Fundamentals of

Control
Management
Systems

Chapter
11

11-2

Learning Objectives
1. Explain the role of a management control
system.
2. Identify the advantages and disadvantages of
decentralization.
3. Describe and explain the basic framework for
management control systems.
4. Explain the relation between organization
structure and responsibility centers.
5. Understand how managers evaluate
performance.
6. Analyze the effect of dual versus single rate
allocation systems.
7. Understand the potential link between
incentives and illegal or unethical behavior.

Management Control
L.O. 1 Explain the role of a management control
System system.
A management control
system is designed to
influence subordinates to
act in the organizations
interest.

11-3

11-4

Decentralization
L.O. 2 Identify the advantages and disadvantages of
decentralization.

The delegation to
subordinates the
authority to make
decisions in the
organizations
name.

11-5

Decentralization Continued
Centralized Organization
Decisions are made by relatively few
individuals in the high ranks of the
organizations. Few decisions are delegated
Decentralized Organization
Decisions are spread among relatively many
managers.
Decisions are delegated
to divisional managers

Advantages of
Decentralization
Local managers have information about local

11-6

conditions and can react quicker than top

management.
Local managers have opportunity for on-thejob training in decision making and have the
satisfaction of making their own decisions.
Top managers have knowledge about strategic
issues and have more time for strategic
decision making.

Disadvantage of
Decentralization
Dysfunctional decision making
When local managers make decisions in
their best interest that may not be in the
best interest of the organization.
Duplication of
administration
Local managers make the
same types of decisions
made at headquarters.

11-7

Management Control
L.O. 3 Describe and explain the basic
Systems
framework for management control

11-8

systems.

A system designed to influence subordinates to act in

the organizations interest
Used by principals
(owners) to influence
agents (managers)
behavior

Delegated
decision
authority

Performance
evaluation and
measurement

Compensation
and reward
decision

Delegated Decision
Authority
A management control
system specifies what
decisions the
subordinate manager
can make in the name of
the organization.

11-9

Performance Evaluation and

Measurement
A management control
system specifies how the
subordinate managers
performance is measure
and evaluated.

11-10

11-11

Compensation or Reward
A management control
system defines how
the subordinate
manager is
compensated.

11-12

Balancing the Elements

The goal of the organization is to make
money. The goal of the subordinate
manager is to make money.
An effective management
control system influences the
subordinate manager through
compensations and rewards
to make decisions that make
money for the organization.

11-13

Responsibility Accounting
L.O. 4 Explain the relation between organization
structure and responsibility centers.

Costs and revenues are reported at the level

within the organization having the related
responsibility.
Cost
center

Profit
center

Revenue
center
Responsibility
center

Investment
center

11-14

Cost Center
Cost
center

Manager is responsible for

costs
Cost and volume
of inputs used to
produce an
output

11-15

Revenue Center
Revenue
center

Manager is responsible for

revenues
Selling a product

11-16

Profit Center
Profit
center

Manager is responsible for

revenues AND costs
Revenues, costs,
production, sales
volume

11-17

Investment Center
Investment Manager is responsible for
profits AND investment in
center
assets
Profits, capital
budgeting, use of
assets

Responsibility Centers and Organization

Structure
Organizational Structure and Responsibility
Centers
Group Vice-President
a

Investment centers

Division VicePresident
Profit
centers

Plant managers
Cost centers

Staff managers
Discretionary cost
centers

District sales
managers
Revenue
centers
Group refers to a group of
divisions.
a

11-18

11-19

Goal Congruence
Agreement by all
members of a
group on a set of
objectives

11-20

Evaluating Performance
L.O. 5 Understand how managers evaluate
performance.

Controllability concept
Managers should be
held responsible for
costs or profits over
which they have
decision-making
authority
Relative performance evaluation (RPE)
Compares divisional performance with
that of peer group divisions

11-21

Compensation Systems
Fixed compensation
Not performance based

Contingent compensation
Performance based

11-22

Corporate Cost Allocation

L.O. 6 Analyze the effect of dual versus single rate
allocation systems.

Global Electronics
Latin America Division
Income for the Year (in thousands)

Global Electronics
allocates corporate
overhead based on
relative revenue.

Corporate Cost Allocation

Continued
Global Electronics
Latin America
Income
for the Year (in
Division
thousands)

My revenue and costs

were on target.

11-23

Corporate Cost Allocation

Continued
Global Electronics
Latin America
Income
for the Year (in
Division
thousands)

Im not responsible for

corporate revenue.

11-24

Corporate Cost Allocation

Continued
Global Electronics
Latin America
Income
for the Year (in
Division
thousands)

Im not responsible for

corporate costs.

11-25

Activity

Cost

Dual rate method

Separates a common
cost into fixed and
variable components and
then allocates each
component using a
different allocation base

Cost

Corporate Cost Allocation

Continued

Activity

11-26

Performance Evaluation Systems

Incentives
L.O. 7 Understand the potential link between
incentives and illegal or unethical behavior.

Does the measure reflect the results of the

actions that improve the organizations
performance?
What actions can improve reported
performance but which are detrimental to
organizational performance?

11-27

Unrealistic Budget
Pressure
HELP!!
This is
impossibl
e

Unrealistic budget pressures,

particularly for short-term
results, occur when
headquarters arbitrarily
determines profit objectives
and budgets without
considering actual conditions.

11-28

11-29

Financial Pressure
Financial pressure resulting from
bonus plans that depend on shortterm economic performance is
particularly acute when the bonus
is a significant component of the
individuals total compensation.

11-30

Chapter 11
Sometimes I
just dont get
it. What do
they want?