Lecture Fundamentals of cost accounting (4th edition): Chapter 12 - Lanen, Anderson, Maher

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(BQ) In the previous chapters we considered how information could be developed to help managers make decisions. In this chapter we will discuss the fundamentals of management control systems. After studying this chapter you should be able to: Explain the role of a management control system, identify the advantages and disadvantages of decentralization, describe and explain the basic framework for management control systems.

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Nội dung Text: Lecture Fundamentals of cost accounting (4th edition): Chapter 12 - Lanen, Anderson, Maher

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Fundamentals of Management Control Systems Chapter 12 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved.
Learning Objectives LO 12-1 Explain the role of a management control system. LO 12-2 Identify the advantages and disadvantages of decentralization. LO 12-3 Describe and explain the basic framework for management control systems. LO 12-4 Explain the relation between organization structure and responsibility centers. LO 12-5 Understand how managers evaluate performance. LO 12-6 Analyze the effect of dual- versus single-rate allocation systems. LO 12-7 Understand the potential link between incentives and illegal or unethical behavior. LO 12-8 Understand how internal controls can help protect assets. 123
Alignment of Managerial and Organizational Interests LO 12-1 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. The purpose of the management control system is to align more closely the interests of the manager and the interests of the organization. 124
Decentralized Organizations LO 12-2 Identify the advantages and disadvantages of decentralization. Decentralization is the delegation of decision-making authority to subordinates in the organization’s name. When authority is decentralized, a superior, whom we call a principal, delegates duties to a subordinate, whom we call an agent . We find principal-agent relationships in many settings. 125
LO 12-1 Decentralized Organizations Some organizations are very centralized; few decisions are delegated. The military is a good example of centralized authority. At the other extreme are highly decentralized companies in which decisions are delegated to divisional and departmental managers. In many conglomerates, operating decisions are made in the field; corporate headquarters is, in effect, a holding company. Good decisions require good information. In large organizations, especially those that are geographically dispersed, much of the information needed to make the decision is local; that is, it is specific to the local conditions. Supporting some local variations can capitalize on local knowledge and allow franchisees to earn more than would otherwise be possible. Local knowledge is knowledge about these local conditions. 126
LO 12-1 Advantages of Decentralization Some of these advantages follow: • Better use of local knowledge . As companies grow, more and more local knowledge needs to be processed in order to manage the business. • Faster response . Local managers can react to a changing environment more quickly than top management can. With centralized decision making, delays occur while information is transmitted to decision makers. • Wiser use of top management’s time . Just as local managers have better information about local conditions, top managers have better knowledge about strategic issues and industry trends. • Reduction of problems to manageable size . The complexity of problems that humans can solve has limits. Even with the aid of computers, some problems are too complex to be solved by central management. • Training, evaluation, and motivation of local managers . Decentralization allows managers to receive on-the-job training in decision making. Top management can observe the outcome of local managers’ decisions and evaluate their potential for advancement. 127
LO 12-1 Disadvantages of Decentralization Decentralization Decentralization has has many many disadvantages disadvantages as as well. well. The The major major disadvantage disadvantage is is that that local local managers managers can can make make decisions decisions that that are are not not in in the the best best interests interests ofof the the organization’s organization’s top top managers managers and and the the owners owners (shareholders). (shareholders). A A second second cost cost of of decentralization decentralization isis administrative administrative duplication. duplication. AA third third cost cost ofof decentralization decentralization is is the the possibility possibility of of poor poor decisions decisions based based onon incomplete incomplete information. information. AAcompany companymust mustweigh weighthe thecosts costsand andbenefits benefitsofofdecentralization decentralizationand and decide decideon onan aneconomically economicallyoptimal optimallevel. level.One Onecancanassume assumethat thatthe the disadvantages disadvantagesof ofdecentralization decentralizationfor forhighly highlycentralized centralizedorganizations organizations outweigh outweighthe theadvantages advantageswhile whilethe thereverse reverseisistrue truefor fordecentralized decentralized companies. companies. 128
Framework for Evaluating Management Control Systems LO 12-3 Describe and explain the basic framework for management control systems. Once an organization has decided to decentralize, it is important to develop a system to reduce the impact of dysfunctional decision making. This system is called a management control system, which is the structure and procedures that the principals (owners) use to influence agents (managers) of the organization to implement the organization’s strategies. 129
