control is the effort to ensure

that products and services perform
to customer requirements.
The traditional approach to controlling

quality in the U. S. was to inspect products
after completing them and reject or rework
those that failed the inspections.
Because testing is expensive, companies

often inspected only a sample of products.
Cost of Quality Report
Four categories of quality costs
Prevention Appraisal
Internal failure External failure

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.

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.

TQM
Total quality management (TQM) focuses on

prevention of defects and on achievement
of customer satisfaction.
The TQM approach assumes an organization

minimizes the cost of quality when it achieves
high quality levels.
TQM is the application of quality principles to

all the organization’s efforts to satisfy
customers.

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.

Quality-Control Chart
3
Percentage of Defects
Actual
2
1
Goal = 0.6%
0
3/12 3/19 3/26 4/2 4/9 4/16 4/23 4/30 5/7 5/14
Week of
Six Sigma
Six Sigma is a continuous process-

improvement effort designed to reduce
costs by improving quality.
It has broadened into a general process to

define and measure a process, analyze it,
and improve it to minimize errors.

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.

Control of Productivity
Productivity is a measure of
outputs divided by inputs.
Outputs
Productivity =
Inputs
Productivity measures vary widely

according to the type of resource
with which management is concerned.

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.

Measures of Productivity

Learning
Objective 7 Balance 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.

The Balanced Scorecard
. . . measures that drive the

organization to achieve its goals.
Internal
Financial
processes
Innovation
Customers
and learning
Learning Service, Government, and Nonprofit
Objective 8
Organizations
Most service, government, and nonprofit

organizations have more difficulty
implementing management
control systems.
Outputs of service and nonprofit

organizations are more difficult
to measure than are the cars or
computers that are produced
by manufacturers.
Service, Government, and Nonprofit
Organizations
These organizations have problems in designing and

implementing an objective similar to the financial
“bottom line” - the unifying goal in private industry.
In nonprofit organizations, many people seek

primarily nonmonetary rewards.

Service, Government, and Nonprofit
Organizations
Management control systems in nonprofit organizations

are not as highly developed as those in profit-seeking firms
because:
 Organizational goals and objectives are less clear.
 Professionals dominate these organizations.
 Measurements are more difficult – no profit
measure and heavy fixed costs.
 Less competitive pressure to improve
management control systems.
 The role of budgeting is more a matter of playing
bargaining games.
 Motivations and incentives differ from for-profit
organizations.
Future of Management Control
Systems
As organizations mature and environments

change, managers expand and refine their
management control tools.
A changing environment often means

that organizations must adjust their
goals or key success factors.

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may be reproduced, stored in a retrieval system,
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or otherwise, without the prior written permission
of the publisher. Printed in the United States of
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Copyright © 2014 Pearson Education, Inc.

publishing as Prentice Hall 99 - 1

Management Control Systems

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 - 2

1. Describe the relationship of management

2. Explain the importance of evaluating

3. Develop performance measures and use them

4. Use responsibility accounting to define an

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 - 3

5. Prepare segment income statements for

6. Measure performance against nonfinancial

7. Use a balanced scorecard to integrate financial

8. Describe the difficulties of management control

This is a logical integration of techniques

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 - 5

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 - 6

Key Success Factors are characteristics or

Goals provide a long-term framework around

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 - 7

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 - 8

Good management control systems foster goal

Goal congruence is achieved when employees,

Managerial effort must accompany

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 - 9

Managerial effort is exertion

Effort means working

Motivation is a drive toward some selected goal.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 - 11

Effective performance measures will:

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 12

Financial measures are often lagging

Operating Profit Return on

Often the effects of poor nonfinancial

Nonfinancial measures often motivate

AT&T Universal Card Services uses 18

These measures include average

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 14

Feedback and learning are at the center

At all points in the planning and control process,

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 15

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 16

Management control system

Controllable events Uncontrollable events

Controllable costs Uncontrollable costs

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 17

An uncontrollable cost is any cost that

Controllable costs include all costs that a

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 18

A responsibility center is a set of activities

System designers apply responsibility

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 19

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 20

In a cost center, managers are responsible

The determination of the number of cost centers

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 21

Profit-center managers are responsible for

Profit centers exist in nonprofit organizations,

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 22

An investment center adds responsibility for

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 23

The contribution margin is especially helpful

Managers may quickly calculate any expected

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 99 -- 24

Managers help explain the total segment contribution,