Description
A management control system (MCS) is a system which gathers and uses information to evaluate the performance of different organizational resources like human, physical, financial and also the organization as a whole considering the organizational strategies. Finally, MCS influences the behavior of organizational resources to implement organizational strategies.
MANAGEMENT CONTROL
SYSTEM
3. BEHAVIOR IN ORGANIZATION
Learning outcomes
1. GOALS & CONGRUENCE
2. INFORMAL FACTORS THAT INFLUENCE GOAL
CONGRUENCE
3. FORMAL CONTROL SYSTEMS
4. TYPES OF ORGANIZATIONS
5. FUNCTIONS OF THE CONTROLLER
8/8/2013 3
Organization Structure
• How tasks are divided, resources are deployed,
and departments are coordinated
– Set of formal tasks
– Formal reporting relationships
– Effective coordination of employees across
departments
TYPES OF ORGANIZATIONS
• FUNCTIONAL ORGANIZATIONS
• BUSINESS UNIT ORGANIZATIONS
• MATRIX ORGANIZATIONS
8/8/2013 5
Five Approaches to Structural Design
8/8/2013 6
Five Approaches to
Structural Design
FUNCTIONS OF THE COTROLLER
1. DESIGNING & OPERATING MCS
2. FINANCIAL STATEMENTS & REPORTS
3. TAX RETURNS
4. PREPARATION AND ANALYSIS OF
PERFORMANCE REPORTS
FUNCTIONS OF THE CONTROLLER(contd.)
5. BUDGET PROPOSALS WITH ANALYSIS &
JUSTIFICATION
6. INTERNAL AUDITS FOR PREVENING
FRAUD/THEFT
7. DEVELOPING PEOPLE IN CONTROL
FUNCTION
8. BUSINESS UNIT CONTROLLER & CORPORATE
CONTROLLER
4. RESPONSIBILITY CENTERS
Learning outcomes
1. TYPES OF RESPOSIBILITY CENTERS
2. COST/EXPENSE CENTERS
3. REVENUE/PROFIT CENTERS
4. INVESTMENT CENTERS
5. MEASURES USED TO EVALUATE THEIR
PERFORMANCES
6. ROI, ROA, MVA
THE CONTROLLER
? BUSINESS UNIT CONTROLLER
? CORPORATE CONTROLLER
? RELATIOSHIP BETWEEN BOTH
? DOTTED LINE
? SOLID LINE
RESPONSIBILITY CENTRES
1. RESPONSIBILITY CENTRES
• MANAGER RESPONSIBLE FOR
ACTIVITIES
• UNIT WITHIN COMPANY
RESPONSIBILITY CENTRES
2. NATURE OF RESPONSIBILITY
CENTRES
• OBJECTIVES
• INPUTS/WORK/OUTPUT
• RELATIONSHIP BETWEEN
INPUT & OUTPUT
RESPONSIBILITY CENTRES
3. MEASURING INPUTS & OUTPUTS
• PHYSICAL MEASUREMENT LIKE HRS,
KGS
• TRANSLATED INTO MONETARY
TERMS
• COST –MONETARY MEASURE OF
RESOURCES USED BY
RESPONSIBILITY CENTRE
RESPONSIBILITY CENTRES
4. EFFICIENCY & EFFECTIVENESS
• RATIO OF OUTPUT TO INPUT
• RATIO OF OUTPUT TO ITS OBJECTIVES
• EVERY RESPONSIBILITY CENTRE OUGHT TO
BE BOTH EFFICIENT AND EFFECTIVE
• A RESONSIBILITY CENTRE IS EFFICIENT IF IT
DOES THINGS RIGHT, AND IT IS EFFECTIVE IF
IT DOES THE RIGHT THINGS
TYPES OF RESPONSIBILITY CENTRES
1. COST/EXPENSE CENRES
2. TYPES
a) ENGINEERED EXPENSE CENTRES
b) DISCRETIONARY EXPENSE CENTRES
TYPES OF RESPONSIBILITY CENTRES
2. REVENUE CENTRES
• OUTPUT IS MEASURED IN MONETARY TERMS
• NO FORMAL ATTEMPT TO RELATE TO INPUT
Responsibility Accounting for
Profit Centres
? Based on detailed information about both
controllable revenues and controllable costs
? Manager controls operating revenues earned,
such as sales,
? Manager controls all variable costs (and
expenses) incurred by the centre because they
vary with sales
Profit Centre
? Shows budgeted and actual controllable revenues and
costs
? Prepared using the cost-volume-profit income statement
format:
– Deduct controllable fixed costs from the
contribution margin
– Controllable margin - excess of contribution
margin over controllable fixed costs – best
measure of manager’s performance in controlling
revenues and costs
– Do not report non-controllable fixed costs
Advantages of Profit Centre
? Speed of operating decisions
? Quality of decisions
? Unit level day to day decisions
? Corporate can concentrate on long term planning
? Freedom for unit managers, less dependence on head
office
? Excellent training ground
? Profit consciousness among units
? Ready made infn on profitability of compny’s independent
units
? Competitive performance
Measuring Profitability
? Contribution margin
? Direct profit
? Controllable profit
? Income before taxes
? Net income
? Revenues
Investment Center
?An investment center is a subunit that is
responsible for generating revenue, controlling
costs, and investing in assets.
