Chapter 17

1. Chapter 17 Management Control Systems and Responsibility Accounting

2. Describe the relationship of management control systems to organizational goals. Learning Objective 1

3. Management Control System What is a management control system? It is a logical integration of techniques to gather and use information. Planning and Control Motivate Evaluate

4. 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 needed to achieve the goals. Top management and critical process managers develop key success factors and performance measures. They also identify specific objectives.

6. Setting Goals, Objectives, and Performance Measures Critical process managers and lower-level managers develop specific performance measures for each objective.

7. Organizational Goals A well-designed management control system aids and coordinates the process of making decisions and motivates individuals throughout the organization to act in concert.

8. Critical Process A criticalprocess is a series of related activities that directly affect the achievement of organizational goals.

9. Key Success Factors • Key success factors are actions that must be done well in order to drive the organization towards its goals.

10. Use responsibility accounting to define an organizational subunit as a cost center, a profit center, or an investment center. Learning Objective 2

11. Responsibility Center • A responsibility center is a set of activities assigned to a manager, a group of managers, or other employees.

12. Responsibility Accounting • Responsibility accounting is used to identify what parts of the organization have primary responsibility for each objective, develop performance measures and targets to achieve, and design reports of these measures by organization subunit or responsibility center.

13. Types of Responsibility Centers A cost center’s manager is accountable for costs only. Profit centers have responsibility for controlling revenues as well as costs. Investment centers have responsibility for revenues, expenses, and the investment used by the center.

14. Compare financial and nonfinancial performance, and explain why planning and control systems should consider both. Learning Objective 3

15. Measures of Performance Good performance measures will… relate to the goals of the organization. balance long-term and short-term concerns. reflect the management of key actions and activities. be readily understood by employees.

16. Measures of Performance be affected by actions of managers and employees. be used in evaluating and rewarding managers and employees. be reasonably objective and easily measured. be used consistently and regularly.

17. Nonfinancial Measures of Performance • 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.

18. Nonfinancial Measures of Performance Often the effects of poor nonfinancial performance do not show up in the financial measures until considerable ground has been lost. quality productivity satisfaction

19. 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.

20. A Successful Organization and Measures of Achievement FINANCIAL STRENGTH Product Profitability, EBIT CUSTOMER SATISFACTION Market Share, Survey Scores, Complaints BUSINESS PROCESS IMPROVEMENT Cycle Time, Defects, Activity Costs ORGANIZATIONAL LEARNING Training Time, Turnover, Staff Satisfaction Score

21. The Balanced 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.

22. The Balanced Scorecard The scorecard measures an organization’s performance from four key perspectives: Financial strength Business processes improvement Customer satisfaction Organizational learning

23. Key Performance Indicators What are key performance indicators? They are measures that drive the organization to achieve its goals.

24. Explain the importance of evaluating performance and how it impacts motivation, goal congruence, and employee effort. Learning Objective 4

25. Goal Congruence Goal congruence exists when individuals and groups aim at the same organizational goals. It is achieved when employees, working in their own perceived best interests, make decisions that help meet the overall goals of the organization.

26. Managerial Effort… is exertion toward a goal or objective. Planning Supervising Thinking

27. Motivation… is a drive for some selected goal. It creates action toward that goal. It creates effort.

28. Prepare segment income statements for evaluating profit and investment centers using the contribution margin and controllable-cost concepts. Learning Objective 5

29. Controllability Management Control System Controllable events Uncontrollable events Controllable costs Uncontrollable costs

30. Controllability Controllable costs include any costs that are influenced by a manager’s decisions and actions. An uncontrollable cost is any cost that cannot be affected by the management of a responsibility center within a given time span.

31. 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.

32. Segments Segments are responsibility centers for which a separate measure of revenues and costs is obtained.

33. Segments East Division West Division Total Net sales $950,000 $1,950,000 $2,900,000 Variable costs 750,000 950,000 1,700,000 Contribution margin $200,000 $1,000,000 $1,200,000 Controllable costs 75,000 60,000 135,000 Segment margin $125,000 $ 940,000 $1,065,000 Allocated costs 70,000 80,000 150,000 Income $ 55,000 $ 860,000 $ 915,000 Unallocated costs 300,000 Organization profit $ 615,000

34. Measure performance against quality, cycle time, and productivity objectives. Learning Objective 6

35. Quality Control Quality control is the effort to ensure that products and services perform to customer satisfaction.

36. Cost of Quality Report • In a cost of quality report, the financial impact of quality is displayed. Prevention Internal failure Appraisal External failure

37. Cost of Quality Report 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.

38. Cost of Quality Report 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.

39. 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.

40. Quality-Control Chart

41. 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. One key to improving quality is to reduce cycle time.

42. Control of Cycle Time • Lowering cycle time requires smooth-running processes and high quality, and also creates increased flexibility and quicker reactions to customer needs.

43. Productivity • Productivity is a measure of outputs divided by inputs. • Productivity measures vary widely according to the type of resource with which management is concerned.

44. Control of Productivity More than half the companies in the United States manage productivity as part of the effort to improve their competitiveness.

45. 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.

46. Control of Productivity • Highly automated companies are concerned with machine use and productivity of capital investments, so capacity-based measures, such as the percentage of time machines are available, may be most important to them.

47. Describe the difficulties of management control in service and nonprofit organizations. Learning Objective 7

48. Service, Government, and Nonprofit Organizations • Most service, government, and nonprofit organizations have more difficulty implementing management control systems. • Why?

49. Service, Government, and Nonprofit Organizations Outputs of service and nonprofit organizations are more difficult to measure than are the cars or computers that are produced by manufacturers.

50. Understand how a management control system uses accounting information. Learning Objective 8