fundamental of mcs
TRANSCRIPT
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McGraw-Hill/Irwin Copyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved.
Fundamentals of Management
Control Systems
Chapter 12
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Learning Objectives:
1. Explain the role of a management control system.
2. Identify the advantages and disadvantages of decentralization.
3. Describe and explain the basic framework for management control
systems.
4. Explain the relation between organization structure andresponsibility centers.
5. Understand how managers evaluate performance.
6. Analyze the effect of dual- versus single-rate allocation systems.
7. Understand the potential link between incentives and illegal or
unethical behavior.
8. Understand how internal controls can help protect assets.
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Service Department Cost AllocationLO1 Explain the role of a management control system.
A managementcontrol system isdesigned to help
managers makedecisions that will
increase the
organization’sperformance.
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DecentralizationLO2 Identify the advantages and disadvantages of
decentralization.
The delegation tosubordinates of authority to makedecisions in theorganization’sname.
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Decentralization, Continued. . .
Decisions are made by relatively fewindividuals in the high ranks of theorganizations.
Decisions are spread among relatively manydivisional and departmental managers.
Decisions are delegated todivisional and departmentalmanagers.
Centralized Organization
Decentralized Organization
Few decisions are
delegated.
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Advantages of Decentralization
Better use of local knowledge:
Faster response:
Wiser use of top management:
Reduction of problems to more manageable sizes:
area managers are more aware of local conditions.
local managers respond more quickly to changing environments.
higher level managers can focus on strategies and industry trends.
by dividing large problems into smaller, more manageable parts,
decentralization reduces the complexity of problems.
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Disadvantage of Decentralization
Dysfunctional decision making
When local managers make decisions intheir interest, which can differ from thoseof the organization.
Duplication of administrationLocal managers make thesame types of decisions
made at headquarters.
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Management Control SystemsLO3 Describe and explain the basic framework for
management control systems.
Delegateddecisionauthority
Performanceevaluation andmeasurement
systems
Compensationand reward
systems
A system designed to influence subordinates to act inthe organization’s interest
Used by principals(owners) to influenceagents’ (managers’)behavior
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Delegated Decision Authority
A management controlsystem specifies whatdecisions thesubordinate manager
can make in the name of the organization.
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Performance Evaluation and Measurement
The performanceevaluation system
specifies how theperformance of thesubordinate manager isto be measured and how
the results will be usedin the evaluationprocess.
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Compensation and Reward Systems
A management control
system that specifieshow subordinates willbe compensated for
their performancebased on statedmeasures.
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Balancing the Elements
An effective management control system
balances the following three elements:
Delegated decision authority
Performance evaluationand measurement systems
Compensation andreward systems
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Responsibility AccountingLO4 Explain the relation between organization structure
and responsibility centers.
Responsibility accounting reports revenuesand costs at the level within the organizationhaving the related responsibility.
Responsibility
Costcenter
Revenuecenter
Profitcenter
Investmentcenter
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Cost Center
Cost
center An organization subunitresponsible only for costs
Managers areresponsible for
cost and volumeof inputs used toproduce anoutput.
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Revenue Center
Managers areresponsible forselling theproduct.
Revenuecenter
An organization subunitresponsible for revenues and,typically, marketing costs
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Profit Center
Profitcenter An organization subunitresponsible for profits andthus, revenues, costs,production, and sales
volume. Managers areresponsible forrevenues AND costs.
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Investment Center
Managers are responsible forlarge amounts of money withwhich to make capital
budgeting and other decisionsaffecting the use of assets.
Investmentcenter
An organization subunitresponsible for profits ANDinvestment in assets
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Goal Congruence
Agreement by allmembers of agroup on a set of
objectives
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Evaluating PerformanceLO5 Understand how managers evaluate performance.
Control based conceptManagers should beheld responsible forcosts or profits over
which they havedecision-makingauthority
Relative performance evaluation (RPE)
Compares divisional performance withthat of peer group divisions
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Compensation Systems
Based on measuredperformance
Contingent compensation
Fixed compensation
Not directly linked to
measured performance
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Corporate Cost AllocationLO6 Analyze the effect of dual- versus single-rate
allocation systems.
Global ElectronicsLatin America DivisionIncome for the Year (in thousands)
1Global Electronics allocates corporate overhead based on relativerevenue. Corporate overhead was $25 million.
Actual
Revenue 70,000$
(Percentage of corporate revenue) 16%
Direct division costs 1 51,800$
Allocated corporate overhead 4,800$
Operating profit 13,400$
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Corporate Cost Allocation, Continued. . .
Global Electronics
Latin AmericaDivisionIncome for the Year (in
thousands)
My revenue
and costswere ontarget.
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Corporate Cost Allocation, Continued. . .
a
$70 000/16%
I’m not
responsiblefor corporate
revenue.
Global ElectronicsLatin AmericaDivisionIncome for the Year (in
thousands)
Revenue
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Corporate Cost Allocation, Continued. . .
I’m not
responsiblefor corporate
costs.
a
$4 800/16%
Global ElectronicsLatin AmericaDivisionIncome for the Year (in
thousands)
Allocated
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Corporate Cost Allocation, Continued. . .
a cost allocation methodthat separates a
common cost into fixedand variable componentsand then allocates eachcomponent using adifferent allocation base
Dual rate method
Activity
C o s t
Activity
C o s t
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Performance Evaluation Systems IncentivesLO7 Understand the potential link between incentives and
illegal or unethical behavior.
1. Does the measure reflect the results of
those actions that improve theorganization’s performance?
2. What actions might managers be takingthat improve reported performance butare actually detrimental toorganizational performance?
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What pressures can lead to unethical behavior?
Unrealistic budget pressures, particularly forshort-term results, occur when headquartersarbitrarily determines profit objectives andbudgets without considering actual
conditions.
HELP!!This is
impossible
Unrealistic budget pressure
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What pressures can lead to unethical behavior?
Financial pressure resulting frombonus plans that depend on short-term economic performance isparticularly acute when the bonusis a significant component of theindividual’s total compensation.
Financial Pressure
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Internal Control
Internal control is a process designed to provide reasonable
assurance that an organization will achieve its objectives in
the following categories:
LO8 Understand how internal controls can help protectassets.
Effectiveness and efficiency of operations
Reliability of financial reporting
Compliance with applicable laws and
regulations
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Internal Control – In Practice
Internal controls are detailed methods of protecting assets
and assuring reliable information. Some examples are:
Segregation of duties
Setting limits on the amount of expenditures
Requiring authorization for the use of assets
Reconciling accounts
Rotating personnel
h
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Chapter 12: END!!
Sometimes Ijust don’t getit. What dothey want?