?An investment center is charged with earning
income consistent with the amount of assets
invested in the segment.
?Most divisions of a company can be treated as
either profit centers or investment centers.
6. Transfer Pricing
Learning outcomes
1. Objectives and need of Transfer pricing
2. Methods of Transfer Pricing
3. Cost Based
4. Market price based
5. Negotiated price
6. Administration of TRANSFER PRICES
Need For Transfer Pricing
?Liberalization and Growth of
multinationals
?More decentralization.
?Considerable autonomy
? Encourage them to perform well.
?Business units are supposed to work
under the same organization
?Performance of business units.
OBJECTIVES OF TRANSFER PRICES
1. Proper distribution of revenue between profit centers.
2. Resulting profit has to be shared between the profit
centers.
3. Providing relevant information to the profit centers
4. Inducing goal-congruent decisions,
-improve the profits of business units and also improve
the profits of the company
4. Measure the economic performance of profit centers
5. Minimizing tax liability
Goal Congruence
Some of the prerequisites for achieving goal
congruency are
1. Competent people
2. Good organizational atmosphere
3. Details of market prices
4. Freedom to source
5. Availability of information
6. Scope for negotiation
Transfer Price Defined
The price that is used to value internal transfers of
goods and services within the same company is
known as the transfer price.
Transfer Pricing
The fundamental principle is that
the transfer price should be similar
to the price that would be charged if
the product were sold to outside
customers or purchased from
outside vendors.
Transfer Pricing
• Not used for external pricing
• Used to set prices for transfers within a
company’s departments, divisions, or segments
Transfer prices do not
affect revenues and costs of
the company as a whole
Transfer prices do affect
revenues and costs of the
divisions involved.
Pricing for Internal Providers
of
Goods and Services
Transfer pricing enables a business to
assess both the internal and external
profitability of its products or services
Methods of calculating transfer price
The three methods of calculating
transfer price that are used commonly
are:
1. Cost-based pricing method
2. Negotiated pricing method
3. Market-Based Pricing Method
Cost Based Pricing
• How to define cost?
– Actual cost
– Standard cost
– Percentage of cost
– Percentage of investment
Market Based Pricing
1. Market Price Information
2. Freedom to source
3. Full Information
4. Negotiation
5. Constraints
Negotiated Transfer Price
?May be based on an agreement to use a cost plus
a profit percentage
?Will be between the negotiation floor and the
negotiation ceiling
?Negotiation floor: the selling division’s variable
cost
?Negotiation ceiling-the market price
This approach allows for cost recovery while still
allowing the selling division to return a profit
Administration of TRANSFER PRICES
Implementing transfer pricing involves
?Long negotiations between heads of
various units
?Classification of products,
?Arbitration conflict resolution in case
conflicts arise.
Transfer Pricing
in Multinational Settings
• Extremely difficult to set
– Tax systems
– Customs duties
– Freight and insurance costs
– Import/export regulations
– Foreign exchange controls
– Internal and external objectives of transfer differ
• May use different transfer prices for different
countries; make certain of legality.
