Chapter 17
Management Control Systems
and Responsibility Accounting
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Learning Objective 1
Describe the relationship of
management control systems
to organizational goals.
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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
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Management Control System
Set Goals,
Measures,
Targets
Plan
and
Execute
Feedback
and
Learning
Evaluate,
Reward
Monitor,
Report
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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.
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Setting Goals, Objectives, and
Performance Measures
Critical process managers and lower-level
managers develop specific performance
measures for each objective.
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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.
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Critical Process
A critical process is a series of related
activities that directly affect the
achievement of organizational goals.
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Key Success Factors

Key success factors are actions that must be
done well in order to drive the organization
towards its goals.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
9-9
Learning Objective 2
Use responsibility accounting
to define an organizational
subunit as a cost center,
a profit center, or an
investment center.
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Responsibility Center

A responsibility center is a set of activities
assigned to a manager, a group of managers,
or other employees.
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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.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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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.
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Learning Objective 3
Compare financial and
nonfinancial performance,
and explain why planning
and control systems should
consider both.
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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.
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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.
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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.

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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
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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.

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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
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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.
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The Balanced Scorecard
The scorecard measures an organization’s
performance from four key perspectives:
Financial strength
Business processes
improvement
Customer
satisfaction
Organizational
learning
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Key Performance Indicators
What are key performance indicators?
They are measures that drive the
organization to achieve its goals.
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Learning Objective 4
Explain the importance of
evaluating performance and
how it impacts motivation, goal
congruence, and employee effort.
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9 - 24
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.
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Managerial Effort…
is exertion toward
a goal or objective.
Planning
Supervising
Thinking
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Motivation…
is a drive for some selected goal.
It creates
effort.
It creates
action toward
that goal.
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Learning Objective 5
Prepare segment income
statements for evaluating profit
and investment centers using
the contribution margin and
controllable-cost concepts.
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9 - 28
Controllability
Management Control System
Controllable events
Uncontrollable events
Controllable costs
Uncontrollable costs
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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.
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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.

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Segments
Segments are responsibility centers for which a
separate measure of revenues and costs is obtained.
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Segments
East
Division
Net sales
$950,000
Variable costs
750,000
Contribution margin $200,000
Controllable costs
75,000
Segment margin
$125,000
Allocated costs
70,000
Income
$ 55,000
Unallocated costs
Organization profit
West
Division
Total
$1,950,000 $2,900,000
950,000
1,700,000
$1,000,000 $1,200,000
60,000
135,000
$ 940,000 $1,065,000
80,000
150,000
$ 860,000 $ 915,000
300,000
$ 615,000
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9 - 33
Learning Objective 6
Measure performance against
quality, cycle time, and
productivity objectives.
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9 - 34
Quality Control
Quality control is the
effort to ensure that
products and services
perform to customer
satisfaction.
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Cost of Quality Report

In a cost of quality report, the financial
impact of quality is displayed.
Prevention
Internal failure
Appraisal
External failure
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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.
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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.
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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.

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Quality-Control Chart
Quality-Control Chart
Actual
Goal .6%
Percentage of
Defects
2
1.5
1
0.5
0
3/12 3/19 3/26
4/2
4/9 4/16 4/23 4/30
Week of
5/7
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5/14
9 - 40
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.
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Control of Cycle Time

Lowering cycle time requires smoothrunning processes and high quality, and also
creates increased flexibility and quicker
reactions to customer needs.
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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.

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Control of Productivity
More than half the companies in the United States
manage productivity as part of the effort to
improve their competitiveness.
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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.

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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.
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Learning Objective 7
Describe the difficulties of
management control in
service and nonprofit
organizations.
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Service, Government, and
Nonprofit Organizations
Most service, government, and nonprofit
organizations have more difficulty
implementing management control systems.
 Why?

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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.
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9 - 49
Learning Objective 8
Understand how a management
control system uses accounting
information.
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9 - 50
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
performance.
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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.
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End of Chapter 9
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9 - 53