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 organizations 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
and
Execute

Feedback
and
Learning

Evaluate,
Reward

Monitor,
Report
2007 Pearson Education Canada

Slide 13-4

Setting Goals, Objectives and

Performance Measures
Top
Topmanagement
managementdevelops
developsorganization-wide
organization-widegoals,
goals,measures
measures
and
andtargets.
targets. They
Theyalso
alsoidentify
identifythe
thecritical
criticalprocesses.
processes.

Top
Topmanagement
managementand
andcritical
criticalprocess
processmanagers
managersdevelop
develop
critical
criticalsuccess
successfactors
factorsand
andperformance
performancemeasures.
measures.
They
Theyalso
alsospecify
specifyobjectives
objectives

Critical
Criticalprocess
processmanagers
managersand
andlower-level
lower-levelmanagers
managers
develop
developperformance
performancemeasures
measuresfor
forobjectives.
objectives.
2007 Pearson Education Canada

Slide 13-5

Forms of Organizational Structure

President

Staff

Functional
VP
Marketing

VP
Production

VP
Human Resources

Divisional

President

VP
Finance

Matrix

Staff

Functional VPs

President

Mkt. Prod. H.R. Fin.

VP
Division A

VP
Division B

2007 Pearson Education Canada

VP
Division C

Divisional
VPs

A
B
C

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

Controllable
Costs

Direct
Costs

Uncontrollable
Costs
Indirect
Costs

Net sales revenue

Variable costs
Contribution margin
Fixed costs controllable by manager
Contribution controllable by manager
Fixed costs controllable by others
Contribution by segment
Unallocated costs
Income before income taxes

Whole
Company

Branch
A

Branch
B

$4,000
3,260
740
260
480
200
280
100
$180

$1,500
1,200
300
100
200
90
$110

$2,500
2,060
440
160
280
110
$170

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
FINANCIAL
STRENGTH
STRENGTH
CUSTOMER
CUSTOMERSATISFACTION
SATISFACTION

BUSINESSS
BUSINESSSPROCESS
PROCESSIMPROVEMENTS
IMPROVEMENTS

ORGANIZATIONAL
ORGANIZATIONALLEARNING
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
Satisfaction

Organizational
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
Four key
factors must
be monitored
at all times

Organizational
Goals
Organizational
Structure

Responsibility
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