7.Measuring & Controlling Assets
Prof.S.G.Patwardhan
Measuring & Controlling Assets
Why long term investment is a strategic issue?
Why long term investments is a control issue?
Characteristics of long-term assets
?Long-term assets (Building, Plant, Machinery,
Information Technology)
?Long-term assets - an organization is committed for a
long period of time.
?The lack of investment could cause opportunity
losses or the investment could cause excess
capacity.
?The investment amount is usually large.
Why relate profits to investments?
• Profits are generated ONLY if you have investments.
• Therefore, earning a satisfactory return on the
investments employed is necessary.
• To compare two units, A and B, without considering
the investment made in each is meaningless.
40
Responsibility Accounting
Types of Responsibility Centers
1. Cost center: only responsible for costs
2. Revenue center: only responsible for revenues
3. Profit center: responsible for both revenues and
costs
4. Investment center: responsible for revenues,
costs, and investments
Measuring the Performance of
Investment Centres
• Return on Investment (ROI)
• Residual Income (RI)
• Economic Value Added (EVA)
42
Accounting-Based Performance
Measures
1. Choose Performance Measures that align with
top management’s financial goals
2. Choose the time horizon of each Performance
Measure
3. Choose a definition of the components in each
Performance Measure
4. Choose a measurement alternative for each
Performance Measure
5. Choose a target level of performance
6. Choose the timing of feedback
Effectiveness
?Degree to which a goal,
objective, or target is met.
?Determined by process design
Effectiveness vs Efficiency
Efficiency
?Degree to which inputs are used in
relation to a given level of outputs.
?Determined by process design and
how the process operates
Performance may be effective, efficient,
both, or neither.
Effectiveness vs Efficiency
45
Return on Investment (ROI)
ROI is an accounting measure of
income divided
by an accounting measure of
investment
Income
Investment
ROI =
46
ROI
• ROI may be decomposed into its two
components as follows:
• ROI = Return on Sales X Investment Turnover
• This is known as the DuPont Method of
Profitability Analysis
Income Income Revenues
Investment Revenues Investment
X =
A. The Components of ROI
ROI has a distinct advantage over income as a measure
of performance since it considers both income (the
numerator) and investment (the denominator).
ROI =
Income
Invested
capital
ROI =
Income
Sales
x
Sales
Invested
capital
Profit Margin Investment Turnover
The breakdown of the formula shows that managers can increase return by more
profit and/or generating more sales for each investment dollar.
48
Measuring the Performance of Investment
Centers
Margin: portion
of sales
available for
interest, taxes
and profit
Operating income
Sales
| |
|
\ .
Turnover: how
productively
assets are being
used to generate
sales
Sales
Average operating assets
| |
|
\ .
D. Residual Income (RI) as an
Alternative to ROI
Residual Income = NOPAT – Required Profit
= NOPAT – Cost of Capital x Investment
= NOPAT – Cost of Capital x (Total Assets – Noninterest
Bearing Current Liabilities)
Residual Income (RI) overcomes the underinvestment problem of
ROI since any investment earning more than the cost of capital will
increase residual income.
50
Residual income
the difference between operating income and the
minimum Rs. return required on a company’s
operating assets
Measuring the Performance of Investment
Centers
( )
Residual Operating Minimum rate of return
= -
Income Income Operating assets ×
Components of RI
Decomposition of the RI formula:
RI = Operating income- (Minimum rate of return x Operating
assets)
= Operating income – Minimum return on Assets
Economic Value Added
Economic value added (EVA) is after-tax operating
profit minus the total annual cost of capital.
EVA = After-tax operating income - (Weighted
average cost of capital x total capital
employed)
53
Economic value added (EVA)
after-tax operating profit minus the total annual cost
of capital.
Measuring the Performance of Investment
Centers
( )
After-tax
Weighted average cost of capital
EVA = operating -
Total capital employed
income
×
Total capital employed = capital assets
plus other expenditures meant to have a
long-term payoff
MVA
Market Value Added (MVA)
–Difference between the market
value of a corporation and capital
contributed by shareholders and
lenders.
doc_278977533.ppt
A management control system (MCS) is a system which gathers and uses information to evaluate the performance of different organizational resources like human, physical, financial and also the organization as a whole considering the organizational strategies. Finally, MCS influences the behavior of organizational resources to implement organizational strategies.
