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Chapter Chapter 1111
Fundamentals of Fundamentals of ManagementManagementControl Control
SystemsSystems
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Learning ObjectivesLearning Objectives
4.Explain the relation between organization structure and responsibility centers.
2. Identify the advantages and disadvantages of decentralization.
3.Describe and explain the basic framework for management control systems.
5.Understand how managers evaluate performance.
1.Explain the role of a management control system.
6.Analyze the effect of dual versus single rate allocation systems.
7.Understand the potential link between incentives and illegal or unethical behavior.
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11-3Management Control Management Control SystemSystemL.O. 1 Explain the role of a management control
system.
A management control system is designed to influence subordinates to act in the organization’s interest.
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DecentralizationDecentralizationL.O. 2 Identify the advantages and disadvantages of
decentralization.
The delegation to subordinates the authority to make decisions in the organization’s name.
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Decisions are made by relatively few individuals in the high ranks of the organizations.
Decentralization ContinuedDecentralization Continued
Decisions are spread among relatively many managers.
Decisions are delegated to divisional managers
Centralized Organization
Decentralized Organization
Few decisions are delegated
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11-6Advantages of Advantages of DecentralizationDecentralizationLocal managers have information about local conditions and can react quicker than top management.
Local managers have opportunity for on-the-job 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.
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11-7Disadvantage of Disadvantage of DecentralizationDecentralization
Dysfunctional decision makingWhen local managers make decisions in their best interest that may not be in the best interest of the organization.
Duplication of administrationLocal managers make the same types of decisions made at headquarters.
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11-8Management Control Management Control SystemsSystemsL.O. 3 Describe and explain the basic
framework for management control systems.
Delegated decision authority
Performanceevaluation and measurement
Compensationand reward
decision
A system designed to influence subordinates to act in the organization’s interest
Used by principals (owners) to influence agents’ (managers’) behavior
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11-9Delegated Decision Delegated Decision AuthorityAuthority
A management control system specifies what decisions the subordinate manager can make in the name of the organization.
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Performance Evaluation and Performance Evaluation and MeasurementMeasurement
A management control system specifies how the subordinate manager’s performance is measure and evaluated.
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Compensation or RewardCompensation or Reward
A management control system defines how the subordinate manager is compensated.
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Balancing the ElementsBalancing 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.
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Responsibility AccountingResponsibility AccountingL.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.
Responsibility center
Cost center
Revenue center
Profit center
Investmentcenter
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Cost CenterCost Center
Cost center Manager is responsible for
costsCost and volume of inputs used to produce an output
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Revenue CenterRevenue Center
Selling a product
Revenue center
Manager is responsible for revenues
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Profit CenterProfit Center
Profit center
Manager is responsible for revenues AND costs
Revenues, costs, production, sales volume
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Investment CenterInvestment Center
Profits, capital budgeting, use of assets
Investment center
Manager is responsible for profits AND investment in assets
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Responsibility Centers and Organization Responsibility Centers and Organization StructureStructureOrganizational Structure and Responsibility Centers Group Vice-President
aInvestment centers
Division Vice-PresidentProfit centers
Staff managers
Discretionary cost centers
Plant managers
Cost centers
District sales managersRevenue centers
a Group refers to a group of divisions.
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Goal CongruenceGoal Congruence
Agreement by all members of a group on a set of objectives
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Evaluating PerformanceEvaluating PerformanceL.O. 5 Understand how managers evaluate
performance.
Controllability conceptManagers 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
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Compensation SystemsCompensation Systems
Performance basedContingent compensation
Fixed compensation
Not performance based
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Corporate Cost AllocationCorporate Cost AllocationL.O. 6 Analyze the effect of dual versus single rate
allocation systems.Global Electronics
Latin America DivisionIncome for the Year (in thousands)
Global Electronics allocates corporate overhead based on relative revenue.
Actual Target
Revenue 70,000$ 70,000$ (Percentage of corporate revenue) 16% 14%
Direct division costs 51,800$ 51,800$ Allocated corporate overhead 4,800$ 3,500$
Operating profit 47,000$ 48,300$
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11-23Corporate Cost Allocation Corporate Cost Allocation ContinuedContinued
Global ElectronicsLatin America DivisionIncome for the Year (in
thousands)
Actual Target
Revenue 70,000$ 70,000$ Direct division costs 51,800$ 51,800$
My revenue and costs were on target.
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11-24Corporate Cost Allocation Corporate Cost Allocation ContinuedContinued
Global ElectronicsLatin America DivisionIncome for the Year (in
thousands)
a $70,000/16%b $70,000/14%
I’m not responsible
for corporate revenue.
Actual Target
Revenue 70,000$ 70,000$ (Percentage of corporate revenue) 16% 14%
Corporate revenue 437,500$ a 500,000$ b
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11-25Corporate Cost Allocation Corporate Cost Allocation ContinuedContinued
Global ElectronicsLatin America DivisionIncome for the Year (in
thousands)
I’m not responsible
for corporate costs.a $4,800/16%
b $3,500/14%
Actual Target
Allocated corporate overhead 4,800$ 3,500$ (Percentage of corporate revenue) 16% 14%
Corporate costs 30,000$ a 25,000$ b
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Separates a common cost into fixed and variable components and then allocates each component using a different allocation base
Corporate Cost Allocation Corporate Cost Allocation ContinuedContinued
Dual rate method
Activity
Cost
ActivityC
ost
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Performance Evaluation Systems Performance Evaluation Systems IncentivesIncentives
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 organization’s performance?
What actions can improve reported performance but which are detrimental to organizational performance?
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11-28Unrealistic Budget Unrealistic Budget PressurePressure
Unrealistic budget pressures, particularly for short-term results, occur when headquarters arbitrarily determines profit objectives and budgets without considering actual conditions.
HELP!!This is
impossible
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Financial PressureFinancial Pressure
Financial pressure resulting from bonus plans that depend on short-term economic performance is particularly acute when the bonus is a significant component of the individual’s total compensation.
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Chapter 11Chapter 11
Sometimes I just don’t get it. What do they want?