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Management Control Systems and Responsibility Accounting. Chapter 9. Health Net. A health care organization that developed a control system called”fourth generation medical management Goal was to increase quality and decrease cost of health care
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Management Control Systems and Responsibility Accounting Chapter 9
Health Net • A health care organization that developed a control system called”fourth generation medical management • Goal was to increase quality and decrease cost of health care • System provides access to information about a patient’s medical history and recommended treatments • This is an example of an integrated management system to coordinate and evaluate the activities of an organization’s value chain • Chapter builds on previous chapters to illustrate how various techniques are blended together to achieve goals
Learning Objective 1 • Describe the relationship of • management control systems • to organizational goals.
Management Control Systems This is a logical integration of techniques for gathering and using information. Planning and control Motivating Evaluating
Feedback and learning The Management Control System Set goals, measures, targets Plan and execute Evaluate, reward Monitor, report
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.
Organizational Goals Goals provide a long-term framework around which an organization will form its comprehensive plan for positioning itself in the market.
Key Success Factors Key success factors are characteristics that managers must achieve in order to drive the organization toward its goals.
Learning Objective 2 • Use responsibility accounting • to define an organizational • subunit as a cost center, • a profit center, or an • investment center.
Identifying Responsibility Centers A responsibilitycenter is a set of activities assigned to a manager, a group of managers, or other employees. System designers apply responsibility accountingto identify what part of the organization has responsibility for each action.
Identifying Responsibility Centers Cost centers Profit centers Investment centers
Learning Objective 3 • Develop performance measures • and use them to monitor • the achievements • of an organization.
Developing Performance Measures • Good performance measures will… • relate to the goals of the organization. • balance long-term and short-term concerns. • reflect the management of key actions and activities. • be affected by actions of managers and employees. • be readily understood by employees. • be used in evaluating and rewarding key personnel. • be reasonably objective and easily measured. • be used consistently and regularly.
Nonfinancial Measuresof 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.
Nonfinancial Measuresof 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.
Monitoring andReporting 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.
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
Learning Objective 4 • Explain the importance of • evaluating performance and • how it impacts motivation, goal • congruence, and employee effort.
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.
Goal Congruence, Managerial Effort, and Motivation Managerial effort is exertion toward a goal or objective. Planning Supervising Thinking
Goal Congruence, Managerial Effort, and Motivation Motivation is a drive for some selected goal. It creates action toward that goal. It creates effort.
Learning Objective 5 • Prepare segment income • statements for evaluating profit • and investment centers using • the contribution margin and • controllable-cost concepts.
Controllable events Uncontrollable events Controllable costs Uncontrollable costs Controllability and Measurement of Financial Performance Management control system
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.
Segments Segments are responsibility centers for which a company develops separate measures of revenues and costs.
East Division West Division Total Net sales $1,500 $2,500 $4,000 Variable costs 1,200 2,060 3,260 Contribution margin $ 300 $ 440 $ 740 Controllable costs 100 160 260 Segment margin $ 200 $ 280 $ 480 Allocated costs 90 110 200 Income $ 110 $ 170 $ 280 Unallocated costs 100 Income before taxes $ 180 Retail Grocery Company
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.
Learning Objective 6 • Use a balanced scorecard to • recognize both financial and • nonfinancial measures of • performance.
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.
The Balanced Scorecard Key performance indicators: What are key performance indicators? They are measures that drive the organization to achieve its goals.
The Balanced Scorecard The scorecard measures an organization’s performance from four key perspectives: Financial Customers Internal processes Employee growth and learning
Learning Objective 7 • Measure performance against • quality, cycle time, and • productivity objectives.
Annual award for being #1 in total customer service. Congratulations! Quality Control Quality control is the effort to ensure that products and services perform to customer requirements.
Cost of Quality Report Prevention Appraisal Internal failure External failure
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.
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.
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.
3 Actual 2 Percentage of Defects 1 Goal = 0.6% 0 3/12 3/19 3/26 4/2 4/9 4/16 4/23 4/30 5/7 5/14 Week of Quality-Control Chart
Six Sigma What is six sigma? It is an analytical method aimed at achieving near-perfect results on a production line. It has broadened into a general process to define and measure a process, analyze it, and improve it to minimize errors.
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.
Control of Productivity Productivity is a measure of outputs divided by inputs. Productivity measures vary widely according to the type of resource with which management is concerned.
Control of Productivity How should outputs and inputs be measured? Labor-intensive organizations are concerned with increasing the productivity of labor, so labor- based measures are appropriate.
Control of Productivity Highly automated companies are concerned with machine use and productivity of capital investments, so capacity-based measures, such as the percentage of time machines are available, may be most important to them.
Resource Possible outputs (numerator) Possible inputs (denominator) Labor Standard direct labor hours allowed for good output × Actual direct labor hour used Materials Weight of output × Weight of input Equipment Expected machine hours for good output × Actual machine hours Measures of Productivity
Learning Objective 8 • Describe the difficulties of • management control in service • and nonprofit organizations.
Service, Government, and Nonprofit Organizations Most service, government, and nonprofit organizations have more difficulty implementing management control systems.
Service, Government, and Nonprofit Organizations Outputs of service and nonprofit organizations are more difficult to measure than are the cars or computers that are produced by manufacturers.
Future of ManagementControl 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.