LO 12-3 Elements of a Management Control System • Delegated decision authority. • Performance evaluation and measurement systems. • Compensation and reward systems. 1210
LO 12-3 Balancing the Elements An effective, well-functioning management control system balances these three elements and defines them consistently. You are the manager of a newspaper stand that is par of a national company. The goal of the organization is to make money (or at least sell newspapers). As the newspaper stand manager, you can affect that by making good decisions about the number of papers to order. The purpose of the management control system is to influence you to make decisions that further the organization’s goal. However, because the performance measure is completely independent of your decisions, it cannot motivate you to make better decisions. The three elements are not consistent; that is, they are not balanced. 1211
Responsibility Accounting LO 12-4 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. 1212
LO 12-4 Cost Centers Managers Managers of of cost cost centers centers are are responsible responsible for for the the cost cost of of an an activity activity for for which which aa well well defined defined relationship relationship exists exists between between inputs andand outputs. outputs. Cost Cost centers centers often often are are found found in in manufacturing manufacturing operations operations where where inputs, inputs, such such as as direct direct materials materials and and direct direct labor, labor, can can be be specified specified for for each each output. output. The The production production departments departments of of manufacturing manufacturing plants plants are are examples examples ofof cost cost centers. centers. 1213
LO 12-4 Discretionary Cost Centers When When managers managers areare held held responsible responsible forfor costs costs but but the the input-output input-output relationship relationship isis not not well well specified, specified, aa discretionary discretionary cost cost center center isis established. established. Legal, Legal, accounting, accounting, R&D, R&D, advertising, advertising, andand many many other other administrative administrative and and marketing marketing departments departments are are usually usually discretionary discretionary cost cost centers centers 1214
LO 12-4 Revenue Centers Managers of revenue centers typically are responsible for selling a product. Consequently, the manager is held responsible for sales price or sales activity variances. An example of a revenue center is the sportswear department of a large department store for which the manager is responsible for merchandise sales. 1215
LO 12-4 Profit Centers 1216
LO 12-4 Investment Centers Managers of Managers of investment investment centers centers have have responsibility responsibility for for profits and profits and investment investment in in assets. assets. These These managers managers havehave relatively large relatively large amounts amounts of of money money with with which which to to make make capital budgeting capital budgeting andand other other decisions decisions affecting affecting the the use use of assets. of assets. Investment Investment centers centers are are evaluated evaluated using using some some measure of measure of profit profit related related to to the the invested invested assets assets in in the the center. center. 1217
LO 12-4 Responsibility Centers and Organization Structure Groupa vice president – Investment centers Division vice president – Staff managers – Profit centers Discretionary cost centers Plant managers – District sales managers – Cost centers Revenue centers a Group refers to a group of divisions. 1218
LO 12-4 Measuring Performance Total goal congruence exists when all members of an organization have incentives to perform in the common interest. This occurs when the group acts as a team in pursuit of a mutually agreed-upon objective. Individual goal congruence occurs when an individual’s personal goals are congruent with organizational goals. In most business settings, however, personal goals and organizational goals differ. Performance evaluation and incentive systems are designed to encourage employees to behave as if their goals were congruent with organization goals. This results in behavioral congruence; that is, an individual behaves in the best interests of the organization regardless of his or her own goals. 1219
Evaluating Performance LO 12-5 Understand how managers evaluate performance. A A company company often often isis tempted tempted to to compare compare the the performance performance of of its its centers centers and and even even to to encourage encourage competition competition among among them. them. AsAs you you will will see, see, the the problems problems inherent inherent in in performance performance measurement measurement complicate complicate such such comparisons. comparisons. In In addition, addition, thethe various various centers centers can can be be in in very very different different businesses. businesses. ItIt is is very very difficult difficult to to compare compare the the performance performance of of aa manufacturing manufacturing center center with with the the performance performance of of aa center center that that provides provides aa consulting consulting service service andand has has aa relatively relatively small small investment investment base. base. Investment Investment centers centers operating operating in in different different countries countries face face different different risks. risks. When When comparing comparing the the performance performance of of investment investment centers, centers, all all such such differences differences should should be be considered. considered. 1220