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Chapter 17. Management Control Systems and Responsibility Accounting. Describe the relationship of management control systems to organizational goals. Learning Objective 1. Management Control System. What is a management control system?. It is a logical integration of techniques

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chapter 17

Chapter 17

Management Control Systems

and Responsibility Accounting

learning objective 1
Describe the relationship of

management control systems

to organizational goals.

Learning Objective 1
management control system
Management Control System

What is a management control system?

It is a logical integration of techniques

to gather and use information.


and Control



management control system4
Management Control System

Set Goals,













setting goals objectives and performance measures
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.

setting goals objectives and performance measures6
Setting Goals, Objectives, and Performance Measures

Critical process managers and lower-level

managers develop specific performance

measures for each objective.

organizational goals
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.

critical process
Critical Process

A criticalprocess is a series of related

activities that directly affect the

achievement of organizational goals.

key success factors
Key Success Factors
  • Key success factors are actions that must be done well in order to drive the organization towards its goals.
learning objective 2
Use responsibility accounting

to define an organizational

subunit as a cost center,

a profit center, or an

investment center.

Learning Objective 2
responsibility center
Responsibility Center
  • A responsibility center is a set of activities assigned to a manager, a group of managers, or other employees.
responsibility accounting
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.
types of responsibility centers
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.

learning objective 3
Compare financial and

nonfinancial performance,

and explain why planning

and control systems should

consider both.

Learning Objective 3
measures of performance
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


be readily understood by employees.

measures of performance16
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.

nonfinancial measures of performance
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.
nonfinancial measures of performance18
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.




monitoring and reporting results
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.
a successful organization and measures of achievement
A Successful Organization and Measures of Achievement



Product Profitability,



Market Share, Survey Scores, Complaints


Cycle Time, Defects, Activity Costs


Training Time, Turnover, Staff Satisfaction Score

the balanced scorecard
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.

the balanced scorecard22
The Balanced Scorecard

The scorecard measures an organization’s

performance from four key perspectives:

Financial strength

Business processes


Customer satisfaction

Organizational learning

key performance indicators
Key Performance Indicators

What are key performance indicators?

They are measures that drive the

organization to achieve its goals.

learning objective 4
Explain the importance of

evaluating performance and

how it impacts motivation, goal

congruence, and employee effort.

Learning Objective 4
goal congruence
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.

managerial effort
Managerial Effort…

is exertion toward

a goal or objective.





is a drive for some selected goal.

It creates

action toward

that goal.

It creates


learning objective 5
Prepare segment income

statements for evaluating profit

and investment centers using

the contribution margin and

controllable-cost concepts.

Learning Objective 5

Management Control System

Controllable events

Uncontrollable events

Controllable costs

Uncontrollable costs


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.

contribution margin
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.

Segments are responsibility centers for which a

separate measure of revenues and costs is obtained.







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

learning objective 6
Measure performance against

quality, cycle time, and

productivity objectives.

Learning Objective 6
quality control
Quality Control

Quality control is the

effort to ensure that

products and services

perform to customer


cost of quality report
Cost of Quality Report
  • In a cost of quality report, the financial impact of quality is displayed.


Internal failure


External failure

cost of quality report37
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.

cost of quality report38
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.

quality control chart
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.
cycle time
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.

control of cycle time
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.
  • Productivity is a measure of outputs divided by inputs.
  • Productivity measures vary widely according to the type of resource with which management is concerned.
control of productivity
Control of Productivity

More than half the companies in the United States

manage productivity as part of the effort to

improve their competitiveness.

control of productivity45
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.
control of productivity46
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.
learning objective 7
Describe the difficulties of

management control in

service and nonprofit


Learning Objective 7
service government and nonprofit organizations
Service, Government, and Nonprofit Organizations
  • Most service, government, and nonprofit organizations have more difficulty implementing management control systems.
  • Why?
service government and nonprofit organizations49
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


learning objective 8
Understand how a management

control system uses accounting


Learning Objective 8
future of management control systems
Future of Management Control Systems

A changing environment often means that

organizations must set different subgoals

or critical success factors.

Different subgoals create different targets

and different benchmarks for evaluating


accounting information
Accounting Information
  • A management control system uses management accounting tools such as budgets and performance reports to focus resources and talents of the individuals in an organization on such goals as quality, cost, and service.