14

Management Control
Systems and
Responsibility
Accounting
© 2002 Pearson Education Canada Inc. Slide 14-1
 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

© 2002 Pearson Education Canada Inc. Slide 14-2

 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

© 2002 Pearson Education Canada Inc. Slide 14-3

 The Management Control System

Set Goals,
Measures,
Targets

Plan Feedback
and and Evaluate,
Execute Learning Reward

Monitor,
Report
© 2002 Pearson Education Canada Inc. Slide 14-4
 Setting Goals, Objectives and
Performance Measures

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© 2002 Pearson Education Canada Inc. Slide 14-5

 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 B
VPs
Division A Division B Division C C

© 2002 Pearson Education Canada Inc. Slide 14-6

 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

© 2002 Pearson Education Canada Inc. Slide 14-7

 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

© 2002 Pearson Education Canada Inc. Slide 14-8

 Controllability and Measuring
Financial Performance
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
Uncontrollable Cost
• Any cost that cannot be affected by management of a
responsibility centre within a given time span
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

© 2002 Pearson Education Canada Inc. Slide 14-9

 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 Unallocated costs 100
Indirect
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)
© 2002 Pearson Education Canada Inc. Slide 14-10
 Nonfinancial Performance Measures
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
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
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

© 2002 Pearson Education Canada Inc. Slide 14-11

Slide 14-12 2002 Pearson Education Canada Inc. ©
ORGANIZATIONAL
ORGANIZATIONALLEARNING
LEARNING
BUSINESSS
BUSINESSSPROCESS
PROCESSIMPROVEMENTS
IMPROVEMENTS
CUSTOMER
CUSTOMERSATISFACTION
SATISFACTION
STRENGTH
STRENGTH
FINANCIAL
FINANCIAL
Measures of Achievement
Successful Organizations and
 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
© 2002 Pearson Education Canada Inc. Slide 14-13
 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
• 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

© 2002 Pearson Education Canada Inc. Slide 14-14

 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

© 2002 Pearson Education Canada Inc. Slide 14-15