Management Control Topic 6

Organizational Structure

the distribution of lines of responsibility within an organization (by functions, by line of business, etc.)

Responsibility Centers

part, segment, or subunit of an organization whose manager is responsible (in charge) for a set of activities

Types of Responsibility Centers

Revenue Center (e.g. sales department)

Cost Center (e.g. reception department)

Profit Center (e.g. a product line/ business unit)

Investment Center (e.g. a subsidiary entity for which the subsidiary’s president is held responsible)

Goal of Cost Center

cost minimization

efficieny

Types of Cost Centers

standard (or engineered) cost center: e.g. manufacturing departments)

discretionary (or managed) cost centers: e.g. r&d department, administrative department (e.g. personnel, purchasing, accounting)

Goal of Revenue Centers

attract and retain customers

maximize revenue

Goal of Profit Centers

profit maximization

Goal of Investment Centers

profitability

Investment Centers Measures

return on investment

residual income

economic value added

return on sales

Degree of Control (Controllability)

whether the cost (income or investment) depends on other factors

the period from which the cost comes

cost (revenue/investment) controllable

Segment

a part or activity of an organization about which managers would like cost, revenue, and profit data (responsibility center)

Segmented Information

accounting by areas of responsibility (by centers, by segment)

Accounting by responsibility centers can

account only for controllable costs, revenue, investments OR

account for controllable and non-controllable assets seperately

Controllability Principle

states that employees should only be responsible for what they control and should not be penalized for bad luck or rewarded for good luck (outcome evaluators can reduce and sometimes eliminate some distorting effects or uncontrollable factors on the outcome measure)

Responsibility v. Culpability

accounting for areas of responsibility should be geared towards who is qualified to provide information and not towards identifying guilty executives

managers may be responsible but at the same time may have a very limited degree of control (may have all the information but little ability to achieve certain results)

Responsibility and Incentives

• responsibility is an incentive

• the choice of the type of responsibility center has its consequences for the behavior of those responsable managers

Autonomy

the degree of freedom to make decisions (the greater the freedom, the greater the autonomy)

Decentralization

the autonomy that managers at the lowest levels of an organization have to make decisions

decentralization empowers managers and other employees to make critical decision for the organization

Decentralization in Multinational Firms (Emphasize the need for decentralization)

physical distribution of subsidiaries and/or parent companies

language of each country

customs of each country

culture of each country

business practices (type of accounting, nature, function, etc.)

rules, laws and regulations

Drawback of Decentralization of Multinational Firms

lack of control