Chapter 12

Fundamentals of
Management Control
Systems

McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Alignment of Managerial and
Organizational Interests
L.O. 1 Explain the role of a management control system.

A management control system is designed

to help managers make decisions that will
increase the organizations performance.

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 Decentralized Organizations
L.O. 2 Identify the advantages and disadvantages of decentralizati

Decentralization is the delegation to

subordinates of authority to make
decisions in the organizations name.

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LO2 Advantages of
Decentralization
Better use of local knowledge

Faster response

Wiser use of top managements time

Reduction of problems to more manageable size

Training, evaluation, and motivation of local managers

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LO2 Disadvantages of
Decentralization
Dysfunctional decision making:
Local managers can make decisions in their interest,
which can differ from those of the organization.

Duplication of administration:
Local managers make the same types of decisions
made at headquarters.

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 Management Control
System
L.O. 3 Describe and explain the basic framework
for management control systems.

It is a system designed to influence subordinates

to act in the organizations interest.

Principals (owners) use this system to influence

agents (managers) behavior.

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LO3 Elements of a Management
Control System

Delegated decision authority

Performance evaluation and measurement systems

Compensation and reward systems

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 Responsibility Accounting
L.O. 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.

Responsibility

Cost Revenue Profit Investment

centers centers centers centers

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Evaluating Performance
L.O. 5 Understand how managers evaluate performance.

Controllability concept:
Managers should be held responsible
for costs or profits over which they have
decision-making authority.

Relative performance evaluation (RPE):

Compares divisional performance with that
of peer group divisions

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 Performance Evaluation
Systems Incentives
L.O. 7 Understand the potential link between incentives
and illegal or unethical behavior.

Fundamental questions regarding a performance

measurement system:

Does the measure reflect the results of those actions

that improve the organizations performance?

What actions might managers be taking that improve

reported performance but are actually detrimental to
organizational performance?

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 Internal Controls
L.O. 8 Understand how internal controls can help protect assets.

Internal control is a process designed to provide

reasonable assurance that an organization will
achieve its objectives in the following categories:

Effectiveness and efficiency of operations

Reliability of financial reporting

Compliance with applicable laws and regulations

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