MANAGEMENT CONTROL
SYSTEM
3. BEHAVIOR IN ORGANIZATION
Learning outcomes
1. GOALS & CONGRUENCE
2. INFORMAL FACTORS THAT INFLUENCE GOAL
CONGRUENCE
3. FORMAL CONTROL SYSTEMS
4. TYPES OF ORGANIZATIONS
5. FUNCTIONS OF THE CONTROLLER
8/8/2013 3
Organization Structure
• How tasks are divided, resources are deployed,
and departments are coordinated
– Set of formal tasks
– Formal reporting relationships
– Effective coordination of employees across
departments
TYPES OF ORGANIZATIONS
• FUNCTIONAL ORGANIZATIONS
• BUSINESS UNIT ORGANIZATIONS
• MATRIX ORGANIZATIONS
8/8/2013 5
Five Approaches to Structural Design
8/8/2013 6
Five Approaches to
Structural Design
FUNCTIONS OF THE COTROLLER
1. DESIGNING & OPERATING MCS
2. FINANCIAL STATEMENTS & REPORTS
3. TAX RETURNS
4. PREPARATION AND ANALYSIS OF
PERFORMANCE REPORTS
FUNCTIONS OF THE CONTROLLER(contd.)
5. BUDGET PROPOSALS WITH ANALYSIS &
JUSTIFICATION
6. INTERNAL AUDITS FOR PREVENING
FRAUD/THEFT
7. DEVELOPING PEOPLE IN CONTROL
FUNCTION
8. BUSINESS UNIT CONTROLLER & CORPORATE
CONTROLLER
4. RESPONSIBILITY CENTERS
Learning outcomes
1. TYPES OF RESPOSIBILITY CENTERS
2. COST/EXPENSE CENTERS
3. REVENUE/PROFIT CENTERS
4. INVESTMENT CENTERS
5. MEASURES USED TO EVALUATE THEIR
PERFORMANCES
6. ROI, ROA, MVA
THE CONTROLLER
? BUSINESS UNIT CONTROLLER
? CORPORATE CONTROLLER
? RELATIOSHIP BETWEEN BOTH
? DOTTED LINE
? SOLID LINE
RESPONSIBILITY CENTRES
1. RESPONSIBILITY CENTRES
• MANAGER RESPONSIBLE FOR
ACTIVITIES
• UNIT WITHIN COMPANY
RESPONSIBILITY CENTRES
2. NATURE OF RESPONSIBILITY
CENTRES
• OBJECTIVES
• INPUTS/WORK/OUTPUT
• RELATIONSHIP BETWEEN
INPUT & OUTPUT
RESPONSIBILITY CENTRES
3. MEASURING INPUTS & OUTPUTS
• PHYSICAL MEASUREMENT LIKE HRS,
KGS
• TRANSLATED INTO MONETARY
TERMS
• COST –MONETARY MEASURE OF
RESOURCES USED BY
RESPONSIBILITY CENTRE
RESPONSIBILITY CENTRES
4. EFFICIENCY & EFFECTIVENESS
• RATIO OF OUTPUT TO INPUT
• RATIO OF OUTPUT TO ITS OBJECTIVES
• EVERY RESPONSIBILITY CENTRE OUGHT TO
BE BOTH EFFICIENT AND EFFECTIVE
• A RESONSIBILITY CENTRE IS EFFICIENT IF IT
DOES THINGS RIGHT, AND IT IS EFFECTIVE IF
IT DOES THE RIGHT THINGS
TYPES OF RESPONSIBILITY CENTRES
1. COST/EXPENSE CENRES
2. TYPES
a) ENGINEERED EXPENSE CENTRES
b) DISCRETIONARY EXPENSE CENTRES
TYPES OF RESPONSIBILITY CENTRES
2. REVENUE CENTRES
• OUTPUT IS MEASURED IN MONETARY TERMS
• NO FORMAL ATTEMPT TO RELATE TO INPUT
Responsibility Accounting for
Profit Centres
? Based on detailed information about both
controllable revenues and controllable costs
? Manager controls operating revenues earned,
such as sales,
? Manager controls all variable costs (and
expenses) incurred by the centre because they
vary with sales
Profit Centre
? Shows budgeted and actual controllable revenues and
costs
? Prepared using the cost-volume-profit income statement
format:
– Deduct controllable fixed costs from the
contribution margin
– Controllable margin - excess of contribution
margin over controllable fixed costs – best
measure of manager’s performance in controlling
revenues and costs
– Do not report non-controllable fixed costs
Advantages of Profit Centre
? Speed of operating decisions
? Quality of decisions
? Unit level day to day decisions
? Corporate can concentrate on long term planning
? Freedom for unit managers, less dependence on head
office
? Excellent training ground
? Profit consciousness among units
? Ready made infn on profitability of compny’s independent
units
? Competitive performance
Measuring Profitability
? Contribution margin
? Direct profit
? Controllable profit
? Income before taxes
? Net income
? Revenues
Investment Center
?An investment center is a subunit that is
responsible for generating revenue, controlling
costs, and investing in assets.
