Chapter 12: Fundamentals of Management Control Systems

Fundamentals of Management Control SystemsChapter 12Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinAlignment of Managerial and Organizational InterestsL.O. 1 Explain the role of a management control system. A management control system is designed to help managers make decisions that will increase the organization’s performance.12 - *Decentralized OrganizationsL.O. 2 Identify the advantages and disadvantages of decentralization. Decentralization is the delegation to subordinates of authority to make decisions in the organization’s name.12 - *Advantages of DecentralizationLO2 Better use of local knowledge Faster response Wiser use of top management’s time Reduction of problems to more manageable size Training, evaluation, and motivation of local managers12 - *Disadvantages of DecentralizationLO2 Dysfunctional decision making: Local managers can make decisions in their interest, which can differ from those of the organization. Duplication of administration: Local managers make the same types of decisions made at headquarters.12 - *Management Control SystemL.O. 3 Describe and explain the basic framework for management control systems. It is a system designed to influence subordinates to act in the organization’s interest. Principals (owners) use this system to influence agents’ (managers’) behavior.12 - *Elements of a ManagementControl SystemLO3 Delegated decision authority Performance evaluation and measurement systems Compensation and reward systems12 - *Responsibility AccountingL.O. 4 Explain the relation between organization structure and responsibility centers. Responsibility accounting reports revenues and costs at the level within the organization having the related responsibility.ResponsibilityCostcentersRevenuecentersProfitcentersInvestmentcenters12 - *Evaluating PerformanceL.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 divisions12 - *Corporate Cost AllocationL.O. 6 Analyze the effect of dual- versus single-rate allocation systems.Global ElectronicsLatin America DivisionIncome for the Year ($000)Revenue(Percentage of corporate revenue)Direct division costsAllocated corporate overhead*Operating profit$70,000 16% 51,800 4,800$13,400$70,000 14% 51,800 3,500$14,700* Global Electronics allocates corporate overhead based on relative revenue. Corporate overhead was $25 million.ActualTarget12 - *Corporate Cost AllocationLO6Global ElectronicsLatin America DivisionIncome for the Year ($000)RevenueDirect division costs$70,000 51,800$70,000 51,800ActualTargetMy revenueand costswere on target.12 - *Corporate Cost AllocationLO6Global ElectronicsLatin America DivisionIncome for the Year ($000)Revenue(Percentage of corporate revenue)Corporate revenue$ 70,000 16%$437,500a$ 70,000 14%$500,000bActualTargeta $70,000 ÷ 16%b $70,000 ÷ 14%I'm notresponsible forcorporaterevenue.12 - *Corporate Cost AllocationLO6Global ElectronicsLatin America DivisionIncome for the Year ($000)Allocated corporate overhead(Percentage of corporate revenue)Corporate costs$ 4,800 16%$30,000a$ 3,500 14%$25,000bActualTargeta $4,800 ÷ 16%b $3,500 ÷ 14%I'm notresponsible forcorporatecosts.12 - *Corporate Cost AllocationLO6 Dual rate method: This is a cost allocation method that separates a common cost into fixed and variable components and then allocates each component using a different allocation base.12 - *Performance EvaluationSystems IncentivesL.O. 7 Understand the potential link between incentives and illegal or unethical behavior. Fundamental questions regarding a performance measurement system: Does the measure reflect the results of those actions that improve the organization’s performance? What actions might managers be taking that improve reported performance but are actually detrimental to organizational performance?12 - *Internal ControlsL.O. 8 Understand how internal controls can help protect assets. Internal control is a process designed to provide reasonable assurance that an organization will achieve its objectives in the following categories: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations12 - *End of Chapter 12Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin