Ch 12 Fundamentals of Management Control Systems (COST)

Decentralized

decisions are delegated to divisional and departmental managers

Management Control System

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 interest of the organization.

Goal Congruence

exists when all members of an organization have incentives to perform in the common interest. This occurs when group acts as a team in pursuit of a mutually agreed-upon objective.

Contigent compensation

paid based on the measured performance. (commission to sale staff)

Fixed compensation

paid to the manager independent of measured performance. (EX: salary)

Superior is also known as

principal

Internal Controls are:

put in place to deal with problems such as financial fraud.

Responsibility accounting report

report revenues and costs at the level within the organization having the related responsibility.

Investment centers are :

responsible for profits and investments in assets. They are responsible for allocating assets to capital budgeting.

Financial pressures

results from bonus plans that depend on short-term economic performance

Discretionary Cost Center examples

Legal, accounting, R&D, advertising, and administration and marketing departments.

Responsibility Accounting Reports

1 Group Vice President - Investment Centers 1 Division Vice President - Profit Centers 1 Plant Managers - Cost Centers 2. District Sales Managers - Revenue Centers 2 Staff Managers - Discretionary Cost Centers

Three Elements of Management Control System:

1. Delegated Decision Authority 2. Performance evaluation and measurement systems. 3. Compensation and reward systems.

Advantages of Decentralization

1. Better use of local knowledge . 2. Faster response. 3. Wiser use of top management time. 4. Reduction of problems to manageable size. 5. Training, evaluation, and motivation of local managers.

Disadvantages of Decentralization

1. local managers can make decisions that are not in the best interest of the organizations's top managers and owners. 2. Cost related to administration duplication. 3. Cost related to possibility of poor decisions based on incomplete information.

Subordinate is known as

agent

Behavioral Congruence

an individual behaves in the best interests of the organization regardless of his or her own goals.

Cost centers

are found in manufacturing operations where inputs, such as direct materials, and direct labor, can be specified for each output.

Profit Centers

are held accountable for profits. They manage both revenues and costs.

Managers at cost centers

are responsible for cost of an activity

Centralized

few decisions are delegated

Good decisions require

good information

Profit centers

have more autonomy than do managers of cost or revenue centers.

Management Cost System

structures and procedures that the principals (owners) use to influence agents (managers) of the organization to implement the organization's strategies.

Decentralization

the delegation of decision-making authority to subordinates in the organization's name.

Local Knowledge

the information managers obtain "locally" or geographically

Revenue Centers

typically responsible for selling a product

Unrealistic budget pressures

when headquarters arbitrarily determines profit objectives and budgets without considering actual conditions.

Discretionary Cost Center

when managers are held responsible for costs but the input-output relationship is not well specified.