?An investment center is charged with earning
income consistent with the amount of assets
invested in the segment.
?Most divisions of a company can be treated as
either profit centers or investment centers.
6. Transfer Pricing
Learning outcomes
1. Objectives and need of Transfer pricing
2. Methods of Transfer Pricing
3. Cost Based
4. Market price based
5. Negotiated price
6. Administration of TRANSFER PRICES
Need For Transfer Pricing
?Liberalization and Growth of
multinationals
?More decentralization.
?Considerable autonomy
? Encourage them to perform well.
?Business units are supposed to work
under the same organization
?Performance of business units.
OBJECTIVES OF TRANSFER PRICES
1. Proper distribution of revenue between profit centers.
2. Resulting profit has to be shared between the profit
centers.
3. Providing relevant information to the profit centers
4. Inducing goal-congruent decisions,
-improve the profits of business units and also improve
the profits of the company
4. Measure the economic performance of profit centers
5. Minimizing tax liability
Goal Congruence
Some of the prerequisites for achieving goal
congruency are
1. Competent people
2. Good organizational atmosphere
3. Details of market prices
4. Freedom to source
5. Availability of information
6. Scope for negotiation
Transfer Price Defined
The price that is used to value internal transfers of
goods and services within the same company is
known as the transfer price.
Transfer Pricing
The fundamental principle is that
the transfer price should be similar
to the price that would be charged if
the product were sold to outside
customers or purchased from
outside vendors.
Transfer Pricing
• Not used for external pricing
• Used to set prices for transfers within a
company’s departments, divisions, or segments
Transfer prices do not
affect revenues and costs of
the company as a whole
Transfer prices do affect
revenues and costs of the
divisions involved.
Pricing for Internal Providers
of
Goods and Services
Transfer pricing enables a business to
assess both the internal and external
profitability of its products or services
Methods of calculating transfer price
The three methods of calculating
transfer price that are used commonly
are:
1. Cost-based pricing method
2. Negotiated pricing method
3. Market-Based Pricing Method
Cost Based Pricing
• How to define cost?
– Actual cost
– Standard cost
– Percentage of cost
– Percentage of investment
Market Based Pricing
1. Market Price Information
2. Freedom to source
3. Full Information
4. Negotiation
5. Constraints
Negotiated Transfer Price
?May be based on an agreement to use a cost plus
a profit percentage
?Will be between the negotiation floor and the
negotiation ceiling
?Negotiation floor: the selling division’s variable
cost
?Negotiation ceiling-the market price
This approach allows for cost recovery while still
allowing the selling division to return a profit
Administration of TRANSFER PRICES
Implementing transfer pricing involves
?Long negotiations between heads of
various units
?Classification of products,
?Arbitration conflict resolution in case
conflicts arise.
Transfer Pricing
in Multinational Settings
• Extremely difficult to set
– Tax systems
– Customs duties
– Freight and insurance costs
– Import/export regulations
– Foreign exchange controls
– Internal and external objectives of transfer differ
• May use different transfer prices for different
countries; make certain of legality.
