Introduction to Management Accounting
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Introduction to Management Accounting
Chapter 9
Management Control Systems
And Responsibility Accounting
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Learning
Objective 1
Management Control Systems
This is a logical integration of techniques
for gathering and using information.
Motivating
Planning
and control
Evaluating
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The Management Control System
A:
Set goals,
targets
D:
Evaluate,
reward
Feedback
and
learning
B:
Plan
and
execute
C:
Measure,
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.
Critical process managers and lower-level
managers develop specific performance
measures for each objective.
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Organizational Goals
Goals provide a long-term
framework around which
an organization will form
its comprehensive plan for
positioning itself in the market.
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Key Success Factors
Key success factors are characteristics that
managers must achieve in order to drive
the organization toward its goals.
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Learning
Objective 2
Identifying Responsibility Centers
A responsibility center is a set of activities
assigned to a manager, a group of
managers, or other employees.
System designers apply responsibility
accounting to identify what part of
the organization has responsibility
for each action.
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Identifying Responsibility Centers
Cost centers
Profit centers
Investment centers
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Learning
Objective 3
Developing Performance Measures
Effective performance measures will…
1. Reflect key actions and activities that relate to organization’s goals
2. Be affected by actions of managers and employees
3. Be readily understood by employees
4. Balance long-term and short-term concerns
5. Be reasonably objective and easily measured
6. 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.
Financial measures are often lagging
indicators that arrive too late.
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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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Learning
Objective 4
Goal Congruence, Managerial Effort, and Motivation
Goal congruence is achieved when
employees, working in their own
perceived best interests, make
decisions that help meet the
overall goals of the organization.
Managerial effort must accompany
goal congruence.
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Goal Congruence, Managerial Effort, and Motivation
Managerial effort is exertion
toward a goal or objective.
Planning
Supervising
Thinking
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Goal Congruence, Managerial Effort, and Motivation
Motivation is a drive toward some selected goal.
It creates
effort.
It creates
action toward
that goal.
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Controllability and Measurement of Financial Performance
Management control system
Controllable events
Uncontrollable events
Controllable costs
Uncontrollable costs
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Controllability and Measurement of Financial Performance
An uncontrollable cost is any cost that
cannot be affected by the management of
a responsibility center within a given time span.
Controllable costs include all costs that a
manager’s decision and actions can influence.
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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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Learning
Objective 5
Segments
Segments are responsibility centers for which a company
develops separate measures of revenues and costs.
Retail Grocery Company
West Division
Groceries
East Division
Produce
Meats
Meat
Store 1
Meat
Store 2
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Retail Grocery Company
East
Division
Net sales
Variable costs
Contribution margin
Controllable costs
Segment margin
Allocated costs
Income
Unallocated costs
Income before taxes
$1,500
1,200
$ 300
100
$ 200
90
$ 110
West
Division
$2,500
2,060
$ 440
160
$ 280
110
$ 170
Total
$4,000
3,260
$ 740
260
$ 480
200
$ 280
100
$ 180
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Learning
Objective 6
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
What are key performance indicators?
They are measures that drive the
organization to achieve its goals.
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The Balanced Scorecard
The scorecard measures an organization’s
performance from four key perspectives:
Financial
Internal
processes
Customers
Employee growth
and learning
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Learning
Objective 7
Quality control is the
effort to ensure that
products and services
perform to customer
requirements.
Quality Control
Annual award for
being #1 in total
customer
service.
Congratulations!
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Cost of Quality Report
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
Percentage of Defects
3
Actual
2
1
0
Goal = 0.6%
3/12 3/19
3/26
4/2
4/9
4/16 4/23
4/30
5/7
5/14
Week of
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Six Sigma
It is a continuous process improvement effort
designed to reduce costs by improving quality.
It has broadened into a general process to
define and measure a process, analyze it,
and improve it to minimize errors.
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Control of 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.
The longer a product or service is in
process, the more costs it consumes.
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Control of Productivity
Productivity is a measure of
outputs divided by inputs.
Outputs
Productivity =
Inputs
Productivity measures vary widely
according to the type of resource
with which management is concerned.
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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 laborbased measures are appropriate.
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Measures of Productivity
Resource
Labor
Possible
outputs
(numerator)
Possible
inputs
(denominator)
Standard direct
Actual direct
labor hours allowed 
labor hour used
for good output
Materials
Weight of output
 Weight of input
Equipment
Expected machine
hours for
good output
Actual machine

hours
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Learning
Objective 8
Service, Government, and Nonprofit Organizations
Most service, government, and nonprofit
organizations have more difficulty
implementing management
control systems.
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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Future of Management Control Systems
A changing environment often
means that organizations
must set different goals or
or key success factors.
Different goals create different
actions and related targets.
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The End
End of Chapter 9
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