7.Measuring & Controlling Assets
Prof.S.G.Patwardhan
Measuring & Controlling Assets
Why long term investment is a strategic issue?
Why long term investments is a control issue?
Characteristics of long-term assets
?Long-term assets (Building, Plant, Machinery,
Information Technology)
?Long-term assets - an organization is committed for a
long period of time.
?The lack of investment could cause opportunity
losses or the investment could cause excess
capacity.
?The investment amount is usually large.
Why relate profits to investments?
• Profits are generated ONLY if you have investments.
• Therefore, earning a satisfactory return on the
investments employed is necessary.
• To compare two units, A and B, without considering
the investment made in each is meaningless.
40
Responsibility Accounting
Types of Responsibility Centers
1. Cost center: only responsible for costs
2. Revenue center: only responsible for revenues
3. Profit center: responsible for both revenues and
costs
4. Investment center: responsible for revenues,
costs, and investments
Measuring the Performance of
Investment Centres
• Return on Investment (ROI)
• Residual Income (RI)
• Economic Value Added (EVA)
42
Accounting-Based Performance
Measures
1. Choose Performance Measures that align with
top management’s financial goals
2. Choose the time horizon of each Performance
Measure
3. Choose a definition of the components in each
Performance Measure
4. Choose a measurement alternative for each
Performance Measure
5. Choose a target level of performance
6. Choose the timing of feedback
Effectiveness
?Degree to which a goal,
objective, or target is met.
?Determined by process design
Effectiveness vs Efficiency
Efficiency
?Degree to which inputs are used in
relation to a given level of outputs.
?Determined by process design and
how the process operates
Performance may be effective, efficient,
both, or neither.
Effectiveness vs Efficiency
45
Return on Investment (ROI)
ROI is an accounting measure of
income divided
by an accounting measure of
investment
Income
Investment
ROI =
46
ROI
• ROI may be decomposed into its two
components as follows:
• ROI = Return on Sales X Investment Turnover
• This is known as the DuPont Method of
Profitability Analysis
Income Income Revenues
Investment Revenues Investment
X =
A. The Components of ROI
ROI has a distinct advantage over income as a measure
of performance since it considers both income (the
numerator) and investment (the denominator).
ROI =
Income
Invested
capital
ROI =
Income
Sales
x
Sales
Invested
capital
Profit Margin Investment Turnover
The breakdown of the formula shows that managers can increase return by more
profit and/or generating more sales for each investment dollar.
48
Measuring the Performance of Investment
Centers
Margin: portion
of sales
available for
interest, taxes
and profit
Operating income
Sales
| |
|
\ .
Turnover: how
productively
assets are being
used to generate
sales
Sales
Average operating assets
| |
|
\ .
D. Residual Income (RI) as an
Alternative to ROI
Residual Income = NOPAT – Required Profit
= NOPAT – Cost of Capital x Investment
= NOPAT – Cost of Capital x (Total Assets – Noninterest
Bearing Current Liabilities)
Residual Income (RI) overcomes the underinvestment problem of
ROI since any investment earning more than the cost of capital will
increase residual income.
50
Residual income
the difference between operating income and the
minimum Rs. return required on a company’s
operating assets
Measuring the Performance of Investment
Centers
( )
Residual Operating Minimum rate of return
= -
Income Income Operating assets ×
Components of RI
Decomposition of the RI formula:
RI = Operating income- (Minimum rate of return x Operating
assets)
= Operating income – Minimum return on Assets
Economic Value Added
Economic value added (EVA) is after-tax operating
profit minus the total annual cost of capital.
EVA = After-tax operating income - (Weighted
average cost of capital x total capital
employed)
53
Economic value added (EVA)
after-tax operating profit minus the total annual cost
of capital.
Measuring the Performance of Investment
Centers
( )
After-tax
Weighted average cost of capital
EVA = operating -
Total capital employed
income
×
Total capital employed = capital assets
plus other expenditures meant to have a
long-term payoff
MVA
Market Value Added (MVA)
–Difference between the market
value of a corporation and capital
contributed by shareholders and
lenders.
doc_278977533.ppt